Audio-Visual Copyright Society Ltd v Foxtel Management Pty Ltd

REFERENCE BY: PHONOGRAPHIC PERFORMANCE COMPANY OF AUSTRALIA LIMITED (ACN 000 680 704) UNDER SECTION 154(1) of the COPYRIGHT ACT 1968

THE APPLICATION TO THE TRIBUNAL 1 The applicant, Phonographic Performance Company of Australia Limited ("PPCA"), is a copyright collecting society. It is a licensor within the meaning of s.136 of the Copyright Act 1968 (Cth) ("the Copyright Act"). PPCA represents the interests of record companies and recording artists in relation to the broadcast, communication and public playing of recorded music and music videos to which the Copyright Act applies. 2 PPCA proposes to bring into operation a licence scheme initially described as the "Fitness Class Licence Scheme" ("the Scheme"). The Scheme relates to "the granting of sound recording licences for the use of sound recordings to accompany fitness classes (Fitness Class Use) held by providers of fitness classes (Fitness Class Providers)". The Scheme is intended to replace an existing scheme relating to the use of sound recordings for fitness class use. 3 Under s.136 of the Copyright Act, a licence scheme is a scheme setting out both: · the circumstances in which the licensor is willing, or the persons on whose behalf the licensor acts are willing, to grant licences, and · the charges, if any, subject to payment of which, and the conditions subject to which, licences would be granted in those classes of cases. 4 The term "licence" is defined in s.136 to include a licence to cause a sound recording to be heard in public. 5 On 8 December 2006, PPCA applied to the Tribunal for an order under s.154(4) of the Copyright Act. Section 154(1) of the Copyright Act provides that, where a licensor proposes to bring a licence scheme into operation, the licensor may refer the scheme to the Tribunal. At the date of the application s.154(4) required the Tribunal to consider such a scheme and make such order, either confirming or varying the scheme, as the Tribunal considers reasonable in the circumstances. PPCA's application sought an order from the Tribunal that the proposed scheme be confirmed or be varied as the Tribunal considers reasonable in the circumstances. However, s.154(4) was amended with effect after the date of the application to provide that the Tribunal might, as an alternative to confirming or varying a scheme, substitute for the scheme another scheme proposed by one of the parties. During the course of the hearing of its application, PPCA indicated that it accepted that it would be open to the Tribunal to substitute another scheme for that which it had proposed. 6 The Tribunal notes that s.157(2) of the Copyright Act allows a person to apply to the Tribunal if that person claims that the grant of a licence would be subject to charges or conditions that are not reasonable in the circumstances of the particular case. If the Tribunal is satisfied that such a claim is well founded, the Tribunal may make an order specifying the charges and conditions that it considers reasonable in the particular circumstances. Thus, the Tribunal is empowered to address the unreasonable application of a scheme in a particular case. 7 It is important to note that the effect of making an order confirming a licence scheme establishes a scheme of general application, binding not only those organisations that were parties to the reference, but all others who use the copyright to which the Scheme relates. However, approval of a scheme does not prevent a person or organisation from reaching an agreement with the copyright owner different from the confirmed scheme: see Reference by APRA [2006] ACopyT 3 per Lindgren P. 8 It is important also to note that a licence fee fixed by the Tribunal under an approved scheme is a maximum fee. There is nothing to prevent a collecting society charging its licensees a lower fee.

Parties to the Application 9 As indicated above, the applicant in these proceedings is PPCA. 10 The first respondent is Fitness Australia Incorporated. It is a national body representing businesses and professionals who together constitute the health and fitness industry in Australia. The Tribunal was informed that its membership comprises the State industry associations who have, as their business members, over 800 health and fitness facility owners, operators and managers and 18,000 registered fitness professionals. 11 The second respondent is the Australian Competition and Consumer Commission (ACCC). Section 157B was included in the Copyright Act in 2006. It empowers the Tribunal to make the ACCC a party to an application under the Copyright Act if the Commission so requests and the Tribunal is satisfied that it is appropriate for it to be a party. At its request, the ACCC was made a party by the Tribunal on 8 May 2007. This is the first application before the Tribunal in which this has occurred. 12 The third respondent, Mr David Smith, is the operator of a fitness centre in Wagga Wagga, New South Wales. Mr Smith took no part in the hearings.

Phonographic Performance Company of Australia (PPCA) 13 PPCA was established in 1969. In its evidence to the Tribunal it said that it was formed for two principal purposes: · to manage the overall process by which owners of copyright in sound recordings could grant public performance and broadcasting licences and receive royalties for the use of those recordings; and · to provide a central licensing body so that users of sound recordings for public performance or broadcast can obtain a single comprehensive blanket licence covering the repertoire of most record companies and recording artists. 14 "Public performance" is the convenient shorthand term used for the exclusive right given by s.85 of the Copyright Act to the owner of the copyright in a sound recording to "cause the recording to be heard in public" and to "communicate the recording to the public". 15 The Tribunal was informed that PPCA is able to give effect to the purposes for which it was established as a result of the receipt from record companies (licensors) of non-exclusive licences of the right to play sound recordings in public. PPCA had 736 licensor members at 6 January 2009. The PPCA licensors include the major recording company groupings Sony Music, EMI, Universal and Warner. The Tribunal was informed that these companies collectively own or control the public performance copyright in 80 to 90 per cent of the sound recordings commercially released in Australia. The licence given to PPCA applies to all the sound recordings owned or controlled by the licensor from time to time. 16 Businesses and other entities that want to play sound recordings in public require a licence to do so from the owner of the copyright in the recording. As PPCA has only a non-exclusive right from its licensors, it would be possible for a person who wished to play a sound recording in public to obtain permission directly from the relevant sound recording copyright owner. However, it is only PPCA that can offer a licence covering the repertoire of many different copyright owners. PPCA warrants that it has the right to licence the works of its licensors. It does not warrant that every sound recording played by a licensee will be covered by the PPCA licence. However, it claims never to have received a representation that a licensee is being sued for breach of copyright. This largely stems from the fact that PPCA's licensors own or control the performance right in most sound recordings that are protected under the Copyright Act. The respondents did not attempt to rebut this claim. 17 References in this decision to "PPCA music" refer to sound recordings comprised within the PPCA repertoire. It is not intended to suggest that PPCA has any copyright interest in music per se.

Australasian Performing Rights Association 18 The Australian Performing Rights Association (APRA) was not a party to these proceedings. However, its position in regard to the operation of fitness centres should be noted. APRA represents the owners of the copyright in musical works, in contrast with PPCA, which acts on behalf of the owners of the copyright in sound recordings of musical works. A fitness centre that wishes to play music as an accompaniment to its fitness classes must have a licence for that purpose from APRA. In contrast with PPCA, APRA has the licensing rights in virtually all musical works published world wide. This distinction in coverage is referred to from time to time throughout this judgment and has an impact on the scheme that the Tribunal approves.

Protected Recordings 19 Copyright protection is afforded to sound recordings by the Copyright Act on the same basis as other works are protected under the Copyright Act, namely: the recording is made by a qualified person; or the recording is made in Australia; or the recording is first published in Australia (Copyright Act, s.89). Protection is then extended to overseas recordings by virtue of the operation of the Copyright (International Protection) Regulations 1969 (CIPR), regulation 4. However, the protection afforded is more limited than that given to other works in which copyright subsists because of the inclusion of subregulation 6(2). That reads: (2) Copyright that subsists in the recording includes the exclusive right to cause the recording to be heard in public, only if: (a) the maker of the recording was, at the time when the recording was made: (i) a citizen or national of a Schedule 3 country; or (ii) a person resident in, or a body corporate incorporated under the law of, a Schedule 3 country; or (b) the recording was made in a Schedule 3 country. 20 A Schedule 3 country is defined by regulation 3 of the CIPR as "a country that is specified in Schedule 3 as a country that provides rights for secondary uses of sound recordings". Schedule 3 contains a list of the countries that provide such rights. They include most of the major record producing countries with the notable exception of the USA. 21 The range of sound recordings protected in Australia is greatly affected by the scope of the reference to the "maker" of a recording. The Tribunal was addressed at length on this topic by the parties. 22 The Copyright Act was amended in 2005 to provide protection for the first time to performers of works. As part of these changes, and in regard only to sound recordings, s.22 was amended by the inclusion, relevantly for present purposes, of subsections (3), (3A) and (7). Those provisions read: (3) For the purposes of this Act: (a) a sound recording, other than a sound recording of a live performance, shall be deemed to have been made at the time when the first record embodying the recording was produced; and (b) the maker of the sound recording is the person who owned that record at that time. (3A) For the purposes of this Act, the makers of a sound recording of a live performance are: (a) the person or persons who, at the time of the recording, own the record on which the recording is made; and (b) the performer or performers who performed in the performance (other than a performer who is already covered by paragraph (a)). 23 Subsection 22(7) contains a number of significant definitions: "performer"in a live performance: (a) means each person who contributed to the sounds of the performance; and (b) if the performance includes a performance of a musical work--includes the conductor. "sound recording of a live performance"means a sound recording, made at the time of the live performance, consisting of, or including, the sounds of the performance. "live performance" means… a live performance, whether in the presence of an audience or otherwise. 24 PPCA asserts that, if a performer who contributes to the making of a sound recording has an Australian connection or is a citizen of a Schedule 3 country, the recording qualifies as a protected recording. Accordingly, if there is any musician satisfying this description who contributes to the recording, even if only as a member of the orchestra, chorus or backing band or vocalists, the record will be protected in Australia. It also relies on the definition of "live performance" to claim that it does not matter if the recording is made in a studio or is not made with all performers present at the one time. It points out that recording techniques involve a layered or iterative process in which various tracks are made and mixed. It is the exceptional case for a recording to be made as a one off exercise with all contributors present. 25 This approach results in many of the records used in fitness classes being classified as protected recordings. It is rejected by the respondents. 26 Fitness Australia asserts that the reference to the "maker" of a sound recording in regulation 6(2) of the CIPR requires all persons who fall within the description of "maker" to satisfy the nationality requirements before the recording can be regarded as being protected. This is the reverse of the PPCA argument. On the Fitness Australia approach, in those cases where the protection for the recording is reliant upon the connection of a person with a Schedule 3 country, if any contributor to the recording does not have that connection, the recording will not be protected. 27 Fitness Australia also rejects the claim by PPCA that a live performance does not require the presence of all performers at the one time. In Fitness Australia's view, a studio recording of a work does not qualify as a protected record unless the work is performed and recorded at the one time by the whole group of performers. 28 This issue became of significance in the hearing before the Tribunal because Ms Lynne Small, Manager, Finance, Operations & Administration at PPCA, undertook an analysis of the track listings of new CDs issued by Fitness Compilation Vendors, ie, vendors of recordings made for use in fitness classes. This analysis applied PPCA's meaning of protected records. It led Ms Small to conclude that around 70 per cent of the tracks included in the records were protected. The overwhelming majority of these tracks would thereby fall within the scope of PPCA's licence. 29 Fitness Australia sought to discredit this analysis. Applying its basis for determining whether a recording is protected under the Copyright Act, it asserted that, at best, 60 per cent and more probably 40 per cent of the tracks sampled were protected. (However, this basis for the number derived is affected by the fact that it is asserted that the Les Mills programmes do not require a PPCA licence, as to which see [72]). Fitness Australia also questioned the methodology adopted by Ms Small to arrive at her conclusion. Fitness Australia claimed that the analysis undertaken was not rigorous and inflated the number of records that could be claimed as protected. 30 In this context it is pertinent to note that the Tribunal had brought to its attention that Rhythm Express Music, one of the largest Australian companies that produces music compilations for use in fitness classes states on its website that: The greatest advantage of all our CDs is that we license the biggest tracks from all the major record companies. We only publish the original artists. 31 The Tribunal does not think it appropriate that it should express a view on the correct approach to be taken to determining what sound recordings fall within the protection provided by the Copyright Act. It involves a very difficult question of the interpretation of the copyright legislation that should be left for a court to resolve in a case where the interpretation bears upon the outcome of an application. It is sufficient for present purposes to indicate that the Tribunal is persuaded that many, but not all, records that are used in fitness classes are protected recordings and that some of these will not be covered by the PPCA licence. The Tribunal has taken this into account in arriving at the figure that it has fixed as the appropriate rate to be paid for the use of such records. It returns to the issue at [275] and [308]. 32 The Tribunal also takes into account that obtaining a PPCA licence largely overcomes the problem of deciding whether a record is protected. A licence provides access to the whole PPCA repertoire. In practical terms, the need to seek the consent of the owner of the copyright to use a particular track on a record for the purposes of a fitness class is taken away. If a record is not protected, no licence to use it is required. If it is protected, the PPCA licence will in practice remove the need to seek permission to use it. While not all protected records are covered by the PPCA licence, it is pertinent to a consideration of the value of the licence to a fitness provider that PPCA is not aware of an instance where a licensee has been called to account for using a record not covered by the PPCA licence. Neither did the respondents identify any such instance.

The fitness industry 33 The fitness industry was said to be made up of a range of sectors that include: (a) traditional fitness centres with group exercise studios and weight areas; (b) weight loss circuit centres; (c) health/wellness centres; (d) personal fitness studios; (e) personal fitness services delivered outdoors; (f) mobile personal fitness centres; (g) leisure/aquatic centres; (h) community centres; and (i) service specific centres such as martial arts, boxing, yoga, pilates and dance studios. 34 The Tribunal was told that there are over 1,000 fitness centres in Australia that offer a diversity of classes and activities to members and casual attendees. 35 In 2007 PPCA commissioned a survey of the fitness industry by The Market Intelligence Co Pty Ltd ("the Fitness Classes Study"). Ms Denise Billard, who was in charge of the project, provided an affidavit to the Tribunal and was cross examined. However, the information provided by the study went largely unchallenged by the respondents. 36 Relying upon a report published in 2006 by the International Health, Racquet and Sportsclub Association (IHRSA), the Fitness Classes Study indicated that 9 per cent of the Australian population are members of a fitness centre. This figure was said to be supported by an Australian Bureau of Statistics statistic that 10 per cent of Australians participate in fitness activities. The study demonstrates a very rapid increase in the number of fitness centres operated by chains of such centres, usually under franchising arrangements. For example, the Fernwood chain centres increased in number from 27 in 2000 to 73 in April 2007. Fitness First centres rose in number from 11 to 69 in the same period. (At the date of the Tribunal hearings in April 2009 this number had risen to 83.) The Curves chain was reported to have opened 178 new centres in 2006-07 (but many of these were purchases of existing centres). Counterbalancing these increases, the study indicated that there has been a decrease in the number of independent fitness centres. 37 Another fitness classes segment noted in the study is that of companies that provide corporate exercise programs. It was said that many of these companies go out to different workplaces, schools or hospitals and in some cases conduct group exercise sessions. The Tribunal received very little information relating to this segment of the fitness industry but it has taken its existence into account in consideration of the licence arrangements that it has determined. 38 The Fitness Classes Study described the fitness industry as being one that was thriving. It referred to the Fitness Australia national strategic plan 2007-2010 which predicted an overall growth of around 10 to 15 per cent. The study noted that fitness centres are targeting new markets for older people and people in rehabilitation. It said that the industry is also benefitting from government health and fitness campaigns. 39 Fitness Australia claimed that, while the industry overall may be growing, traditional fitness centres have experienced a decline in membership. It was said at the hearing that, while this position had been exacerbated by the then current economic climate, the downturn had commenced earlier. Competition from other forms of fitness activities, including the development of specialised centres offering such activities as yoga and pilates, was said to have sparked this trend. However, these types of centres will fall within the proposed PPCA licence scheme if they offer classes to which the scheme applies. 40 Many fitness centres provide group classes. The Fitness Classes Study put this offering at a mean of 35 classes per week in individual centres and 48 in centres that were part of a chain. The number of classes offered in the centres that were the subject of the study ranged from 3 to 199 per week. The number of persons taking part ranged from 1 to 33 with an average of 12. Of the classes attended by researchers engaged in the Study, 97 per cent were said to use music in the whole or part of the class. 41 The study noted that 50 per cent of the classes that used music were conducted in time to the beat of the music for the whole class and 16 per cent for part of the class. Thus a third of the classes where music was used were not conducted in time to the music. Whether or not exercise is conducted in time to the music it may be an integral part of the class. See the discussion from [50] below. 42 Fitness Australia claimed that the number of fitness classes that used music was in fact diminishing. It observed that classes such as pilates, yoga, tai chi, stretch and circuit were increasingly popular with members and that most of these classes used music only as background. The use of background music in the sense of music being played in a centre generally and not being directed to the participants in a class is not the subject of the licence under consideration in this case. However, the licence application is not limited to the use of music in classes conducted in time to the music. It includes also any use of music where it is provided specifically as part of a fitness class. 43 The Tribunal was not provided with any clear evidence as to the proportion of members of fitness centres who attended fitness classes in which the use of music was an integral part of the training being undertaken. Mr Malcolm Allan, Operations Director, Fitness First, said that about 28 per cent of visits to fitness centres resulted in a person attending a fitness class. Ms Jadranka Raguz, who is the Managing Director of the New Dimensions Health Club in Mount Druitt, NSW, stated that her records showed that around 12 per cent of the members of her club attended fitness classes. The large Fernwood women-only fitness centre chain reported attendance in classes as 42 per cent. 44 Whatever might be the exact figure, it is apparent that this type of class comprises a significant element of the training being offered at many, but by no means all, fitness centres.

