Comment
11. Parallel importing relates to the acquisition through importation of legitimate goods made by or with the authority of the right holder, other than through authorised distribution channels. This will generally occur where goods can be sourced more quickly or cheaply in this manner. The potential risk that parallel importing poses to New Zealand's creative industries is that it may reduce the ability of right holders to extract greater returns from their intellectual property investments and, therefore, reduce the incentives to invest in and promote New Zealand creative talent.
12. The NECG report looks at the effect that the removal of the restriction on parallel importing has had on New Zealand creative industries through its impact on three key sectors: the book industry, the music industry, and the computer software industry. The film industry is subject to a separate review to be completed by 2008 [POL Min (01) 30/3, CAB Min (01) 35/5, POL Min (01) 33/8 and CAB Min (01) 38/6 refer].
Investment in Creative Industries
Book Publishing
13. The NECG report concludes that there is no evidence to date to suggest that the removal of the restriction on parallel importing has had an adverse effect on investment in the book industry in New Zealand. The report finds that the total investment in the publishing of local works by subsidiaries of multinational publishers does not appear to have fallen dramatically. One local subsidiary noted that their level of investment in the New Zealand book industry has remained relatively constant for the past decade (i.e. since before the restriction was lifted).
14. The NECG report also finds that the level of exports of books from New Zealand has risen substantially since 1998. Of the 3,600 domestic titles published in 2002, nearly 2,100 were exported. These were particularly in the area of educational books, which are the main feature of New Zealand's domestic publishing sector. The NECG report also notes that, since 1998, the level of real income earned by publishers in New Zealand has increased substantially, although real operating surplus remains unchanged. There is no evidence, however, to suggest that the decline in real operating surplus compared with real income represents anything other than the erosion of margins through increased competition.
15. The evidence presented suggests that the level of parallel importing in the book industry remains low. Retailers indicate that reasons for not engaging in more parallel importing include that they want to maintain good relationships with the local subsidiaries of major publishers. Many noted the improved service performance of these subsidiaries since the restriction was lifted. Publishers have indicated that the key change resulting from parallel importing is the increase in remaindered books available to consumers here. Remaindering is a provision in some contracts with publishing houses, which allows the wholesaler or retailer to significantly discount any books that remain unsold after a period, and removes the obligation to pay royalties on those sales back to the copyright owners. NECG found that the level of remaindered books available in New Zealand had increased significantly since the ban on parallel importing had been removed, resulting in overall lower prices for consumers.
16. In regards to children's books, however, some publishers have indicated that the proliferation of remaindered children's books has made them very selective about taking on children's illustrated works because they cannot be produced at prices that match the overseas remainders. This raises concerns about New Zealand children having access to books that reflect New Zealand culture and experience. This issue does not, however, appear to be common to all publishers of New Zealand children's books. Other publishers have indicated no similar constraints in determining whether to publish children's books.
17. These findings are generally consistent with the findings of the previous reviews. In 1999 the local book publishing community argued that the investment in publishing local works by the agents of the international publishers would fall dramatically if the parallel importing restrictions were lifted; the contention being that New Zealand subsidiaries on international publishers cross-subsidise the publication of local authors from profits made on the distribution of foreign titles in New Zealand. To date, there has been no evidence presented to support this contention, and no evidence presented to support the suggestion that the absence of a restriction has resulted in the publication of fewer New Zealand books.
18. The Book Publishers Association of New Zealand ("BPANZ") expressed concern in its submissions, however, about potential future developments in its industry. It states that a major New Zealand retailer is on the verge of deciding to source its books from its Australian sister company rather than through New Zealand warehouses. BPANZ argues that this could encourage overseas companies to reduce their local infrastructure and, ultimately, undermine the viability of local publishing by those companies as the balance of cross subsidisation would be lost. Without local distribution and sales capability here, BPANZ claims that independent publishers would not have a platform to take their books to market as easily.
19. Such a situation, were it to eventuate in its totality, would be a serious concern in terms of the government's GIF and cultural objectives. It is not clear, however, that this scenario will occur. It cannot be assumed that if the retailer concerned were to source its books from Australia in the main, it would cease to purchase as many books by New Zealand authors as before, simply because there is money to be made from selling these titles in New Zealand. Further, if a major retailer were to reduce stock of New Zealand works, it could create a competitive advantage for other retailers who stock such works, where there is a demand for them from the local market. This situation also relates to the issue of closer co-ordination with Australia and the encouragement of a single market between the two countries.
20. On balance, I do not consider at this time that it would be prudent to alter New Zealand's parallel importing policy, which has other benefits, particularly for consumers, when the threat to the publishing of New Zealand books may not eventuate or require government intervention. Given concerns about the remaindering of children's books and potential future developments in the book industry, it is recommended that the situation continue to be monitored and that the impact of parallel importing on the creative industries generally be reviewed again, in conjunction with the review on the film ban, due to be completed in 2008 (see Conclusion).
Music
21. As with the book industry, no evidence has been presented to suggest that investment in and promotion of the New Zealand music industry and the development of local artists has declined since the ban on parallel importing was removed in 1998.
22. The evidence presented points to improved performance of the local music industry in this period. The number of sound recording studios has increased and available data suggests that their financial performance has improved also. There is also no evidence of a discernable trend to suggest royalty incomes have been detrimentally impacted upon since the restriction was removed.
23. These finding are consistent with industry reports that 2004 was again a successful year for the New Zealand music industry. New Zealand artists produced seven of New Zealand's top 20 singles and eight of New Zealand's top 20 albums during 2004, as well as the biggest selling album and single of the year. New Zealand music was also heavily supported by radio, with five New Zealand singles in the top 20 radio plays. This is in part due to the Radio Broadcasters' Association's Voluntary Code of Practice for New Zealand music, which is supported by broadcasters.
24. Since 1998, the government has implemented a significant number of important initiatives aimed at boosting the New Zealand music industry, including direct funding, which may have counteracted any negative effects caused by the lifting of the ban. These initiatives include promotional efforts, the Cultural Recovery Package (2000), which doubled NZ On Air's budget for New Zealand music, and the recent announcement of an additional $5.4 million to support export growth. While it is not clear what the impact of the removal of the ban would have been in the absence of such initiatives, these results are consistent with previous advice that direct funding initiatives appear to be more likely to achieve the government's policy objectives than a blanket ban on the parallel importation of creative goods.
25. The recording industry has suggested that parallel importing in Australia is affecting traditional wholesalers with a probable flow-on effect for record companies' investment in Australian artists. In terms of substantive evidence for New Zealand, however, the NECG assessment and 2004 statistics both support the findings of the earlier review that the absence of a ban on the parallel importation of music has not led to a decline in investment in the domestic music industry or in the quantity of New Zealand music produced by international record companies or promoted internationally.
Computer Software
26. A similar result can be found in relation to computer software. The New Zealand industry is, by nature, generally specialist rather than creators of commodity ("off-the-shelf") software and is largely produced with private finance rather than relying upon investment by overseas companies. Consequently, there is little evidence to suggest that the lifting of the ban on parallel importing has had any impact on the investment in the New Zealand computer software industry.
27. As with the previous review, software producers cited piracy as the key concern resulting from the liberalisation of parallel importing. The computer software industry argues that:
- it can be more difficult to detect infringers with the multiple distribution channels possible in a liberalised parallel importing environment; and
- copyright owners have to prove some degree of knowledge that the goods were pirated before any remedy is available and the multiple distribution channels possible in a liberalised parallel importing environment make it easier for dealers in pirated goods to claim lack of knowledge.