Membership 45 Membership of fitness centres is very fluid. Fitness First is one of the major fitness centre operators both in Australia and overseas. At the time of the hearing it owned and operated 83 centres in Australia with approximately 340,000 members. Mr Allan stated that the average member remains with Fitness First for only two years. Approximately 50 per cent of members leave Fitness First each year. Mr Allan said that he understood that this represented the experience of the industry generally. 46 Persons may attend fitness centres on a casual basis rather than as a member but the evidence before the Tribunal indicated that this represents only a very small percentage of total attendance at centres.

Membership fees 47 The fees structure for membership adopted by fitness centres varies between centres both as to terms and amount. There are administrative fees, joining and cancellation fees, deferral fees and transfer fees in addition to the standard attendance fees. Many centres require the taking out of an annual membership. Others have monthly membership. Cancellation does not usually entitle a full refund of the balance of the fees paid. 48 Membership fees vary considerably according to the nature of the facilities available and the degree of personalised attention a member is given. The figures provided to the Tribunal were confidential but it can be said that, in 2008, they covered a spectrum from around $40 per month per member to nearly $300. Fitness First charges $18-$25 for casual visits. The 2007 Fitness Classes Survey put the average figure for such visits at $14. 49 In most centres it appears that fees are not geared to the particular use of facilities by members (except at the higher end of the range). The membership generally entitles access to all facilities of the centre, including fitness classes where these are available.

Activities using music 50 Fitness centres offer a diversity of exercise types. Some are directed to building core strength and muscle tone. Others are concerned with improving aerobic capacity or flexibility. 51 Music is not an integral part of all activities carried out at a fitness centre. Activities such as weights, swimming, cycling, walking machines and classes with personal trainers are often undertaken without using music. (Music may be played as ambient background sound to these activities but that use is not the subject of this application before the Tribunal). Some activities offered by fitness centres take place outside the centre, eg, boot camps and running. Music is not usually used by the fitness centre providers as a part of these activities. 52 However, music is an integral part of a number of activities which are conducted as classes. These can include activities such as aqua and cycling (also known as "spin") which can also be undertaken by a person on their own as an alternative to being part of a group in a class environment. The reference to the Tribunal is concerned only with class activities. The evidence to the Tribunal indicated that classes in which music will be an integral part of the training include aerobics, circuit, dance, cycle/spin, and aqua. 53 It was claimed by PPCA that stretch, yoga and pilates classes should also be included among these. The evidence to the Tribunal was that the practice in relation to these types of classes varied considerably. Some were conducted to music but many were not. Even when music was played in the class, it was seldom, if ever, used for its beat. However, the Tribunal notes that, while these types of activities serve a different fitness purpose than the activities that have a rhythmic basis, music may still be seen as contributing to the value of the class. 54 It was accepted by the parties that music is used in various classes to provide the rhythm and tempo for the exercises undertaken. Professor Patricia Tremayne, who is an Associate Professor in Psychology at University of Western Sydney and a former fitness instructor, said, in an affidavit on which she was not examined, that the presence of music has a range of practical benefits in fitness classes. Professor Tremayne's view of these benefits may be summarised as: · allowing the instructor to alter the training effect on muscles by varying the speed of movement; · enabling the instructor to control and structure the class - both the structure of the class as a whole and for the individual moves within the class; · motivating the participants by adding rhythm and interest - reducing fatigue and uplifting participants and making exercise more effective and interesting; · generally increasing the enjoyment and benefits of the class. 55 Professor Tremayne did not limit these advantages to circumstances where exercises in a class had to be performed to the beat of the music. She considered that the comments were applicable also to classes where the exercises were not performed to the beat of music and gave as examples spin, circuit, boxing and yoga. In spin classes music acted as a motivator; in circuit and boxing it added energy, intensity and aggression; in yoga and pilates it created a relaxed and meditative atmosphere. 56 Professor Peter Terry, a Professor of Psychology at University of Southern Queensland, made similar comments on the value of music in fitness classes. In particular he said that music exhorts participants to greater efforts and improves work output. He alluded to research that indicated that listening to motivational music significantly increased a participant's stamina, enhanced their emotional responses and exhorted them to greater effort thereby improving work output. 57 Professor Terry also asserted that it was unlikely that an individual would gain any extra motivation, positive emotions or enhanced mood during exercise where only a beat machine, ie, a machine that provides a beat but no melody, was being used. He also asserted that an original version of a musical work has a better psychological effect than a cover version (see from [61]). He was subjected to strong criticism in the course of cross-examination on this last assertion. However, his other remarks were not contradicted. 58 No evidence of a significant kind was led by the respondents suggesting that these assertions of the importance of music in the conducting of fitness classes were incorrect. It was claimed that it was possible to undertake classes to a beat machine or by an instructor calling out directions but it was recognised that these were poor alternatives to music. 59 Fitness Australia laid some emphasis on evidence that indicated that other factors were as, if not more, important to the success of a fitness class than the music used. It was asserted that the skill of the instructor was regarded by participants as the most important feature in their enjoyment of a class. Significant also were the nature of the classes, the equipment used and the choreography followed. 60 The Tribunal accepts that many factors go to the enjoyment of a class and that the music used is but one of those factors. However, it considers that playing sound recordings is regarded by instructors and participants as an essential part of many forms of fitness class conducted by fitness centres, particularly those that are rhythm based. It also concludes that members of fitness centres would find certain classes less attractive without music and would be unlikely to continue to attend some types of classes or would look to other classes in the absence of the use of sound recordings.

The sound recordings used 61 The music to be used in rhythmic fitness classes has to be suitable for the purpose in that it is required to have a standardised beat. Bridges between individual works and pauses may be removed from sound recordings to permit the continuity necessary for an uninterrupted exercise session. 62 There is an established market for compilations of music for use in fitness classes. These are customised recordings of popular music specially selected and sequenced for fitness class use. The tempo of the various pieces of music on the recordings will have a designated beat per minute (BPM). For the purposes of freestyle classes (as distinct from those which have been pre‑choreographed), a fitness class instructor selects the piece that has the BPM to suit the particular exercises or activities that are being performed in the class that he or she is taking. 63 Many of the pieces of music included in compilations are original performances by well known singers or groups. However, many are "cover" versions where another performer or group provides their version of the original. 64 There was a difference of opinion expressed by the witnesses before the Tribunal as to whether participants in fitness classes preferred to hear original performers or were content with cover versions. The Tribunal does not have to resolve this issue. It is apparent that both types of recordings are widely used. While it may have a marginal effect on the popularity of a particular class, it does not seem to the Tribunal to be a matter that has a significant impact on the value of recordings to the conduct of the classes. The more significant issue is the proportion of PPCA licensed recordings used in fitness centres. This is returned to below. 65 There was some difference of opinion in the evidence as to whether it was possible to buy fitness compilation recordings in retail stores. Whether or not this is possible, it was apparent that most compilation recordings are bought directly from compilation vendors. Many, but by no means all, compilation recordings are manufactured and sold by PPCA licensors.

Use of non-PPCA music in classes 66 Not all fitness classes use music that is a part of the PPCA repertoire. Although the ACCC noted that PPCA's licence from the recording companies was non exclusive and so users could by-pass PPCA, there was no evidence of this occurring, or if it was occurring, the extent of it. However, the evidence supported the claim by Fitness Australia and the ACCC, that there is a substantial amount of recorded music available for use in fitness classes from other sources. 67 There are two established programs of fitness classes that use at least some non-PPCA music for the purposes of their exercises. These programs constitute training packages that are bought by fitness clubs and are presented by trained instructors. The programs are known as Les Mills and Radical Fitness. There are also other sources of music for use in fitness classes.

Les Mills 68 Les Mills fitness programs originated in New Zealand and were first used in Australia under licence in the mid-1990s. They have proved extremely popular. Mr William Robertson who introduced the programs into Australia informed the Tribunal that there are 4,000 licensed Les Mills programs running at approximately 900 licensed locations in Australia. Over 1 million people take part in a Les Mills class each week. 69 There are eight Les Mills programs. They are all pre-choreographed and may only be conducted by licensed instructors. New versions of each program are released quarterly to maintain interest in the programs. The licence agreement between the fitness centre and the Les Mills organisation entitles the licensee to use the music that provides the basis for the exercises included in the classes that make up the program. The music provided for the classes may not be used in any other environment in or outside the fitness centre licensed to use the programs. 70 As has been noted above, the music to be used for fitness classes often needs modification to make it suitable for use. Mr Robertson informed the Tribunal that Les Mills is not permitted to modify original music without the consent of the copyright owner. Accordingly, where permission to modify a work cannot be readily obtained, a cover version of the work will be made. Mr Robertson advised that approximately 18.3 per cent of the sound recordings used in the 12 month period July-June 2007-2008 were cover versions. Some programs use a higher percentage of cover versions because the nature of the programs does not lend itself to use of original recordings. Les Mills owns the copyright in these cover versions. 71 The cover versions of music produced by Les Mills for use in the Les Mills classes will frequently constitute protected records as New Zealand is a Schedule 3 country. 72 The Tribunal was not provided with any clear evidence relating to the need to obtain a PPCA licence in respect of the playing of music as part of a Les Mills class at a fitness centre in Australia. To the extent that the records played as part of the class constitute cover versions in which Les Mills owns the copyright, it is possible for Les Mills to give a licence to the fitness centres to play such music. However, as noted above, most of the music that is played is derived from protected sound recordings. The Tribunal can see no obvious reason why a PPCA licence would not be necessary to permit the playing of these sound recordings. It does not see a basis for concluding that, even if a fitness centre provided only Les Mills classes, it would not need a PPCA licence.

Radical Fitness 73 Radical Fitness is an Argentinean company that offers fitness classes to fitness centres in Australia. It works in much the same way as Les Mills except that the exercises are not all completely pre-choreographed thereby giving an instructor some flexibility in their presentation. However, the music that is used comprises exclusively cover versions of songs that are recorded in South America. These recordings are not protected records in Australia. 74 Radical Fitness classes have not been adopted as widely in Australian fitness centres as Les Mills exercises. The evidence indicates that at least 66 fitness centres in Australia offer Radical Fitness programs. It was claimed that these programs provide a realistic alternative to classes that use PPCA music. However, no evidence was presented to the Tribunal suggesting that any centre presented solely Radical Fitness programs as fitness classes for its members.

Other sources of music 75 Fitness Australia led evidence that there are other producers of music for use in fitness classes. At present none of these are firmly established in Australia. 76 Ms Susan Kingsmill, the owner and operator of Hiscoes Fitness Centre in Sydney and President of Fitness Australia, said that SAIFAM is a significant producer of music recorded for fitness classes covering all major exercise regimens. These records are continuously up dated. SAIFAM licences the use of sound recordings made by it and fitness centres using SAIFAM records would not need a PPCA licence. Ms Kingsmill said that preliminary negotiations were under way to make SAIFAM records more readily available in Australia. These negotiations were sparked by the PPCA action to increase its licence fee. 77 It was also asserted by Fitness Australia that it would be possible for fitness centres to direct their fitness instructors to use only music sourced from non-PPCA records in their classes. It said that this was likely to happen if the licence fees for PPCA records were considered to be too high. 78 Mr David Allan of Fitness First, which has the largest market share of the fitness industry in Australia, stated that he was exploring the possibility of using fitness programs provided by "Body Training Systems" (BTS), a United States provider of fitness programs. BTS programs utilise unprotected music. Mr Allen said that he would pursue use of these programs if the PPCA fees increased significantly.

Conclusion on effect of other sources of music 79 The Tribunal notes the availability of exercise programs that do not use PPCA protected music. However, it is not convinced that they can or are likely to displace all use of the PPCA repertoire. The fitness industry is dynamic and it is apparent that the various modes of fitness training pass through periods of popularity. It seems that members of fitness centres desire change in their activities. Despite the current popularity of Les Mills classes in particular, the Tribunal considers that it is unlikely that pre-choreographed programs would be favoured by all participants and the participation rate could well decline if they were the only type of training offered. Centres need to provide some flexibility in their offerings. 80 There are also issues relating to competition between centres. Not all centres will wish to offer the same types of classes and there are limits in the range and variety of pre-choreographed classes. There is also an issue of counterbalancing costs for centres. While they might have to pay a fee for the use of PPCA licensed music, this must be compared with the need to pay for the right to use pre-choreographed classes and the cost of training the instructors to present those classes. 81 The Tribunal is not persuaded that the availability of alternative sources of music for classes means that there will be no market for the PPCA repertoire in fitness centres in the future. The evidence does not establish that the Radical Fitness classes are likely to be accepted by all persons who attend fitness classes as a substitute for instructor choreographed classes or as a competitor with Les Mills. As indicated at [72], the Tribunal is not persuaded that the use of the music in Les Mills programs does not require a PPCA licence. 82 The Tribunal is also not persuaded that the Les Mills classes should properly be seen as a substitute for classes that use PPCA protected music vis a vis the use of music. Fitness Australia claimed that, prior to the introduction of the Les Mills programs, the popularity of freestyle classes was waning and: It was the differentiating aspects of the Les Mills offering - namely the choreography, the training of instructors, the systemisation and marketing - that led to the success of Les Mills. 83 Contrary to the position of Fitness Australia, this tends to suggest that the value of Les Mills programs was not the music per se, but their ability to address deficiencies associated with fitness instructors and the nature of the classes being offered. Mr Robertson did not suggest that the resurgence of interest was due to the music being used. It was the total experience that the classes provided. Music is but a part of this. 84 The bundled nature of the Les Mills programs creates another problem when considering substitutability between different sources of recorded music for use in fitness classes as the bundle is being compared with one component of the bundle, the recorded music. 85 The Tribunal is unable to conclude that close substitutes for PPCA protected music for use in fitness classes are readily available. The range and availability of such recordings is limited. While it is possible that such recordings may become more generally available in the future, the Tribunal must reach its decision based on the current position. The Tribunal concludes that the provision of music for use in fitness classes will continue to be dominated by the use of PPCA protected recordings for the foreseeable future.