28. Piracy is a global problem for computer software manufacturers and is best addressed directly. As the New Zealand computer software industry noted in consultations with NECG, the changes introduced by the 2003 Amendment Act go some way to addressing this concern and Microsoft commented that the reintroduction of a ban on parallel importing is not a necessary means of addressing piracy. These amendments to the Act shifted the evidentiary onus of proof to the defendant in civil proceedings concerning whether the imported goods in question are infringing copies. These changes to the onus of proof only apply to sound recordings, films and computer programs. Changes were also made to create a more objective test for the knowledge requirement of whether imported goods infringe copyright.
The Australian Experience
29. The Australian experience supports the case for maintenance of New Zealand's treatment of parallel imports.
30. Australia has partially lifted the ban on parallel importation of books, allowing parallel importation if a book has not been released in Australia within 30 days of its overseas release. This has led to increased efficiencies of supply and improved availability. Prices, however, have remained substantially higher than in overseas markets.
31. In relation to sound recordings, the treatment of parallel imports has been more liberal. Since 1998 there have been no restrictions on the parallel importing of sound recordings. As with New Zealand, there is no evidence that this has led to a decline in the level of investment in Australian artists. Australia has also achieved local success since 1998. Between June and December 2004, seven local acts held the number one chart position in Australia, the highest number in a six-month period since the Australia Recording Industry Association (ARIA) chart was established. Consumers in Australia have also benefited from lower average prices for CDs.
32. Restrictions on the parallel importation of computer software were removed in Australia in 2003. There have been no follow-up studies of the resulting effects on prices and other variables. Previous studies undertaken by the Australian Competition and Consumer Commission found that Australians paid more over the previous decade for consumer software than overseas consumers, and that the bans on parallel imports contributed to those relatively high prices by permitting copyright holders to price discriminate to the detriment of Australians.
Films
33. The NECG report does not consider the impact of the introduction of a partial ban on the parallel importation of films. At the time that the report was commissioned, the reintroduction of the ban had only recently taken effect and it was considered too premature for its impact to be effectively assessed. The amended legislation also included a sunset clause. This means that if left the limited ban on the parallel importation of film would expire after 5 years from when the amendment entered into force. The ban will be reviewed by the end of 2007 to allow adequate time for any consequent legislative changes prior to the five year expiration date of 2008.
Conclusion
34. The review provided no evidence to show that the level of investment in and promotion of, New Zealand creative industries has declined since the removal of the parallel importing ban in 1998, with the possible exception of children's books. This is consistent with the previous review undertaken by MED in 2000. While there are many factors that influence the market for creative works, the evidence does indicate that parallel importing has contributed to improvements in choice and quality of service to retailers and consumers through increased competition. These findings are consistent with the Australian experience.
35. There does not appear to be substantial evidence, therefore, that a ban on parallel importing would achieve the government's objective of increasing investment in, or promotion of, New Zealand creative industries. The review supports the contention that the government's policy objective of increased investment in local creative talent is better achieved through direct funding initiatives.
36. It is, therefore, recommended that the current treatment of parallel imports be maintained. Given the findings regarding children's book publishing, however, and other concerns expressed by the publishing industry about potential future developments, it is recommended that the impact of parallel importing on the creative industries generally be reviewed again, in conjunction with the review on the film ban. A review would also allow continuing concerns on the part of the music industry to be addressed further and allow both industries more time to gather evidence on any harm caused by parallel importing.
37. While our approach is consistent with international trading obligations, United States producers and distributors of music and software have voiced concerns in the past that allowing parallel imports makes it more difficult to detect and combat piracy and erodes the value of their products in New Zealand and third country markets. Following the amendments made in 2003 to New Zealand's Copyright Act (which included a ban on the parallel importation of films), the US has not included New Zealand's parallel importing provisions in the United States Trade Representative (USTR) "Special 301" Watch List. The US government did, however, note its industry's concern about New Zealand's parallel importing provisions in its 2005 National Trade Estimates report, which lists foreign trade barriers affecting US exports.
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