PRESENT LICENCE 86 PPCA presently administers a licence scheme for the use of sound recordings for the purposes of fitness classes. (As noted previously, this is to be distinguished from the use of sound recordings in fitness centres as background music. This use is governed by another scheme). The fitness class licence scheme was established in 1987. It covers two uses of protected sound recordings: · as an integral part of fitness classes at venues such as fitness centres, gymnasiums and health clubs; · by teachers and instructors conducting fitness classes at venues that would not ordinarily require a licence such as church halls, schools and community centres. 87 The fee for use of sound recordings in such classes was originally based on a daily rate to be paid by the fitness class provider with a minimum and, in the case of fitness centres, a maximum annual fee. The rate to be paid was reviewed in 1995 and a rate per class introduced. Again there was a minimum and maximum annual fee. The rate adopted was $0.71 per class with an annual minimum fee of $35.00 and a maximum of $1,814.05. 88 In the following years the 1995 rate was adjusted following the introduction of GST and has since been increased to take into account CPI increases. The rate at the commencement of these proceedings was $0.946 per class with a minimum annual fee of $49.39 and a maximum of $2,570.04 but it has increased since then to take account of CPI increases. The rate is a flat per class fee. It does not vary with the number of attendees at a class, the membership fee payable to the fitness class provider or the fee charged for undertaking a class. 89 In 1997 a Board of Review, an external dispute resolution mechanism established by PPCA to deal with complaints by licensees, reviewed the tariff as it applied to a particular licensee. The Board, on 16 March 1998, confirmed the then tariff but reduced the amount payable by that licensee.

REVIEW OF LICENCE 90 Mr Stephen Peach, CEO of PPCA, gave evidence to the Tribunal that in 2003 he decided to examine the fees that were being charged for the various licences administered by PPCA. He said that this decision was driven by his view that the PPCA tariffs should be set at a level which properly reflected the economic value of the recorded music being licensed and his understanding that there had never been any proper economic valuation of the rights PPCA was licensing for commercial uses. 91 The first such review was that for nightclubs and dance parties. This review resulted in the application considered by the Tribunal in Reference by Phonographic Performance Company of Australia Limited under section 154(1) of the Copyright Act 1968 (2007) 73 IPR 162 (Nightclubs case) (affirmed on review, Australian Hotels Association v Copyright Tribunal (2008) 75 IPR 449). This decision is discussed further below. 92 Attention was then turned to the fee charged for music used in fitness classes. Mr Peach asserted that the rate fixed in 1995 had not been based on an economic analysis or valuation process that took account of the value of music to the fitness industry. He also indicated that, in his view, the rate set for the licence did not reflect the importance of music in fitness classes, a use which he said continued to grow. He was concerned that the rate per class on which the tariff was based did not adequately reflect the fact that attendance in many classes was high: a figure of 15-20 participants was alluded to. Mr Peach said that this meant that the amount that each member was paying for the use of music did not represent the value that the music gave to their class participation. 93 Having decided to review the fitness class licence, PPCA undertook a preliminary analysis of operational aspects of the fitness industry including the nature of classes offered and the charges for participation in those classes. It also commissioned Frontier Economics Pty Ltd to undertake work to ascertain the value of sound recordings in fitness classes. 94 Frontier Economics undertook a pilot study comprising a short, limited choice modelling exercise based on face to face interviews with fitness class participants at a small number of fitness centres in Melbourne. The report on this survey is known as the "Roberts Research". The result of the research was to produce a preliminary estimate of the value of music in fitness classes. See further from [128]. 95 Armed with this information and confirmed in its view that its existing tariff was too low, PPCA set out to engage in negotiations for an increase with various fitness associations in Australia which were perceived to be representative of the 1,000 or so fitness class providers. These negotiations were not successful in arriving at an agreed tariff. PPCA thereafter commenced these proceedings. 96 To support its application to the Tribunal, PPCA commissioned Frontier Economics to undertake a choice survey of users of fitness centres. The results from this survey, known as the Gyms Survey, became a major part of PPCA's case.

SURVEY EVIDENCE BEFORE THE TRIBUNAL 97 The amount of remuneration that should be paid by a person to a copyright owner for the use of the owner's copyright can be equated to the monetary value that the use of the copyright has for that person. This general proposition has resulted in the presentation to the Tribunal in cases involving copyright licences of evidence directed to estimating that value. On occasions this evidence has taken the form of a survey of the members of the public who take the benefit of the use of the copyright, eg the playing of music, the viewing of films, etc. An attempt is made to ascertain what value those persons would place on the copyright work as a component of the total cost that they are prepared to pay for the activity that uses the copyright work. 98 It has generally not been found to be satisfactory to simply ask people to state what that value is to them ("stated preference"). It has been found that this tends to result in a reduced figure being advised if the person thinks that he or she might have to pay the amount. Greater accuracy in survey responses has been found to be achieved through obtaining what is termed a "revealed preference" from respondents. This is achieved by asking respondents carefully constructed questions based on alternative scenarios that contain some common and some variable factors. Analysis of the responses to these scenarios can reveal the preference of the respondent for a particular factor included in the scenarios and the willingness to pay for that factor. 99 The Tribunal has had to consider survey evidence in two recent cases: Audio-Visual Copyright Society Ltd v Foxtel Management Pty Ltd (No 4) [2006] ACopyT 2 (AVCS case) and the Nightclubs case. In the AVCS case the Tribunal said of the use of survey evidence: 279 While courts and tribunals have to a limited degree over the last twenty years or so admitted survey results into evidence (see the cases cited in Kellogg Company v PB Foods Ltd [1999] FCA 1610 at [107]), they have done so with caution. Examples are evidence of properly conducted surveys exploring issues such as reputation, market or consumer confusion. We note that these are matters of existing fact. Courts and tribunals have been concerned to be satisfied that there has not been inappropriate prompting or the creation of artificial circumstances in which a survey respondent's true state of mind is unlikely to be discerned. 280 The primary issues for the Tribunal are those of the relevance of, and weight to be accorded to, the Survey: see the comprehensive review of the authorities by the Full Court of the Federal Court in Arnotts Ltd v Trade Practices Commission (1990) 24 FCR 313 at 358-365. 281 Factors that are to be considered are whether there are ambiguities in the Survey questions, and whether any positive conclusions can be safely drawn about the likely behaviour of the respondents and of the general population (see State Government Insurance Corporation v Government Insurance Office of New South Wales (1991) 28 FCR 511 at 542-544). It is also important to consider whether the utility of the results is limited by the fact that the survey seeks to elicit responses in a context removed from that of consumer decision making in the real world. 100 In the AVCS case, the Tribunal indicated that it had such doubts about the validity of the contingent valuation survey relied on by the applicant that it could attach no weight to it. 101 In contrast, in the Nightclubs case the Tribunal attached considerable weight to the findings that emerged from the survey submitted by the applicant. The Tribunal was satisfied that the survey methodology was sound and that the questionnaire used there had provided guidance as to the amount that patrons would be willing to pay for the use of sound recordings in nightclubs and at dance parties. 102 The survey used for the purposes of the Nightclubs case was a choice modelling survey. Choice modelling surveys are discussed further from [118]. 103 PPCA in this case commissioned the administration of a choice modelling survey of fitness centre users to endeavour to ascertain their willingness to pay for the use of music via sound recordings in fitness classes ("the Gyms Survey"). This survey formed the centrepiece of the PPCA's claim for an increase in its tariff. Its value as a guide to the determination of the appropriate licence fee is returned to below.

PROPOSED LICENCE 104 At the outset, PPCA resolved to abandon the two categories of uses that are provided in the present licence. It substituted one category applicable to all fitness class providers irrespective of the venues at which the classes take place. It also determined that it should move from a per class method of specifying the tariff to one based on membership of fitness centres that offer fitness classes. 105 PPCA initially sought the approval of the Tribunal to a rate of $4.54 per member of a fitness centre per month or $0.99 per visit by a casual attendee at such a centre. This fee was not related to participation in fitness classes. It applied to all members of the fitness centre on the basis that membership entitled a member to participate in fitness classes and this opportunity cost should be included in the fee. 106 At the conclusion of the hearing, the Tribunal was presented with a scheme described as the Fitness Centre Licence Scheme ("the amended Scheme") that contains three options with differing methods of calculating the tariff. The first is based on a payment per member per month. 107 The second option is a flat rate of $20 per class, including for stretching, yoga, etc, classes. 108 The third option is based on a rate per-attendee per-class. When the amended Scheme was presented to the Tribunal it was made clear that this option was not favoured by PPCA or Fitness Australia and accordingly no amount for the rate was proposed by PPCA. However, it was the method for calculating the licence fee favoured by the ACCC. 109 The options are summarised in Appendix 1.

APPLICATION OF LICENCE SCHEME 110 The intended application of the amended Scheme can be gleaned from the notes to Option 1 of the scheme as set out in Appendix 1. Points of significance are: · The range of activities that fall within the definition of "Fitness Class" covers most activities that are conducted in a "Fitness Centre". The only requirement is that it be a "structured form of exercise" and that it be accompanied by a sound recording. There is no limitation in the definition that the class involve some rhythmic movement. · The definition of PPCA Class extends the scheme to classes where there is any use of a PPCA repertoire record in the class. There is no variation in liability depending upon quantum of use. · A fitness class does not have to be taken by a fitness instructor to fall within the amended Scheme; the accompaniment of a sound recording is the qualifying factor. · On the per member rate, a lower fee is to be charged for classes conducted in Specialist Yoga Centres and Specialist Rhythmic Only Centres. 111 Following the hearing, an exchange of correspondence took place between the Tribunal and the parties. The Tribunal indicated that it was minded not to adopt Option 1 but was inclined to make Option 3 available to fitness class providers. Fitness Australia stated that it was still opposed to that form of tariff. However, PPCA indicated that it was prepared to accept such an approach to determining the tariff and proposed a fee per attendance of $1.50 for a single attendance at a class. PPCA did not differentiate in its proposed fee between different types of classes. Unlike its proposal in relation to Option 1, it drew no distinction between general and specialist centres (as it had not in Option 2). 112 PPCA proposed that additional conditions should apply if the per class attendance tariff were adopted. It proposed that, a fitness centre be required to elect one fee basis, ie per class or per attendance for a 12 months period. The Tribunal agrees with this. It also proposed that there be a minimum amount per class, for example $15, or a higher per attendance rate for classes with low attendance. The increased administrative burden associated with this proposal was not canvassed and the Tribunal considers that it adds a degree of complexity to the option that is not warranted. The Tribunal returns to PPCA's proposals at [288]. 113 The ACCC had indicated at the hearing that it favoured an attendance per class tariff but it responded to the Tribunal's subsequent correspondence to advise that it did not wish to make any submissions on the issues raised.

TRIBUNAL'S ROLE IN DETERMINING LICENCE FEES 114 The appropriate fee for payment for the use of sound recordings in public was recently considered by the Tribunal in the Nightclubs case. In the course of its judgment the Tribunal summarised its role in relation to an application for approval of a licence scheme as follows: [10] In each reference under s 154, the Tribunal must make a value judgment as to what it considers reasonable in the circumstances. It is not usually possible to calculate mathematically the correct licence fee in any particular case (APRA v AFRB 46 IPR 20 at [19] and [11]). Where approval of a scheme would lead to a substantial increase in fees, the increases can be phased in over a period of years rather than being introduced immediately. In the present case, the Society proposes that there be a phasing in of the increase claimed by it. [11] In determining whether a proposed scheme, and the licence fee payable under it, are reasonable, a number of approaches might be adopted. The approaches include the following, which may overlap to a certain extent: · Market rate: the rate actually being charged for the same licence in the same market in similar circumstances. · Notional bargain rate: the rate on which the Tribunal considers the parties would agree in a hypothetical negotiation, between a willing but not anxious licensor and a willing but not anxious licensee. · Comparable bargains: bargains not in the same market but sufficiently similar to such a notional bargain as to provide guidance to the Tribunal. · Judicial estimation: the rate determined by the Tribunal after taking into account a range of matters such as: · previous agreements or negotiations between the parties; · comparison with other jurisdictions; · comparison with rates set by other licensors, capacity to pay, value of the copyright material, the general public interest and the interests of consumers; and · administrative costs of a licensing body (see Audio Visual Copyright Society Ltd v Foxtel Management Pty Ltd No. 4 68 IPR 367 at [131] and [142]). 115 The Tribunal accepts this analysis as appropriate for it to follow in the present application. 116 In this case, PPCA contends, in essence, that there is no market rate or comparable bargain available. It says that the Tribunal's approach must, therefore, be a combination of notional bargain rate and judicial estimation. Fitness Australia rejects this saying that the present rate represents a market rate and that it is comparable with rates adopted in other countries for the like use of sound recordings and with the APRA rate for the use of music in fitness classes. 117 PPCA based much of its case on the choice survey that it had commissioned from Frontier Economics. The Tribunal turns now to that survey.

What is the objective? 118 No specific market value is available for the use of recorded music from the PPCA repertoire in fitness classes provided by fitness centres. The music to which access is provided by the PPCA licence is bundled with other attributes offered by fitness centres such as the instructor, the venue and the equipment. Consequently, membership fees paid by those attending these classes provide little, if any, insight into the value of the music. Thus, to estimate the value of the music and hence the economic value of the licence, it is necessary to unbundle the fitness centre offering. 119 Arriving at the economic value of the licence involves two steps: a. estimation of the value generated for their benefit by fitness centres through the use of the music; and b. determination of the share of that value that should accrue to PPCA. 120 Although not categorically accepted by Fitness Australia, the Tribunal is satisfied that the evidence establishes that it is valid to assume that playing recorded music in fitness classes adds value from the perspective of attendees and hence increases the profits of the fitness centres. This is because more people choose to attend these classes and people are prepared to pay more for classes playing recorded music than if no music was played. The operators of fitness centres may have some idea of the value of this music for their operations, and as the ACCC submitted, they would appear to be the appropriate party to provide information about this. However, if asked, their incentive would be to understate the value of the music. 121 However, as the demand for music by fitness centres derives from the value placed on the use of recorded music by those attending the classes, that is, it is a derived demand, it may be possible to obtain the information necessary for valuing the music from attendees rather than from the fitness centre operators, that is, the value placed on the music by attendees may provide a proxy for the value placed on it by fitness centre operators. This can be referred to as their willingness to pay for it (WTP). 122 The issue is whether it is an appropriate proxy. Fitness Australia and the ACCC argue that it is not. This is because, first, under the present arrangements fitness centres generally charge a membership fee that is not specific to attendance at fitness classes. Secondly, there may be a difference between the WTP of fitness centres and their customers. Professor William Hanemann (Chancellor's Professor in the Department of Agriculture & Research Economics and the Goldman School of Public Policy at the University of California at Berkeley) was an expert witness called by Fitness Australia. He observed: The willingness to pay of the clubs may be lower than that of their customers because of factors that limit their ability to pass on the full increase in the cost of operating classes to the portion of their membership that use these classes. Even in a market which is not competitive, absent perfect price discrimination, a seller is unlikely to capture the entire WTP of a buyer. 123 The Tribunal accepts that this may mean that the value placed on music by attendees at fitness classes may not be a precise indicator of the value of that music to the operators of the fitness centres. It was incumbent on PPCA to establish that there was a consistent relationship between the WTP of attendees and of the operators. Fitness Australia claimed that this had been assumed rather than established by the evidence. It said that the fees paid by members of fitness centres cannot be used to deduce a WTP for music in fitness classes. The Tribunal notes the difference with the position in Nightclubs where attendees paid a fee to attend which was primarily reflective of the music played and the nightclub essentially offered a single product. 124 The Tribunal also notes that attendees also have an incentive to understate the value of recorded music used in classes - if they reveal the true value of the music to them, they may be required to pay higher attendance prices. Thus, it is better that they be asked indirectly, rather than directly, about the value of music. If this value can be determined and there is a reasonably consistent relationship between the value that attendees and fitness centre operators place on the recorded music, this provides useful input into estimating a price for that music. More importantly, to provide a satisfactory proxy, there must be a reasonably consistent relationship between the value placed on the music by attendees and by fitness centre operators. Dr Philip Williams is the Executive Chairman of Frontier Economics, the independent economics consultancy engaged by PPCA (see [93]-[96]). Dr Williams accepted that no simple one to one relationship exists between the WTP of fitness centres and the WTP of attendees. Nevertheless, the Tribunal is inclined to accept that the value placed on recorded music played in fitness classes by consumers is a reasonable if imperfect proxy for the value that the operators of fitness centres place on the recorded music. 125 Professor David Hensher is Professor of Management and the founding director of the Institute of Transport and Logistics Studies, within the Faculty of Economics and Business at the University of Sydney. Professor Hensher explained that choice modelling offers a means by which to estimate the value of particular product attributes which are not marketed separately, such as the use of recorded music in fitness classes. Choice modelling involves: …offering individuals various packages of attributes and associated levels, and asking them to review the offerings, and choose which one they most prefer. Through a process of varying the levels of the attributes associated with each alternative across a number of choice scenarios, and having the individuals make a choice each time, we uncover information that effectively tells us about the individual's preferences for each package and the role that each attribute plays in their choices and ordering of the alternatives. 126 From this it is possible to estimate the relative importance of an attribute in the total level of satisfaction associated with each alternative offer. Given this, the maximum WTP for the individual attributes tested in the choice modelling can be estimated. WTP is the maximum amount that buyers are willing to pay for a product (in this case, recorded music played in fitness classes) rather than forego the product. In part this depends on the substitutes available and how close those substitutes are to the original product. 127 Although there was some discussion by the various experts before the Tribunal concerning the appropriateness of choice modelling for the present purpose, it was agreed that practical use is being made of choice modelling and important commercial decisions are being based on the results. Ultimately there was in principle agreement that this approach could be used to estimate the WTP for recorded music used in fitness classes. There was, however, considerable disagreement between the experts as to how the choice modelling survey should be undertaken and the way in which the information obtained could or should be used.

The processes undertaken by and on behalf of Frontier Economics 128 Frontier Economics was engaged by Gilbert + Tobin on 1 September, 2005, initially to provide preliminary advice about the value of recorded music used in fitness classes. Frontier Economics indicated that it would use the Roberts Research Group to design an appropriate research methodology for this purpose. Roberts Research was to undertake a pilot conjoint analysis (ie choice modelling) to assess the value of sound recordings used during fitness classes relative to other attributes. 129 The qualitative phase of this project involved 15 interviews of 10 minutes duration at two fitness centres located in Melbourne to identify the attributes that users considered important in choosing, and continuing to attend, fitness classes. The second phase involved a conjoint analysis based on 72 interviews undertaken at six gyms in Melbourne. Respondents were presented with two options describing different fitness centre attributes, based on information from the first phase of the project, and they were asked to choose between them. Based on these choices, it was found that attendees valued the use of music in fitness classes at $6.10 per member per class, and this increased by $0.52 as the quality of the music improved to "favourite". 130 In its report of 25 November 2005, Frontier Economics outlined its methodology for dividing the estimated WTP from the Roberts Research conjoint analysis between the relevant parties. This involved an equal division. The relevant parties were assumed to be PPCA, APRA and the fitness centres. Frontier Economics estimated that the value of sound recordings used in fitness classes was approximately $95 per class (after allowing for costs). This is based on a WTP of $7 per person per class (derived from the Roberts Research inquiry), an average class size of 15 and costs of $10 per class. Thus, the value due to PPCA was $31.67 per class, the latter representing a three-way split between fitness centre operators, PPCA and APRA). Dr Williams concluded that: Roberts preliminary analysis provides evidence that the WTP for classes is substantially greater than the price charged for classes. This is evident from the relatively low importance placed on the cost of class attribute in the choice of whether or not to attend a class, and the share of preference shown for more expensive classes even when low cost choices were available. 131 Frontier Economics noted the limited sample size and that the results were highly sensitive to the assessment of the characteristics of the fitness centre. Consequently, proposals for a more extensive study were presented to Gilbert + Tobin by Frontier Economics in September, 2005. 132 The information from the Roberts Research study was used by PPCA to commence a formal consultation process with the fitness industry. PPCA held information sessions with the industry in February and April 2006. In October 2006, at a meeting between PPCA and the Fitness Industry, Dr Williams outlined the proposed study to value sound recordings used in fitness classes. Initially, it was anticipated that this would be a collaborative process between PPCA and the fitness industry but a lack of progress resulted in PPCA's present application to the Tribunal. 133 Gilbert + Tobin engaged a number of consultants, including Professor Terry and Associate Professor Tremayne (see from [54]), to collect and analyse information relating to the use of music in sporting situations and in relation to the fitness industry. Early in 2007 Australian Market Research Pty Limited (AMR), the parent company of Online Research Unit Pty Limited (ORU) was engaged to implement and conduct a survey on the internet (the Gyms Survey) using a questionnaire supplied by Frontier Economics. Frontier Economics employed Professor David Hensher and Dr John Rose of the University of Sydney to design the survey instrument to collect data concerning the value placed by attendees at fitness classes on the use of recorded music in those classes. 134 In October 2007, Gilbert + Tobin retained Allen Consulting to conduct a study, involving four focus groups, to assess consumer perceptions, responses and preferences related to music used in fitness classes. Subsequently, the initial Focus Groups were conducted by Taverner Research on 23 January 2007 in Sydney to produce a set of attributes and levels to incorporate into the survey instrument. A strong positive relationship between the use of music in fitness classes and the level of satisfaction experienced by class participants was identified. This enabled development of a draft survey instrument in late February 2007. 135 The draft was then presented to a second round of focus groups on 23 April 2007. This resulted in further refinements to the survey instrument to produce the pilot survey instrument which was tested on further focus groups in early May 2007. Taverner reported that respondents completed the survey quickly and easily and encountered no significant difficulties. However, there were suggestions for improvements and the issue of boredom on the part of the respondents was raised. The pilot survey was undertaken in the week beginning 8 May 2007 in Sydney. Twenty responses to the pilot survey were completed and 19 were used to obtain preliminary estimates of relevant variables. Dr Williams reported that: The average WTP per class of having music relative to having the instructor keep the rhythm and beat is $4.56 per person per class and $2.92 to have music relative to a beat machine provide such a service. In low impact classes, [yoga and stretching] the average WTP per person per class for music relative to having no music was found to be $2.18. The survey instrument was further reviewed in response to findings from the pilot survey. 136 The respondents provided comments (undated) on the proposed survey methodology, suggesting that theoretical and other flaws may result in consumer WTP being overstated. Comments on the proposed methodology were also received from the ACCC dated 15 August 2007. Frontier Economics replied to these criticisms in a report dated 11 October 2007. The final survey was then undertaken using a sample of respondents drawn from an existing internet panel. 137 Early in 2008 Professor Hensher used the statistical output derived from the final survey provided by Professor Robert Bartels (a consultant at Frontier Economics) to derive estimates of the WTP by attendees for recorded music used in fitness classes. The aim was to derive an estimate of the maximum WTP of the fitness centre operators to be able to play recorded music in these classes. It was decided that WTP would be estimated separately for yoga/pilates classes as music served a different purpose in these classes. Based on the choice modelling results it was estimated that WTP for the use of recorded music in rhythmic fitness classes was $14.13 per person per month and in yoga and pilates classes it was $11.95. 138 PPCA stated that it had provided its results to the Tribunal as a guide for determining an appropriate licence fee to be paid by fitness centres for the use of this music.

The questionnaire 139 The premise underlying the questionnaire was explained by Dr Williams. He explained that the demand for gym memberships (or WTP) was inversely related to the price of membership - at high prices relatively few memberships will be demanded as the proportion of potential consumers with high WTP is relatively low; at lower prices more memberships are demanded as a higher proportion of potential consumers have a WTP equal to or greater than the price. 140 Next, Dr Williams assumed that music is played in fitness classes. This shifts the demand curve such that more memberships will be purchased at each price level or to put it slightly differently, WTP has increased to reflect the value added by the music, and so more memberships are demanded at any given price level. From this he concluded that the value added by the use of the music is the difference between the price consumers are prepared to pay for gym membership with and without music. 141 The final questionnaire began with a screening question intended to ensure that respondents had attended a fitness class with an instructor in the last three months, as well as questions concerning the centre most frequently attended, membership payments, frequency of attendance, the type of classes attended and an assessment of the fitness centre most often attended. Other questions related to age, gender, income and location. 142 The balance of the questionnaire comprised 6 hypothetical choice sets where the respondent was asked to select from Centres A, B and C where C corresponded to the centre the respondent most frequently attended. Respondents were provided with information about the notional price of membership at their current centre as a basis for comparison. In each of the six choice sets, the attributes offered related to: a. the range of equipment; b. the quality of the equipment; c. the means by which the instructor maintains rhythm and tempo in class; d. music in classes such as yoga, pilates and stretch classes; e. the professionalism and quality of instructors; f. the range of times classes are offered; g. the range of types of classes; h. membership fee per month. 143 These attributes were then varied across the choice sets. In relation to music, for example, respondents were told that music was or was not offered in yoga/pilates classes; or that the instructor maintained rhythm and tempo by calling out but not offering music, or by using a beat machine rather than by playing music.

Wrong variable measured 144 It was claimed by a number of expert witnesses and by Fitness Australia that in attempting to measure WTP for recorded music used in fitness classes, the questionnaire measured the wrong variable. This is because the aim should have been to measure the value of music from the PPCA repertoire used in these classes, rather than the value of all recorded music used in such classes. The availability of recorded music which is not part of the PPCA repertoire may have the effect of reducing the value of similar music available from the PPCA repertoire because it provides a cheaper substitute to the extent that, for the alternative music, a licence fee is not payable to PPCA. It may also create a problem in determining the nature of the hypothetical bargain (see below). 145 The Tribunal considers that it would not be feasible to ask respondents to distinguish between recorded music from the PPCA repertoire and non PPCA recorded music. The problems relating to this division have been discussed at [19]-[32]. When the parties familiar with the music industry are unable to agree on the basis on which recordings are to be categorised, it is unrealistic to invite fitness class participants to identify whether or not they are listening to PPCA protected music. Rather, it may be appropriate to allow for this possibility after the data has been collected and processed. 146 PPCA's position was that its "blanket" licence covers nearly all sound recordings commercially released in Australia. However, the ACCC argued that the focus should be not on the extent of PPCA's repertoire but on that part of its repertoire that relates specifically to sound recordings suitable for use in fitness classes. PPCA does not specifically monitor the music used in such classes, instead relying on airplay logs relating to radio airtime, and PPCA admits that this information may not be a good representation of use in fitness classes. The Tribunal considers that this issue has its impact on the distribution of revenue from licence fees, rather than impacting on the licence fee itself. 147 The Tribunal considers that although in some instances the playing of music from these alternative suppliers does not require a reproduction licence from PPCA, in most cases use of this product in fitness classes in Australia will require a public performance licence, as contended by PPCA. However, so long as fitness centres obtain a PPCA licence, the blanket nature of this licence addresses the issue from the perspective of the fitness centres. 148 Dr Timothy Bock is a director of Numbers International Pty Ltd, a market research consultancy specialising in quantitative research. He was called as an expert witness by Fitness Australia. Dr Bock used an example based on the television series Gilligan's Island to argue that PPCA's experts had confused WTP and economic value, given the availability of recorded music to fitness centres from both the PPCA repertoire and from non PPCA sources. The example related to the opportunity for two people from a group marooned on the island to leave it on a boat capable of carrying only two passengers. Under these circumstances, the WTP and hence the price is likely to be very high. However, just as a deal is about to be struck, another boat arrives, making it possible to negotiate a considerably lower price. The lower price is attributed to the increased supply, rather than to a change in demand, although as per Dr Williams' analysis, movement down the demand curve in response to increased supply and lower prices means that the average WTP will be lower when substitutes are present. It is apparent that the WTP when only one boat is available overstates the economic value compared with when more than one boat is available. 149 Nevertheless, the example begs the question as to the size of the second boat and the conditions of its use. Likewise its applicability to the use of PPCA recordings in fitness classes is based on the premise of extensive availability of alternative non PPCA recordings. That is not the present position and it is questionable whether there will be a close substitute for PPCA recordings in the foreseeable future: see above at [79]-[85]. 150 Dr Williams was aware of the problem but assumed, at least implicitly, that most recorded music used in fitness centres was from the PPCA repertoire; and that it was not possible to unbundle PPCA-music from the recorded music offering in fitness classes. This is implicit, for example, from his decision to use a joint seller construct in relation to the hypothetical bargain (see below). Dr Bock used the Roberts Research finding that the WTP per person per class when music was defined as "likeable but not preferred" was $6.10 compared to $6.62 when the music was "favourite and preferred". By equating the latter to PPCA-protected music, he concluded that the applicable tariff should be 7.9 per cent of the estimated WTP for music. Likewise, Professor Hanemann assessed WTP for PPCA-protected music to be about $0.52 per person per class. However, under cross examination, the witnesses conceded that "favourite and preferred" did not equate to recorded music in the PPCA repertoire. 151 Dr Bock suggested other methods by which the problem of estimating WTP for PPCA-music given the availability of recorded music outside of the PPCA repertoire. These included: a. replacing reference to the beat machine in the questionnaire with asking respondents to imagine "similar sounding music" to the original; b. a comparison of the price of fitness centre membership for centres playing more and less PPCA music; c. exposing respondents in a fitness class to PPCA-music and non PPCA-music and obtaining their reaction to each; d. carrying out a long term behavioural experiment at fitness centres along the same lines as (c) above; e. a contingent valuation study. 152 None of these appears particularly practical or helpful in the present context for the following reasons. As recognised by PPCA, there is a significant problem in narrowing the focus of survey respondents to protected music in the PPCA repertoire in that they are unlikely to be able to differentiate between music within and outside the repertoire. As Fitness Australia points out, that may imply that PPCA-music and non PPCA music are close substitutes. PPCA's solution was to assume that the fee payable based on the value of all music could be discounted to allow for the over-inclusiveness of this approach. A similar problem was encountered in Nightclubs and the Tribunal discounted the value of the music to reflect the 20 per cent of music used which was unprotected. 153 However, this requires reasonably reliable information about the extent of non PPCA product available. Various estimates were made relating to this but there was considerable disagreement concerning their reliability (in particular see discussion of the estimates provided by Ms Small at [28]-[29]). Importantly, not only is it necessary to have information concerning availability and current usage, it is also important to understand the extent to which users of recorded music in fitness classes would be prepared to switch away from PPCA music in response to an increase in the PPCA licence fee. Notwithstanding the availability of recorded music outside of the PPCA repertoire, the evidence before the Tribunal indicated that fitness centres prefer to use PPCA music. 154 The Tribunal concludes that it was not practicable for the survey to distinguish between PPCA and non PPCA recordings. Nor is it persuaded that there was any other realistic means available to test user preferences for the different types of recordings.

Modifications to the questionnaire 155 Focus groups were used to test the survey instrument and in response to the findings from these the questionnaire was modified. For example, Dr Williams and Professor Hensher concluded that the instructions for the choice experiment were too long, the definitions of the attributes were too wordy, there were too many attributes, and there were too many separate choice experiments for respondents to conduct. Consequently, the instructions and definitions were reduced, one attribute was dropped, and the number of choice experiments was reduced from 10 to 6. 156 Dr Bock recognised this but stated that focus group participants were only asked to address whether questions were confusing or answerable, rather than whether they could be answered accurately or in the way the researcher required. He suggested that the wording of the questionnaire could produce confusion about the meaning of "fitness classes" and that the description of the alternative attributes that respondents had to select between was not sufficiently clear. However, Dr Bock accepted that Professor Bartels and AMR/ORU applied their own test of quality and excluded responses that appeared doubtful. 157 Professor Hanemann stated that a choice experiment must offer respondents tradeoffs that are realistic and credible and respondents must engage with the trade-off in a thoughtful and deliberate manner. However, in his view neither of these requirements was satisfied and the changes made based on feedback from the focus groups did not overcome the problems. In relation to the latter issue, he criticised the number of attributes used in the Gyms Survey, and the number of choice sets, even though there were only six choice sets in the final questionnaire compared to the 10 originally proposed. In particular Professor Hanemann raised concerns about "non traders" and their impact on the results. 158 "Non trading" refers to a respondent who does not engage in the choice exercise but simply selects, in the context of the Gyms Survey, the same centre for each choice scenario. Professor Hanemann was of the view that around one third of the sample respondents were non traders. This was because the number of choice sets resulted in respondents becoming tired and/or bored. In relation to the realism of the choices offered, Professor Hanemann was of the opinion that this requirement was not satisfied - for example in relation to location. He was also concerned about the lack of response by respondents to changes in price. These criticisms are discussed below. 159 In addition, Dr Bock suggested that what he regarded as a high drop-out rate amongst respondents may have been due to "a poor questionnaire". Dr George Terhanian is President of Harris Interactive Europe, a business and consumer research firm specialising in internet based market research. Dr Terhanian stated that, in his experience, the drop-out rate was not unusually high given that the survey was a conjoint exercise and quite complex.

Location 160 During the hearing there was a great deal of discussion about the role and treatment of location in the survey. It was clear from the Roberts Research findings that location was a key factor determining the fitness centre which people chose to attend. Fitness Australia, and its experts, claimed that failure to include location specifically meant that a key attribute influencing the respondents' choice of fitness centre was excluded and that as a consequence either this contributed to the non trader problem (see below) and/or it distorted the choices made. Professor Hanemann claimed that: …eliminating two or three dominant attributes (location, parking, perhaps child-minding facilities) by setting them aside from the choice makes it impossible to obtain an accurate assessment of the true weights associated with the other, less dominant attributes that are varied in the choice experiment… He stated that if location was critical, removing it would not be helpful. Removal from a choice survey of an attribute that is essential or non negotiable leaves respondents with no basis for ranking the other variables. 161 In cross examination, Professor Hensher accepted this but maintained that it had been appropriately allowed for in the questionnaire. However, location was not included as a separate attribute in the choice sets. Instead, respondents were instructed "to assume that the fitness centres are all located very close to the fitness centre you attend the most and they all have the same facilities (parking, child-minding, etc) as your fitness centre." 162 Professor Hensher explained that location "...was accommodated through the way in which the choice set was defined by having a reference to alternative locations…". He said that this avoided location dominating the responses, where location was not the variable of interest. In his opinion, respondents therefore would engage in the task of choosing between the options in each scenario. They would be prepared to trade rather than determine all responses with respect to location. 163 Professor Hensher stated that there are always some factors that influence choice that are not explicitly included in the options provided to respondents. These are captured in the choice modelling process through recognition of a set of unobserved attributes, and the imposition of appropriate statistical analysis to deal with the issue. However, Fitness Australia claimed that in cross-examination Professor Hensher conceded he had not captured the effects of location. In its final submissions, PPCA claimed that the modelling captured the respondents' utility for any other characteristics, that is, those not individually identified, including location. 164 From the evidence presented to the Tribunal, it is apparent that the relevant literature is unsettled on the treatment of key attributes such as, in the context here, location, that are not the focus of the study. Nevertheless, there is some support for the view that it is preferable to include but neutralise such variables because omitting them may result in inferences about the variable and its treatment that affect responses. PPCA cited studies where a similar approach to that employed by Professor Bartels and Professor Hensher was adopted. However, the question has a practical dimension: were respondents to the survey able to set aside the role of location and focus on the role of music? Fitness Australia claimed that they were unable to do so. PPCA claimed that the evidence showed that respondents were aware of other fitness centres in the same vicinity and therefore it was not unreasonable to ask them to imagine three fitness centres in one area. 165 Importantly, however, the problem posed by location could have been reduced. In Professor Hanemann's opinion, it could have been overcome if the questions had been about one centre with varying attributes. The Tribunal agrees that such an approach may have enhanced the value of the survey. However, while the treatment of location may have created some inaccuracy in the survey responses, given that the respondents were drawn from an existing panel available for survey purposes, the Tribunal considers that it is reasonable to conclude that even in relation to a factor that is a key determinant of the fitness centre selected, the respondents would recognise the hypothetical nature of the question and so be able to answer appropriately.

Price responses 166 As the survey aims to create a trade-off between music and price in relation to fitness classes, it is important to include price in the choice scenarios. Professor Hanemann observed that: The logic of the measurement strategy adopted by Dr Williams and his colleagues was to use a survey to create a tradeoff between music and price in fitness centres. The success of the strategy depends, inter alia, on the measurement of these two variables 167 Professor Hensher explained that the way in which this was dealt with was: a. to ask participants what they paid for their current gym membership and whether they paid weekly or monthly, etc - this was then converted to a price per month; b. use of a "pivot" design. This "...pivots the fee levels for the options in the choice scenarios around what the person currently pays per month." Thus, "...the computer resets the prices provided to each survey participant for their choice sets to be higher or lower (but centred around) their current price. As a result, each participant was evaluating the attribute package in the context of a range of fees that were sensibly established relative to their current fee.."' 168 Conversion of the price to an equivalent fee per month was controversial. In practice only 24.5 per cent of respondents paid per month, and Professor Hanemann was critical of treatment of "other" forms of payment. Professor Hensher responded that he had assumed that respondents chose the payment structure that gave each the lowest expenditure given the number of visits to a fitness centre. However, he admitted that it would have been better to structure the survey to take account of the payment method actually used by each respondent. 169 Professor Hanemann claimed that the transcript of the April 2007 focus group suggested that some respondents might have ignored price and focused on one or two of the most important non price attributes to simplify their choice and so selection may not have been based on price. If this was the case, it could be expected to result in measurement error, that is, a difference between the price perceived by respondents and that used by the econometricians analysing their responses, and this may positively bias the estimated WTP. Dr Bock estimated that for about 80 per cent of respondents it was not possible to determine whether they had taken price into account when completing the questionnaire. 170 The Tribunal accepts that variability in the level of pricing across fitness centres and in the basis for pricing presented a challenge in representing price in the choice experiments. However, it regards much of the commentary on the respondents' treatment of price as no more than speculation - it is simply a possibility that it would have distorted the survey findings.

Alternatives to recorded music 171 Recorded music provides beat, melody, instrumentation and, sometimes, lyrics. A difficulty faced in the type of valuation exercise being undertaken by PPCA is to identify a sensible alternative to be offered for the attribute to be valued. The Tribunal accepts that it is essential to consider the respondent's best alternative option. One option is to assume that no music is played in the relevant fitness classes - essentially this was the option in the Nightclubs matter and it was made possible because music was regarded as an essential part of the nightclubs' product. In relation to fitness classes, other options included the instructor calling out or the use of a beat machine, although each provides only tempo. 172 For yoga and pilates classes, music is not always used and it was decided that respondents could easily select between music and no music and so they were offered choices involving the use of recorded music or no music. In rhythmic fitness classes, because music was almost always used, it was regarded as inappropriate to offer the alternative of "no music". Instead, in different scenarios, the alternatives were "instructor calling out" oruse of a"beat machine". However, Professor Hanemann pointed out that if non‑protected music was a perfect substitute for PPCA-music, then the value of PPCA music would be zero. This issue is considered further below. 173 Use of the "beat machine" option was highly controversial. Professor Hensher stated that he regarded the beat machine as a poor substitute for recorded music. Fitness Australia observed that the value attributed to the beat machine by respondents was ignored by PPCA. Professor Joshua Gans (Professor of Management (Information Economics) at the Melbourne Business School, University of Melbourne and Professorial Fellow in the Department of Economics, University of Melbourne) is the managing director of CoRE Research Pty Ltd (an economics consultancy). He was called as an expert witness by the ACCC. Professor Gans, Professor Hanemann and Dr Bock regarded the beat machine as the appropriate comparator as it had the next highest WTP after the use of recorded music. 174 ACA Research was engaged by Gilbert + Tobin on behalf of PPCA to undertake focus groups to collect information about preferences for beat machines in the context of fitness classes, and this occurred on 7 and 8 October 2008. The finding from the focus groups was that a beat machine was an unsuitable alternative to playing recorded music in fitness classes, and even limited use of it would cause considerable migration from fitness classes. 175 As noted, the only option offered for yoga and pilates classes was "no music". Dr Bock was critical of this, suggesting that there were alternatives such as recordings of waves, birds or chimes that could have been used. However, these were merely hypothetical alternatives not reflective of actual practice. The Tribunal accepts that in the circumstances the option of recorded music or no music in yoga/pilates classes was to be preferred. 176 The appropriateness of the options offered in relation to recorded music affects the validity of the responses obtained and has implications for how the WTP estimate derived from these alternatives was employed in obtaining the estimate of WTP for recorded music (see below). The Tribunal accepts on the evidence that recorded music is an essential part of most fitness classes and that a "beat machine" is not a realistic alternative. Accordingly, the WTP for a beat machine derived from the survey is not informative or helpful for the present purpose - see the discussion at [50]-[60].

The Survey process 177 In relation to the conduct of the survey, the two key issues between the parties were whether it was appropriate to: a. use an online survey; b. use a pre-existing list of potential respondents. The latter merges into the issue of non random sampling (see below).

Use of online surveys 178 Mr Brian Fine is the chairman of AMR. Mr Fine and Dr Terhanian were engaged by PPCA for the purposes of the surveys. Each discussed the benefits of using an online or internet -based survey for choice modelling. These included: a. speed; b. ability to use larger samples; c. easier to reach hard to reach respondents when have online panels stored in data bases; d. versatility in the way the material is presented to the respondent; e. innovation; f. greater likelihood of getting honest responses to personal questions; i. convenience of access at any time; ii. more productive - panellists can read faster than they can listen, so more information can be obtained in less time. In particular, an on-line survey is advantageous where respondents are being asked to consider a range of options, as in the case of choice modelling. 179 Despite extensive debate on this issue, Dr Bock agreed that online surveys have advantages, notwithstanding his concerns about whether the sample used in this instance is representative of the appropriate population. The Tribunal accepts this.

Use of existing panel 180 Early in 2007 AMR/ORU was engaged by Frontier Economics to implement and conduct the Gyms Survey on the internet. Having acquired the survey instrument from Frontier Economics, AMR/ORU created a computer program for undertaking the survey online. Then a random sample of potential respondents was compiled from the online data base of AMR/ORU, reflecting certain characteristics for the composition of the sample as specified by Frontier. (A sample is random if every member of a relevant population has an equal or at least a known chance of being selected in the survey. This has the advantage that statistical tests can then be applied to the survey results.) 181 Mr Fine said that the AMR/ORU panel has been built up from an audience measurement panel, by inviting respondents who have completed telephone or mail surveys to join the panel and by purchasing other online data bases. He stated that: AMR/ORU has established a series of groups of consumers, known as "panels", who make themselves available to complete market research surveys, or participate in market projects, including by completing online surveys. Mr Fine said that there are over 340,000 online consumer panellists aged 15 years and above on the AMR/ORU database. A range of details, such as age, occupation, gender, household structure, income and consumption patterns, have been obtained previously from these panellists. For any particular project, panellists with applicable criteria are selected. 182 Professor Jon Krosnick is the Frederic O Glover Professor in Humanities and Social Sciences and Professor of Communication, Political Science and Psychology at Stanford University, USA. He was called as an expert witness by Fitness Australia. Professor Krosnick accepted that: [i]nternet based data collection represents a viable approach in conducting representative sample surveys. However, he was particularly critical of the use of an existing panel for undertaking the Gyms Survey because it may not be representative of the relevant population. Essentially Professor Krosnick's concern was that the panel itself has been created by a process of selection which was not random. As a consequence it was unlikely to be representative of any particular population for which a survey is to be undertaken. Mr Fine rejected this. He claimed that the panel had been built up according to best practice as identified by domestic and international market research. 183 There was some debate as to the relevant population for the Gyms Survey: Professor Krosnick referred to the population as having been identified as residents of city and regional areas around Australia, although it is unclear as to whether Professor Krosnick himself regarded this as the relevant population or whether he was saying that this was the population assumed by PPCA. PPCA claimed that the relevant population was attendees at fitness classes. The Tribunal considers that the population of interest is attendees at fitness classes at fitness centres. A "screening" question was used by AMR/ORU in the Gyms Survey to achieve an appropriate group of respondents, namely people who had attended a fitness class with an instructor within the last three months. 184 Professor Krosnick was concerned that the accuracy of the sample results obtained from a non random sample cannot be ascertained statistically. An additional concern with the use of existing on-line panels for undertaking surveys was that panel members may become "professional respondents", being motivated by the incentives offered to participate and failing to provide truthful or accurate answers. Dr Terhanian acknowledged this but stated that these risks "...can be reduced or eliminated through effective panel practices." 185 The Tribunal is satisfied that online surveys based on existing panels are being used in a variety of situations and that information from them is being used to make important business decisions. It accepts this approach in relation to the Gyms Survey. There is recognised industry best practice to ensure that the information obtained is as accurate as possible given the financial and other constraints on data collection and Mr Fine attested that AMR/ORU meets these standards. Various steps were taken to improve the accuracy of the sample selected. Obtaining information from respondents who are experienced in completing questionnaires, assuming that they form part of the relevant population, may be beneficial in circumstances where the survey is somewhat complex.

Sample size 186 Sample size is generally determined by a trade-off between accuracy and cost - the more variable the population to be sampled, the greater the risk of chance error and so the larger the desired sample, but this will mean greater cost. Dr Williams offered no explanation as to how the sample size for the final survey was arrived at. He simply indicated that it was 500 (however 509 completed surveys were obtained). The effective sample was 453 because Professor Bartels removed 56 of the completed responses because: a. some respondents recorded the typical number of classes attended per month as zero and so should have been eliminated by the screening question; b. some respondents gave implausibly low values for their fitness centre membership fee -less than $1 per month; c. some respondents indicated that the average size of their fitness class was zero or one - this was taken to mean that the person was not actually attending a class. 187 Both Professor Hanemann and Dr Bock were critical of the sample size, suggesting that it was too small. In addition, in Dr Bock's opinion approximately 120 of the completed surveys should have been discarded because they provided no useful data (see the discussion on non traders from [203] below) which further reduced the sample size. 188 However, Dr Hensher responded that the number of choice sets determines the effective size of the sample not, as is usually the case, the number of respondents. Consequently, the number of observations made available from the completed responses was between 2,717 and 1,968 observations. 189 The Tribunal does not consider the sample was so small that the results of the survey should be discarded. However, given the relatively small cost of increasing the sample size and given the various issues that emerged in relation to the survey, a significantly larger sample may have been justified.

Random and non random sampling 190 Professor Krosnick stated that the necessary steps for a high level of accuracy from surveys are: a. drawing a representative sample of the population; b. taking extensive steps to collect data from as many sampled people as possible (avoiding non response); c. asking questions that are easily comprehensible and do not elicit biased answers; d. weighting the results to correct for unequal sample probabilities. 191 Mr Fine explained that 30,000 emails were sent to randomly selected members of the AMR/OMU Consumer Panel inviting them to participate in the Gyms Survey. This number reflected the sample size required, the period given to complete the questionnaire (in this case, four weeks) and the particular qualifying characteristics for respondents. From those who responded to the invitation, 4,126 were screened out because they had not attended a fitness class in the previous three months and nine were screened out because they did not indicate that they understood the instructions for undertaking the survey. Then 509 completed questionnaires were forwarded to Frontier Economics. 192 Sampling error may arise because of chance error or due to response bias. Chance error occurs because the variability in the population is not accurately represented in the sample. It is reduced as the sample size increases. Response bias (whether from non response or from other sources) is a consistent departure from the true position and increases as the sample size increases. 193 Essentially the criticism in relation to the sampling technique used in the Gyms Survey was that it was not random, as claimed by PPCA. Dr Bock described stratified random sampling as requiring random selection of a group of potential participants from the panel where random selection is used to ensure that they are selected in proportion to their known population distribution. Professor Krosnick explained that the AMR/ORU method uses a data base that did not give every member of the relevant population an equal (or known) chance of being included in the sample. He claimed that respondents self selected (the opt-in approach) and suggested that this may introduce bias into the results. Likewise Dr Bock expressed concern about whether a self selected sample from an existing panel is likely to be representative of the population of interest. However, Mr Fine stated that the invitation to participate in the on-line survey did not reveal the nature of the survey and this should have reduced the risk of self-selection bias. 194 Professor Krosnick explained that the advantage of random sampling techniques is that chance error can be calculated thus providing a measure of the accuracy of the sample, and statistical techniques enable an estimate of the true population value. This is not the case if the sampling technique is non random. If the Gyms Survey sample was non random there was no way of estimating the accuracy of the sample results. 195 For random sampling, it is necessary to have a sampling frame, that is, a list of all members of the relevant population. No such sampling frame seems to exist for attendees at fitness classes at fitness centres. In such circumstances a non random sampling technique may be the only technique open for use - this is often the case in relation to opinion polls but also for surveys for commercial purposes. Dr Terhanian distinguished the theoretical desirability of ensuring that a random sample is used from the practicality of sampling, and expressed the opinion that, in sampling, what is important is to obtain as representative a sample as possible. One way of doing this is by ensuring that relevant characteristics of the population are appropriately included in the sample. In this case, AMR/ORU randomly offered invitations to participate and then selected respondents in such a way as to replicate certain relevant attributes in the population -gender, age and location (State). 196 Mr Fine stated that the best description of the Gyms Survey was that it was a stratified random quota online survey. A stratified sample pre-determines the representation of particular attributes (such as age and gender) in the sample to reflect as nearly as possible the occurrence of those attributes in the population - for example, various age categories would be identified and a specified percentage of the sample would be randomly selected from each. Quota sampling pre-determines the number or proportion of sample respondents drawn with particular characteristics so as to reflect known proportions in the population but the respondents are not selected randomly. 197 In relation to the Gyms Survey, Mr Fine explained that: a. invitations were sent to online panel members to reflect the representation of particular characteristics (gender, location and age) based on Australian Bureau of Statistics (ABS) population census data. Within these strata, respondents were selected randomly. However, as not all invitees chose to participate in the survey, the number of respondents in the various categories (strata) was monitored and, where necessary, adjusted; b. action can be taken to ensure greater accuracy in the sample results, such as careful preparation of the questionnaire, ensuring that relevant known characteristics of the population are adequately represented in the sample, careful quality control of the completed questionnaires and detailed knowledge of the characteristics of panel members; c. even in a random sample, errors may be introduced, for example, by questions that elicit biased responses and/or as a result of non response, and either of these will result in errors in estimating the population parameters. 198 Dr Bock expressed concern about the actual sampling process undertaken for the Gyms Survey. PPCA stated that the sampling was not based on quota sampling, claiming that the lack of administrative records is inconsistent with quota sampling and that the structure of the questionnaire is inconsistent with quota sampling as people were screened out for attendance at fitness centres in the last three months before being asked about age. However, Mr Fine stated that Dr Bock was confused in believing that the sample was a stratified random sample. Rather it was a stratified random quota sample. This was reflected in the way in which invitations to participate in the survey were sent out. Absent a sampling frame (list of the relevant population), stratification may occur after random selection of respondents. This seems to be more or less what happened in the Gyms Survey. 199 To test the accuracy of the Gyms Survey sample, Mr Fine compared the representation by gender, age and State in the Gyms Survey with results obtained by the ABS in a survey of selected sports and physical recreation activities (Cat. No 4177.0) and concluded that the two were broadly consistent, although the differences in relation to age (especially for 18-24 and 55-64) are not insignificant. Fitness Australia was extremely critical of Mr Fine's conclusion that the sample was reasonably representative. The sample was structured specifically to replicate the characteristics of the ABS Population Census data with respect to age, gender and state. Thus, one would not necessarily expect a particularly close correlation between the sample and the ABS data relating specifically to sporting activity. 200 Given the debate on this issue, the Tribunal notes that the ABS data were of a more general nature than the Gyms Survey and so the characteristics of the two may not be expected to correlate particularly closely. 201 In relation to the sampling methodology, the Tribunal accepts that the approach used in the Gyms Survey was the only practical methodology. Although it was not a random sample of attendees at fitness centres, it was a random sample. The Tribunal accepts that the survey methodology resulted in a reasonably representative sample in the circumstances.

Statistical analysis of results/modelling decisions 202 Professor Bartels was responsible for carrying out the statistical analysis of the data collected using the Gyms Survey. He commenced this process by removing responses that appeared anomalous. Issues that arise in this context include: a. the non trader problem and treatment of it; b. choice of the relevant distribution; c. imposition of constraints on variability. Each of these is discussed below.

Non trader problem 203 In analysing the responses contained in the completed surveys, Professor Hanemann found that 125 respondents had selected their current fitness centre for each choice set, that is, 27.6 per cent (125 out of 453). Professor Hanemann concluded that these 125 non trading respondents, together with two respondents who always selected Centre A and two respondents who always selected Centre B, should be removed from the Survey leaving only 324 useable responses. He observed that the tendency to select the current centre increased with progression through the survey. Professor Hanemann expressed concern about respondents "switching off" part way through the questionnaire (specifically after the fourth choice set) due to boredom and/or tiredness. 204 Professor Hanemann referred to Stephane Hess, John M Rose & John Polak, Non-trading, Lexicographic and Inconsistent Behaviour in Stated Choice Data. Working Paper, Centre for Transport Studies, Imperial College, London, February 7 2008, a leading textbook in the area. The authors refer to this conduct as "non trading" behaviour; that is, behaviour which may be reflected in respondents selecting their recent experience over all other options. They attribute this to genuine, but extreme preferences, or strategic behaviour, or boredom/fatigue. 205 In Professor Hanemann's opinion, "...Genuine preference or strategic behaviour are unlikely to explain the outcome". He regarded it as "statistically improbable" that respondents who always selected their current centre were genuinely participating in the survey. He conceded that although each alternative would not be expected to be chosen one third of the time, "...one would expect some degree of balance among the choices". He believed it was more likely that the respondents did not find the alternatives to the current centre realistic and opted out. 206 Although they were aware of the problem of non traders, PPCA's experts were criticised by Fitness Australia for not having disclosed the non trader problem initially and for not testing for non trading. It appears that Professors Hensher and Bartels each believed that the other was responsible for dealing with this issue. Professor Bartels was aware of the non trader problem but took the view that it was unsurprising that a portion of the sample preferred a fitness centre with the attributes of their current centre. As the latter could not be distinguished from genuine non traders, he made no adjustment to exclude these respondents. 207 Professor Hensher stated that the existence of non traders did not significantly affect the estimate of WTP. Whilst on its face this seems to be correct, Professor Hanemann explained that this was because non traders were assigned a value of music equal to the average of the other respondents. Dr Bock stated that this resulted in an over-estimate of WTP because non traders should be assigned a value of $0, although he conceded in cross-examination that the actual value was very unlikely to be this but it was the only value that could be assigned. 208 In Professor Hanemann's opinion, non trading resulted from boredom or tiredness and so these non traders should therefore have been excluded from the sample results. However, the basis for this conclusion is unclear and appears to be speculative. Subsequently Professor Hensher re-estimated the model excluding those responses where the respondent always selected their current centre, the answers to questions 5 & 6, and certain other data, designating this as Model A1. Professor Hensher opined that the results derived from this model indicated that there was no statistically significant difference between these results and those from the original model. 209 The Tribunal regards the issue of non traders as a difficult one. There are problems in distinguishing genuine non traders, identifying why they are non traders (the literature indicated that only non trading due to boredom/fatigue should be excluded), determining the extent of non trading by individual respondents, and the fact that apparent non trading may result from a strong preference for current location. The literature in relation to the treatment of non trading, to which the Tribunal was referred, is not conclusive in its approaches. Further, to the extent that there is non trading and the responses of these non traders are retained, there is no generally accepted method of allowing for this. Consequently, it is unclear what value should be assigned to those non traders. Nevertheless, the Tribunal considers that two factors mitigate the likelihood of significant non trading. First, the respondents were "experienced" at responding to surveys. Secondly, the average time taken to complete the survey was just 7-8 minutes. Thus, whilst the Tribunal accepts that there may be some genuine non traders, it does not consider that non trading per se destroyed the validity of the survey results.

Choice of model 210 Statistical analysis of the choice data involves using a model which specifies how the choices made vary with the attributes or variables. For the Gyms Survey, the model specifies how the attributes contribute to the total utility the attendee derives from attendance at a fitness class. The specific choices made by respondents in the survey are then used to estimate the importance that respondents place on the various attributes in making these choices. 211 Professor Bartels stated that no single model can be identified as the "correct" model. In its closing submissions, PPCA pointed out that: The specification of a statistical model in any data analysis is a complex exercise which involves balancing multiple considerations and criteria...the procedure is to find a model that best fits the data and is appropriate for the purpose to which the data is sought. 212 Professor Bartels selected a Random Parameter Logit (RPL) model, also referred to as a mixed logit model, as an appropriate model for processing the data collected in the Gyms Survey. This is because the model: a. can deal with situations where choice responses are correlated rather than independent; b. allows for heterogeneity across individuals in the utility attached to particular attributes; c. does not cause any estimation problems. 213 Experts called by Fitness Australia accepted the use of a mixed logit model but they were critical of the use of a constrained symmetrical triangular distribution to obtain random parameter estimates from the model.

Constrained v unconstrained distribution 214 Having decided on the use of the RPL model, it was then necessary to specify a particular model for the purpose of analysing the data from the Gyms Survey. One aspect of the management of data in such a model is how heterogeneity or variability is to be dealt with. It is necessary to specify how to describe the heterogeneity across individuals in relation to the utility attached to a particular attribute, that is, it is necessary to specify the form of the relevant distribution. The normal distribution is a frequently used distribution, but other distributions commonly used to explain heterogeneity in the RPL model are the log normal distribution and the triangular distribution. 215 Professor Hensher and Professor Bartels accepted that the distribution should be selected based on best fit to the data. Professor Bartels found that the results obtained using either a normal distribution for the random parameters of each attribute or a symmetrical triangular distribution were very similar, but the latter gave a slightly better fit and so was selected. According to Professor Bartels a triangular distribution has the advantage, compared to a normal distribution, that "…it can be specified to ensure that the range of utilities that people attach to an attribute are either all positive or all negative". 216 Contrasting with this, the limits of a normal distribution are infinity. However, in cross-examination, Professor Bartels accepted that, as there was evidence of a group of people attending fitness classes who had a negative utility with respect to the use of recorded music, constraining responses to be positive with respect to utility was inappropriate, although this would depend on the significance of this group. In this case the range of the symmetrical triangular distribution was constrained as well. By constraining the variability of responses, those making "extreme" choices or supplying unrealistic answers are excluded and so do not distort the results. 217 However, in its closing submissions Fitness Australia expressed the view that: The effect of the constraints in this case was to force the data into a shape that it could not otherwise approximate. [Further] ...if someone indicated an implausibly high value or someone indicated no value, or even a negative value, for music, they were nevertheless attributed a value within the range defined by the assumptions made. The Tribunal accepts this criticism, but its significance depends on the proportion of responses outside of the constraints and the reasons for such responses. 218 Dr Bock was critical of the use of the constrained triangular distribution because: a. use of the triangular distribution concealed fundamental problems with the data and inflated the WTP - it was particularly detrimental with respect to non traders; and b. imposition of the constraints meant that it was not possible to validate the results using statistical tests. 219 The latter gives rise to concerns about Professor Bartels' claim that the coefficients of the key attributes were statistically significant and the use of a chi-squared test to test the reliability and explanatory power of the model. Dr Bock concluded that the constraints were a key determinant of the conclusions drawn from the data. However, PPCA was critical of Fitness Australia claiming that it had not raised its concerns with the use of the constrained triangular distribution when it had an opportunity to do so. The Tribunal accepts that Fitness Australia did raise this concern as early as August 2007. 220 Professor Bartels accepted that there may be problems in using the constrained distribution. No doubt there are problems with any specification. The Tribunal would have found it helpful if Professors Bartels and Hensher had re-estimated the model without constraints to enable comparison of the effect on the WTP estimate from alternative distributions. Dr Bock did undertake such an exercise - see [251] below. 221 The Tribunal accepts that it is not unusual in modelling data to limit the range of values. This may be because some data are obviously incorrect based on some justifiable a priori expectation or because, in the light of other information that has become available, values outside a certain range are inappropriate. However, in the Tribunal's opinion, too little attention was paid by PPCA to explaining the reason for the extent of the constraints imposed. In addition, it would have been appropriate to have provided results for an unconstrained distribution as a basis for comparison but this was not done.

Estimating willingness to pay 222 Professor Hensher received the output from the model Professor Bartels had estimated which he used to calculate WTP for the full sample (designated M1) and for several sub-groups. The latter allowed Professor Hensher to investigate whether WTP changed/differed between groups such as respondents who attended rhythmic classes compared to those who attended yoga/stretch/pilates classes and whether the directional changes in estimated WTP by these groups was sensible given the characteristics of each subgroup (the submodels were designated S1, S2 and S3). The subgroups for which the model was separately estimated were: a. respondents who recorded having taken aquarobics, boxing/combat, cardio/pump and/or spin (S1) - this enabled investigation of the differences in WTP based on the type of activity; b. respondents who recorded taking yoga/stretching/pilates classes (S2) - this enabled investigation of the differences in WTP based on the type of class; c. respondents who attended at least 4 classes per month and who indicated a class size of at least 5 (S3) - this enabled investigation of WTP of higher level users compared to lighter users. 223 Professor Hensher described the process he undertook as follows: a. Taking the set of individual parameters for each attribute that are unique to each person which is an output of the estimation of the mixed logit model, allows us to calculate the WTP for each individual in the sample. I used this distribution of WTP to provide an average for the sample as a whole. I also calculated the standard deviation (SD) of the sample, and found the SD to be very small relative to the mean...which gives confidence in the reliability of the mean in representing the population... b. I then identified the mean value which respondents in that particular sample had ascribed to the level of "music" over the base level (with the least value) of the "instructor calling out", for the attribute "means by which the instructor maintains rhythm and tempo in class". This value was estimated in the survey in relation to the respondents' monthly fee payment; c. I then similarly identified the mean value that respondents in that particular sample had ascribed to "Music" in yoga/pilates classes, over the value ascribed to "no music"; d. At that point, I had the figures showing WTP for music in rhythmic exercise classes and in yoga/pilates classes, on a per person per month basis. For rhythmic exercise classes, that WTP was $14.14 and for yoga/pilates, it was $11.9; e. To calculate the WTP for music in all types of fitness class, we add WTP for the two class types, yielding an average WTP of $26.08 per person per month for music in all fitness classes... f. Finally, a WTP of 50% of the WTP of attendees was assigned to those attending fitness centres but who were non attendees at fitness classes. A weighted average of the WTP of attendees and non attendees was then obtained, the weights being 47% attendees and 53% non attendees (using information from the Freedman survey).

Non use values 224 In calculating the WTP for recorded music used in fitness classes, PPCA has imputed a value to non users of these classes. This issue arises because of the decision to apply a fee per member per month rather than to base the fee on attendance at the relevant classes. Membership fees for fitness centres provide access to all the facilities of the centre and so some members only attend fitness classes and some rarely, if ever, attend fitness classes. Quoting from a report by the UK Department of Transport, Local Government and the Regions, with which Professor Hanemann was involved, PPCA defined "non-use value" as arising where "…an individual is willing to pay for a good even though he or she makes no direct use of it, may not benefit even indirectly from it, and may not plan any future use for themselves or others." The inclusion of a non use-value was illustrated by reference to studies showing that people who had never visited a national park, for example, placed a value on having such parks. Other studies used to support the existence of a non use value included historic buildings, luxury hotels, rivers, space tourism and geriatric care. 225 PPCA argued that a WTP value for recorded music used in fitness classes should be attributable to non users because of: a. the option to use the product in the future (option value); b. knowledge that the particular good exists (existence value); and c. other intrinsic benefits derived from the existence of the product. 226 PPCA relied on the first of these, the option value, to justify attributing a non use value to fitness centre members who did not attend fitness classes. A number of people join a fitness centre and thereby gain the right to use all of the centre's facilities, but do not actually use any, or use only some of the facilities available. PPCA argued that this fact supported the existence of an option value among non users. 227 Dr Williams admitted to having no evidence as to the non user value - he simply assumed that it was less than for attendees at fitness classes but greater than zero. It was assumed that the non user value was 50 per cent of the WTP of respondents who did not attend fitness classes as estimated from the Gyms Survey, that is, 50 per cent of $26.08 - . the assumption is attributed to Mr Peach who explained his figure as simply half way between zero and 100 per cent. In closing, PPCA reduced this to 40 per cent. There was considerable debate about the non user value between the experts. Both Professor Hanemann and Professor Gans argued that the non use value should be zero or very small. 228 The Tribunal regards the assumptions made in relation to non use value as significant and dubious. It considers that there seems to be a significant difference between having a WTP for a national park or other public amenity that the individual may never visit and assuming a WTP for music in a fitness class that the individual is unlikely to attend. The former relates to goods that the public values if they are appropriately supplied (for example, to make them available to vulnerable members of society or to future generations). As Fitness Australia noted, "There is a basic conceptual difference between a WTP for something which has a broader public benefit and a WTP for a commercial good such as music in fitness classes". Even if this were not the case, to justify inclusion of a non user value would require specific investigation of the issue. This has not been done. There is not even agreement as to the proportion of fitness centre members attending fitness classes - PPCA reduced its estimate of attendees to 35 per cent, while Fitness Australia claimed it was more like 28 per cent. 229 Given this, the Tribunal accepts that any non use value is likely to be zero or very close to zero. It notes that the problem created by non use would be avoided if the basis for payment was attendance at fitness classes that use music, not membership of the centre where they are offered.

Willingness To Pay for music in yoga and pilates classes 230 The Gyms Survey distinguished between yoga and pilates classes and other classes on the basis that music served a different purpose in the former and may not be played at all. Several issues arose in the context of estimating WTP for these classes. These include: a. not all respondents attended these classes but all were asked to value the use of recorded music in these classes; b. the type of music appropriate for such classes is different from that used in rhythmic fitness classes. 231 Not all survey respondents participated in yoga/pilates classes - 60.5 per cent of the 453 respondents did not. The WTP for the use of recorded music in these classes was estimated to be $11.12 per class by those not attending the classes compared to $13.22 by those who did attend them, the former being 84 per cent of the latter. PPCA claimed this was consistent with the view that those who participate will value music more highly than those who do not. 232 However, Fitness Australia claimed that the difference in WTP for recorded music in yoga/pilates classes by those respondents who attended classes and those who did not was implausibly low. Both Professor Hanemann and Dr Bock regarded this as indicative of problems with the design and/or administration of the Gyms Survey. Professor Gans was also troubled by this result as it suggested that people are willing to pay for something that they do not use and this is contrary to economic theory. 233 The Tribunal is not persuaded that the non use issue is any different in relation to yoga and pilates classes as compared to other fitness classes. The Tribunal has a general concern about the treatment of non users in the analysis of the data from the Gyms Survey which is addressed above from [224]. 234 Further, given the basis proposed by PPCA for levying the licence fee, that is, fitness centre membership, fitness centres offering yoga/pilates classes which do not use recorded music would still be required to pay the PPCA licence fee.

Willingness To Pay based on average rather than marginal Willingness To Pay and incremental values 235 Professor Hensher indicated that the estimated WTP of fitness centre members was the average of each respondent's marginal WTP. Dr Williams explained that fitness centres compete for marginal members, those just on the border of joining/leaving a fitness centre, that is, the marginal consumer relates to gym membership, and that this is appropriately reflected by average WTP. 236 As the ACCC noted, the difference between it and PPCA in this respect lies in how the marginal consumer is defined. Given the options available to fitness centres in terms of using music licensed by both PPCA and APRA, music licensed only by APRA or using an alternative where no tariff need be paid for music, Professor Gans regarded it as appropriate to take the average of the bottom 5 per cent of the distribution to represent marginal consumers: Even if it were appropriate to use a consumer's WTP, the important information in the survey would be the WTP of the marginal consumer, say the bottom 5%. Using average consumer WTP would be inconsistent with how fees are determined in competitive markets. Thus, for Dr Williams, the marginal consumer is the marginal consumer of fitness centre memberships. For Professor Gans, the marginal consumer is the marginal consumer of music. 237 Even if it is accepted that Professor Gans' concept of the marginal consumer is appropriate for the present purpose, the Tribunal accepts that it is questionable whether this is what the bottom 5 per cent of the distribution actually measures. The problem was further complicated by the effects of constraining the distribution. The disagreement between the experts is reflective of the difference in what each regards as the appropriate variable to be measured. 238 The other issue between the parties in this context relates to the addition to value which results from the use of recorded music rather than some alternative. In its closing address, the ACCC pointed out that, given the availability of substitutes for recorded music in the PPCA repertoire, the relevant consideration is the impact on the profits of fitness centres of not playing PPCA music but being able to play non-PPCA music, that is, it is the difference between the two, referred to as the incremental value. However, this approach assumes a level of substitutability that the Tribunal is not persuaded exists: see [85]. 239 For rhythmic classes, the WTP for recorded music derived from the Gyms Survey, rather than having the instructor call out the tempo, was estimated to be $14.13. Compared to the beat machine it was $7.27. Dr Williams relied on the former. However, experts for Fitness Australia and the ACCC claimed that the WTP should be measured relative to the next best alternative, that is, the beat machine. The effect is to halve the WTP for recorded music by reducing it from $14.13 per person per month to $7.27 per person per month. In response, Professor Hensher stated that the beat machine was not a real option - it was a baseline comparator - and that the real comparison should be with the instructor calling out. 240 The evidence presented to the Tribunal in relation to this matter was not helpful. On the one hand, the survey provided certain information about the additional value of one option over another but these values were affected by any problems affecting the survey results generally. On the other hand, there was some evidence to the effect that a beat machine was unlikely to be favourably received. More information would have been needed for the Tribunal to have confidence in the arguments of either party in this context.

Summing the estimates 241 Professor Hanemann argued that summing the WTP for music in rhythmic classes and the WTP for music in yoga/pilates to obtain total WTP for music in fitness classes was incorrect. In response, Professor Hensher explained why the two types of classes were separated out and the Tribunal accepts that the Gyms Survey showed that most respondents either attended rhythmic classes or they attended yoga/pilates, but not both. Professor Hensher then stated that: "...it is appropriate to treat the marginal utility of each music attribute as additive of each attribute as a contribution to the overall utility of the alternatives presented to the respondents." 242 The Tribunal does not accept this approach. It considers that where two groups of respondents with possibly different WTP are involved, the appropriate way to combine the two results, if they are to be combined, would not be to sum the averages but rather to take a weighted average of the two results. This results in the present case in a significantly lower overall average WTP.

Verification of Survey results 243 Professor Hensher stated that he had tested the validity of his results in various ways. He claimed that their validity was confirmed by the fact that: a. the statistical analysis of the results demonstrated the robustness of the mean estimate when evaluated against the standard deviation; b. all of the co-efficients used to calculate WTP were statistically significant at the 95 per cent level and all were of the right sign (except where particular forms of music did not appeal, such as the beat machine for yoga classes); c. the models estimated displayed good fit to the data; d. the models had high T statistics, especially on parameters of interest; e. the comparison of WTP across different classes and across different sub-groups is logical and sensible; f. the results from model M1 confirmed the a priori null hypothesis that there would be a higher WTP for music as the means of providing rhythm and tempo in fitness classes than for the beat machine which provides only tempo. 244 Fitness Australia, including its experts, was extremely critical of reliance on these checks. In relation to [243a] & [b] above, Fitness Australia criticised Professor Hensher's use of the standard deviation (measure of the spread of the data) when that spread had been deliberately constrained. In cross examination, this was accepted by Professor Hensher. Similar criticisms were made by Fitness Australia with respect to [243b] & [d]., Fitness Australia in its closing address was critical of Professor Hensher for not estimating confidence intervals for the WTP estimates. Although Professor Hensher failed to explain the absence of such estimates, confidence estimates require a reliable estimate of the standard error of the sample results and given the constraint on the variability of the distribution this is not available. 245 In relation to [243c] above, Fitness Australia criticised Professor Hensher's claim concerning goodness of fit because, if the non traders were removed, Dr Bock estimated that the measure used for this purpose (the pseudo R-squared) fell from 0.30 to just 0.15, a poor result. The Tribunal notes that the validity of this criticism rests on the acceptance of the concerns about the non traders and the implications of this. 246 In relation to [243e] above, Fitness Australia criticised Professor Hensher's comparison of : a. the estimated WTP for recorded music in yoga/pilates classes by attendees and by non attendees because it was implausibly small; b. the estimated WTP for the total current gym package against actual membership payments. 247 In relation to the first of these, Professor Hensher provided an analysis of the "directional validity of results". Of particular interest was "whether there was a change in WTP when a more focussed, or homogeneous, sub-sample of the entire data sample was used, as a means of reviewing whether the overall survey results made logical sense". To this end, he investigated: a. the difference in WTP for either music in a rhythmic class or in a yoga/pilates class if the sample included people only attending rhythmic classes (sub-sample S1) or only attending yoga/pilates (sub-sample S2). S3 may also include people who attend yoga/pilates classes. In each case, it was found, in accordance with Professor Hensher's expectations, that the average WTP was higher than for the full sample. From this, he concluded that WTP calculated for the full sample was a conservative estimate; b. when "light" users of fitness classes were excluded from the sample (sub-sample S3), it was found that regular users of rhythmic classes had a higher WTP for music in both rhythmic and yoga/pilates classes compared to the full sample of fitness class users. The Tribunal found neither of these results surprising or particularly useful. 248 In considering the relationship between WTP and membership price, Professor Hensher found that: The average estimation for the sample to preserve a package of attributes equivalent to their current gym was $71.18. When compared with the average fee paid per month of $62.21, this figure suggests that current patrons of gyms are deriving a benefit that is slightly in excess of the current average fee. However, Professor Hensher conceded that the estimated WTP ignored the term that accounted for "all other factors that add value" such as location, parking, child care and the like. This appears to cast doubt on the validity of the estimates, contrary to Professor Hensher's claim. Nevertheless, in the context of a similar comparison in relation to the Roberts Research, Dr Williams explained the relationship as follows: ...the average price respondents were paying for a class was $6.11. ...If the total WTP for music is around $7.00, there is a suggestion that WTP for the class as a whole may be more like $20.00. How can this be reconciled with respondents paying an average fee of $6.11? The reconciliation can be found by considering the relationship between price and WTP...It may well be that the price paid for an exercise class is (for the average attendee) well below their WTP for the class. If services are produced in a highly competitive market, as exercise markets are likely to be, prices will be set equal to costs (including an allowance for the cost of capital) and this may be very low compared with the WTP of the average attendee. 249 In response to the issues raised by Dr Bock and Professor Hanemann, the model based on the Gyms Survey was re-estimated by Professor Bartels to test the impact of excluding certain responses (particularly the non traders) and to allow for certain interactions which could affect the estimated WTP, and this model was designated A1. After analysing these results, Professor Hensher was "...confident that Dr Bock and Professor Hanemann's criticisms do not substantially affect the mean WTP estimates as the WTP values are not substantially different from those derived in Model M1..." He concluded that "...the remodelling demonstrates the robustness of the original model results...". Dr Bock was critical of Model A1 and the results obtained from it and demonstrated his concerns by further re-estimation of the model. It seemed to the Tribunal that Professor Hensher was less confident when addressing this issue in cross examination. 250 In relation to [243f] above, Fitness Australia criticised Professor Hensher's claim that people preferred (had a higher WTP for) recorded music to a beat machine for providing rhythm and tempo in fitness classes because Professor Hanemann and Dr Bock stated that there was no statistical difference between WTP for each based on model A1 (the model from which the non traders had been removed). 251 Dr Bock pointed out that one means of checking models is to assess the sensitivity of key conclusions to changes in the assumptions underlying the model (sensitivity analysis). He re-estimated the model of Professors Bartels and Hensher using alternative specifications of the model to the mixed logit model. The results differed substantially. 252 The Tribunal considers that there is a great deal of room for disagreement between experts as to the choice of models and their estimation. Given this, it is relatively easy to raise issues that might make the estimates obtained appear to be inaccurate and unreliable. Nevertheless, criticisms of substance were not satisfactorily negated by Professors Bartels and Hensher. The Tribunal does not accept that the estimates from the models, and hence of WTP, are likely to be accurate.

Conclusions concerning the Gyms Survey and estimates 253 The Tribunal has analysed the Gyms Survey at considerable length for two reasons. First, because it was advanced by PPCA as the key basis justifying its increase in its licence fee. Secondly, because, as indicated below, the Tribunal considers that applications before it can be assisted by survey evidence. The Tribunal considers that the analysis undertaken here may assist in the conduct of surveys in other cases. 254 In the Tribunal's view, survey evidence is but one of a range of tools available to it to provide guidance as to the appropriate level for licence fees for the use of copyright material. There will be circumstances where such evidence is compelling, as it was, for example, in the Nightclubs case. In other circumstances, for example, in the AVCS case, the Tribunal may for one reason or another consider such evidence unhelpful or inconclusive. That is not to say that the Tribunal has a preference for or against survey evidence. It is merely to observe that the utility of such evidence will vary from case to case. 255 Survey evidence may be unhelpful or inconclusive for a number of reasons. It may simply not be suited to the particular circumstances confronting the Tribunal. A survey may also be flawed in its conception, its design, its application or its analysis. The quantitative technique, if any, that is best suited to particular circumstances may be simple and inexpensive or it may be highly sophisticated and very expensive. It may be based on a questionnaire, in which case it is essential that the questionnaire collects appropriate information and that advance consideration is given to how foreseeable difficulties may be overcome. A survey may seek to establish a stated preference or a revealed preference for copyright material. Whatever information is collected, it is necessary to ensure that correct data processing is undertaken. If techniques are used that limit subsequent statistical testing of survey results, the value of the evidence to the Tribunal will be reduced unless the Tribunal can be provided with other information which gives confidence as to the reliability of the survey evidence. In particular, where assumptions are made that impact upon the data produced from a survey great care is needed to assess the implications of those assumptions and the robustness of the data analysis that flows from them. 256 In the present case, there was a sophisticated, concentrated, detailed and lengthy attack upon the survey relied upon by PPCA. Many of the issues raised by expert witnesses called by Fitness Australia were highly theoretical and technical with little regard to the substantive issues to be addressed by the Tribunal. Some of the expert evidence was simply speculative. Nevertheless, the Tribunal considers that the attacks on the Gyms Survey disclosed real flaws in the design of the survey instrument, in the application of it and in manipulation and analysis of data obtained from the survey. The Tribunal was particularly concerned about assumptions made concerning the value of music to non users of fitness classes in the analysis of the data obtained from the survey. In the Tribunal's view this goes to the heart of the case for PPCA that a licence fee should be fixed based upon a monthly membership fee of a fitness centre, regardless of whether fitness centre members attend fitness classes. The Tribunal is also concerned about the treatment of so called non traders in the analysis of the survey data and with the processing errors and shortcomings which have been identified. In view of its concerns, the Tribunal is unable to rely on the estimated WTP derived from the choice modelling survey. 257 In the Tribunal's view the survey results obtained by Roberts Research in PPCA's preliminary survey, which was simpler in its concept and more modest in its design, provides more reliable information, despite the limited size of the sample. In particular, the Tribunal considers that the preference for music by survey participants in the Roberts Research project provides a more useful guide to WTP for music than the Gyms Survey. The Tribunal rejects the proposition that the preference for "preferred music" provides a reliable estimate of WTP for recorded music in the PPCA repertoire. That is because the Tribunal has no confidence that "preferred music" in the Roberts Research survey has any correlation with the PPCA repertoire. In the Tribunal's view, that survey provides a useful comparison between preferences for music and no music in fitness classes.

Allocation of Economic Value Created by use of music between parties: the bargain 258 Setting the licence fee to be paid for the use of recorded music in fitness classes requires a decision to be made concerning the distribution of the value created by the use of recorded music in fitness classes between the relevant parties. Two steps are involved: a. derivation of WTP of fitness class attendees from the statistical results of the model; b. using this to determine an amount payable for the use of PPCA repertoire in fitness classes, that is, how that net value should be allocated or distributed between relevant parties. 259 It is uncontentious that the value available for distribution is the difference between the maximum WTP by the purchaser and cost of supply and hence the minimum willingness of the supplier to accept (WTA). Price (in the present case, the licence fee) apportions this surplus or value between the producer and the purchaser. The surplus of WTP over price is the consumer surplus, while the excess of price over cost is the producer surplus. 260 The maximum WTP is the value that the choice modelling was intended to help identify. However, it identifies the WTP by members of fitness centres, not directly the WTP of the fitness centres. WTA is the minimum amount that the supplier of recorded music, in the present matter, is prepared to accept, taking into account the cost of supply. There was very little evidence provided to the Tribunal in relation to the latter, but Professor Gans' evidence suggested that this figure is likely to be zero or close to zero. This is because once a recording has been made and added to the PPCA repertoire, there is little additional cost to make it available to another group of users, that is, in the physical distribution process. However, Professor Gans' evidence failed to recognise that copyright owners maintain their "good" has an inherent value that must be paid for and that it will not be made available without adequate recompense, that is, the willingness to accept will not be at or near zero. 261 The share of the surplus that parties to the transaction receive determines the price paid by the user, that is, the royalty or licence fee payable. However, the fee actually paid will be negotiated between the licensee and the licensor and will reflect their relative bargaining power. In modelling the hypothetical bargain between the parties cooperative or non cooperative approaches may be used. The grant of copyright confers a degree of bargaining power on the copyright owner. However, s.154 of the Copyright Act effectively assumes away this bargaining power and implies a cooperative approach. Consequently, it is generally assumed that, after taking account of any additional costs incurred by the parties, the surplus will be divided equally between all relevant parties. Dr Williams proposed that this should be accomplished using a Nash Bargaining solution, while Professor Gans favoured using the Shapley Value Model.

Competitiveness of fitness industry - commitment to bargain 262 A further issue relates to the competitiveness of the fitness centre industry. This goes to the assumption that each party aims to maximise the value created and that the relevant parties negotiate vigorously in respect of the distribution of the value created. 263 Dr Williams assumed that the industry was competitive based on the claims of industry representatives. Therefore, he explicitly assumed that any supra normal profits achieved by a fitness centre via the bargaining process, would quickly be competed away. From this he concluded that the level of the tariff will only affect the income level of the rights owners and performer/producers rather than fitness centre operators, but it may have some impact on the level of activity of fitness centres. 264 On the other hand, Professor Gans stated that he made no assumption about the competitiveness of the fitness industry. However, he opined that individual centres could earn economic rents for various reasons even if the industry is competitive. Further, absent this possibility, fitness centres would have no direct interest in the bargaining process - they would just pass costs through as they would be unable to maintain a surplus. 265 Nevertheless, Dr Williams pointed out that operators will be likely to negotiate vigorously in relation to licence fees in order to keep costs as low as possible because lower costs mean lower prices, and this means more members, other things remaining constant. 266 Whether or not economic rents can be earned by fitness centre operators, any assumption that these operators are passive with respect to the copyright licence fee payable seems to be dispelled by the conduct of Fitness Australia in this case which indicated considerable concern with the outcome of the price negotiations. Furthermore, the statutorily imposed requirement that a willing but not anxious buyer should be assumed renders the issue irrelevant.

The Nash Bargaining Solution 267 Dr Williams based his approach to the bargaining process on the assumption that in order for value to be created: a. fitness centres must agree to use sound recordings; b. APRA must agree to licence musical works; c. PPCA must agree to licence sound recordings. That is, fitness centres must negotiate with, and obtain a licence from, both PPCA and APRA in order to be able to use (protected) sound recordings in their classes, thereby creating value. 268 Thus, Dr Williams assumed that PPCA and APRA were joint sellers of the rights necessary for the use of protected recorded music in classes offered by fitness centres, although he did not assume that the parties needed to negotiate simultaneously. He maintained this position in cross examination using the analogy that in order to offer someone a drink of water, it is necessary to have both the glass and the water but they need not both be supplied by the same party. Dr Williams concluded that, as a consequence, the parties should be treated separately and the value created should be divided equally between the three parties. 269 Professor Gans took issue with Dr Williams concerning the relationship between PPCA and APRA in negotiating with the fitness centres. He claimed that if PPCA and APRA are indeed joint sellers (accepting that this does not mean that they actually negotiate simultaneously but rather that a licence from each is required for the fitness centres to be able to use the music) the two should be treated as a single entity for the purpose of the bargain. Consequently, Dr Williams should have assumed two parties to the bargain.

Complementary seller construct and Shapley Value Model 270 Professor Gans adopted the Shapley Value Model as the basis for distributing the value created by the use of protected recorded music in fitness classes. He regards this as appropriate because it provides an equitable outcome for situations where the parties acting cooperatively can create value (and that value would not be created without their co-operation) and so the value thus created should be divided equally between the parties (assuming that they contribute equally). 271 In Professor Gans' opinion, adopting the joint seller construct would require PPCA and APRA to be joint licensors of all protected recordings, that is, permission from both is needed in order to play each recording used. In reality, however, there are sound recordings the use of which requires a licence from APRA but not from PPCA, that is, there are recordings in respect of which APRA controls the performing rights in the music, but for which PPCA does not hold rights in the sound recordings and so a licence from PPCA is not always necessary. Based on these facts, Professor Gans concluded that PPCA and APRA supply copyright products that complement each other, but do not completely overlap. Consequently, Fitness Australia could negotiate with APRA but not PPCA and still create value. Professor Gans suggests that this is consistent with the Shapley Value Model. However, he considers there to be four parties to the bargain (rather than the three identified by Dr Williams) because in his opinion the fitness centres and those attending them must be regarded as separate parties. 272 Professor Gans' opinion as to the significance of rejecting the joint seller construct in favour of the complementary seller construct was as follows: a. The focus will be on PPCA and the profits the fitness centres would lose if they were unable to play the PPCA repertoire in classes, but could play unprotected music (for example, they could commission their own recordings and, if necessary, pay APRA but not PPCA). Under these circumstances PPCA is no longer essential to the transaction. b. This approach would necessitate consideration of the maximum WTP of fitness centres for PPCA protected music as compared with the maximum WTP for non PPCA protected music. If the joint seller construct is not appropriate, then it is necessary to estimate separately the maximum WTP for PPCA-protected music and for unprotected music - but this information is not available. 273 Ultimately, the practical implication of the disagreement between the experts in relation to negotiating the bargain amounts to whether the value created, or surplus, should be divided between two, three or four parties, not the academic concern of whether a joint or complementary construct should be assumed. The Tribunal accepts that, on the material before it, attendees at fitness classes were used as a proxy for the fitness centres and so do not constitute a separate party and consequently there are a maximum of three parties to the notional bargain. 274 In Professor Gans' opinion, recognition of the availability of unprotected music, that is, music outside of the PPCA repertoire, would influence the value placed on the use of recorded music from the PPCA repertoire by both attendees and fitness centre operators. This cannot be addressed directly after the Gyms Survey has been undertaken. To allow for it would require a survey to discover the value of the recorded music used in fitness classes from the PPCA repertoire rather than of music generally. Dr Williams responded by saying that the issue of unprotected music can be dealt with by discounting the proposed licence fee. In addition, it was claimed by PPCA that the presence of non PPCA music that could be used instead of PPCA repertoire constrained the PPCA in setting the tariff because, if it was set too high, fitness centres would switch to non PPCA music. However, the ACCC argued that this risked leaving consumers exposed to prices that are too high because prices would be increased before there was a response first from fitness centres and then from PPCA, in other words, only after prices have increased and substitution has occurred will PPCA respond. The Tribunal accepts that this is not necessarily correct. PPCA, aware of the risks, may negotiate smaller price increases rather than risk substitution. 275 Based on the evidence available to it, the Tribunal accepts that up to 40 per cent of the recorded music played in fitness classes may be music that does not require a PPCA licence. This raises a question: is this sufficiently large to conclude that APRA and PPCA should be treated as complementary sellers? The evidence addressed the principle but not the practical application. It seems to the Tribunal that it has no need to resolve this academic debate. The Tribunal considers that there are three parties to the bargaining process, that is, PPCA, APRA and the Fitness Centres. The Tribunal starts from the assumption that each contributes approximately equally to the creation of value. Allowance then needs to be made for the portion of recorded music played in fitness classes that is not included in the PPCA repertoire. However, the Tribunal accepts PPCA's submission that having a PPCA licence is of itself a benefit because it reduces the likelihood of disputes and claims concerning coverage for users of recorded music. 276 This is probably not something that could have been addressed in the Gyms Survey - it is unlikely that attendees at fitness classes can be effectively asked questions about the recorded music used in such classes in order to allow a value to be placed on PPCA recorded music alone. The issue is further complicated by PPCA's claim, which the Tribunal accepts, that licensees acquire some value from knowing that if they hold a PPCA licence this effectively removes their copyright risk. It is difficult to know how much of an issue this is as PPCA has claimed that for much of the "alternative" recorded music, a performance licence is required. 277 One approach, and that suggested by Dr Williams, is to discount the estimated WTP to reflect the availability of non PPCA records, as was done in Nightclubs. Whether this is appropriate, however, depends at least in part on the extent of unprotected music; that is, it may not be appropriate if a high proportion of the music used/available is not part of the PPCA repertoire. This is because the existence of substitutes for PPCA music affects the WTP of fitness centres for PPCA music but this will not be reflected in the attendees' valuation of the music and so the assumed relationship between the WTP by attendees and by fitness centres may be invalidated. The ACCC expressed a general concern about the reliance placed by PPCA on this relationship. 278 In relation to fitness classes there appears to be a significantly greater "leakage" than existed in relation to Nightclubs. PPCA conceded that as high as 40 per cent of the recorded music played may not be part of the PPCA repertoire. Fitness Australia claimed the figure was as high as 60 per cent. (However, this includes the Les Mills music as to which see [72]). In addition, information concerning the magnitude of this leakage is far less reliable than was the case in Nightclubs. 279 An alternative approach proposed by PPCA is to allow the market to deal with it through substitution in favour of non PPCA repertoire and so avoid or reduce payment of the PPCA licence fee. The risk posed to PPCA in terms of lost revenue if licence fees are raised above the competitive level (reflective of the alternative offerings available) may mean that, rather than discounting the WTP estimate, it is the share of the WTP attributable to PPCA that needs to be discounted. In the Tribunal's view, this risk can be left to the market to deal with. The Tribunal only sets a maximum licence fee (see [8]).

CONCLUSIONS AND DETERMINATION OF THE LICENCE SCHEME 280 As is noted in the closing submissions of Fitness Australia, there are three principal aspects to the proposed licence scheme which the Tribunal must consider under the current Reference: a. whether the scheme should be based on a per-member per-month basis or on a per-class basis or on a per-attendee per-class basis; b. how a fitness class should be defined. The current licensing scheme does not contain a definition of a "Fitness Class"; and c. the rate which should be paid under the scheme. 281 As noted at [104]-[109], the reference filed by PPCA on 8 December 2006 attached the licence scheme which PPCA proposed at that time but it was subsequently amended on 2 April 2008. The reference was further amended in the closing stages of the Tribunal hearing as a result of which PPCA now provides three alternative options. The first alternative is a per-member per-month option which is a variation on the original and amended references. The second and third alternatives are a per-class option and a per-attendee per-class option which are proposed as substitutes for Option 1. Fitness Australia also proposed two alternative schemes but in substitution for the schemes proposed by PPCA. The first proposes to maintain the existing rate for all classes but without a cap. The second proposes that the rate for stretching type classes such as yoga and pilates should be half the existing rate, based upon the current APRA licence. 282 There is a legal question of substance whether the Tribunal is empowered to vary (as opposed to simply adopting) one or other of the alternative schemes now proposed by the parties. Until 2006 the Tribunal's powers were limited to making "such order, either confirming or varying the scheme" which the Tribunal considers reasonable in the circumstances. In 2006 the Copyright Act was amended giving the Tribunal the option of also "substituting for the scheme another scheme proposed by one of the parties". Fitness Australia submits that, while the Tribunal's powers were considerably extended in the 2006 Act, they are still limited in that it is not able to itself propose a new scheme but rather is limited to confirming or varying a scheme which is the subject of reference. Fitness Australia submits that if the Tribunal is minded to reject "the Scheme" (as opposed to amending it) it is open to it to accept without change another scheme proposed by the parties. However, Fitness Australia submits that it is not open to the Tribunal to vary a scheme proposed by one of the parties other than the original Scheme. Fitness Australia suggested that if the Tribunal was minded to adopt a scheme proposed by a party with a variation it would "probably" be necessary for it to advise the parties of its preference and a party could then, as a matter of formality, propose a new scheme for adoption by the Tribunal, which reflected the Tribunal's view. 283 Conversely, in its closing submissions, PPCA stated that the amended Scheme now put before the Tribunal by PPCA proposes three alternatives as outlined above. PPCA submits that it is open to the Tribunal pursuant to s.154(4) of the Copyright Act to confirm any of those three alternatives, with such variations as the Tribunal may consider reasonable. 284 The Tribunal accepts that the correct position is as stated by PPCA. First, the scheme before the Tribunal for consideration is not the Scheme in the original or the amended reference, it is the amended Scheme proposing three alternatives in the further amended reference filed by PPCA. The Tribunal has the power under s.154(4) to confirm or vary one or other of those three alternatives. 285 Secondly, the Tribunal considers that the purpose of the 2006 amendments was to empower the Tribunal to adopt (with or without variations) an alternative scheme proposed by a party other than the moving party (in this case PPCA). The Tribunal has considered its jurisdiction under s.154(4) of the Copyright Act on several occasions, including in the ABC case (Copyright Agency Ltd v Department of Education NSW (1985) 5 IPR 449). In that case, the Tribunal considered whether s.154(4) enabled it to substitute a new scheme for one proposed that it considered to be totally unreasonable. The Tribunal referred to the contrast between the language used in ss.148 - 151 on the one hand, where the Tribunal's task is to determine "equitable remuneration" and the reference to variation of the scheme in s.154 on the other hand. The Tribunal concluded that the word "variation" was not to be construed so widely that it would empower the Tribunal to substitute for the scheme, which is referred under the section, a scheme of an entirely different kind in cases where the Tribunal concluded that the referred scheme was wholly unreasonable. The Tribunal considered that in such a case the only course was to make no order on the application. The Tribunal held, however, that it could vary the percentage of expenditure upon which the proposed formula was based or vary the base upon which the calculation was to be made. 286 The 2006 amendments addressed the problem identified in the ABC case. The Tribunal does not consider that it was Parliament's intention to confine the Tribunal's powers to adopting unchanged such an alternative scheme. It would be an odd result if the Tribunal could vary a scheme proposed by PPCA in its reference but could not vary a scheme proposed by Fitness Australia as an alternative. At the very least, the Tribunal has the power to fix the appropriate rate for the use of copyright material and is not bound to accept a rate proposed by one or other of the parties in a proposed licence scheme. 287 As a precaution, the Tribunal wrote to the parties on 27 January 2010 indicating its preliminary thinking in general terms in relation to the various schemes proposed by the parties and gave an opportunity for further submissions. The Tribunal wrote again on 4 February 2010 to provide further clarification at the request of the ACCC. The Tribunal received additional written submissions from PPCA and Fitness Australia in response to that correspondence. 288 The first of the options proposed by PPCA, in the amended Scheme is based upon the periodic membership fees paid by members of Fitness Centres. The Tribunal does not consider that a per-member per-month scheme would be reasonable principally for two reasons. First, the membership fees paid by members of Fitness Centres give no indication as to the value placed by those members on music in fitness classes. Fitness Centres provide a range of exercise options to their members which include fitness classes. Members are free to participate or not participate as they wish. Some members will choose to participate in fitness classes. Others (and the evidence suggests the majority) will not. 289 Secondly, the Tribunal does not accept the reliability of the WTP for music derived from the Gyms Survey and relied upon by PPCA. In particular, the Tribunal rejects the proposition that the Gyms Survey provides any basis for attributing a value for music in fitness classes by non users of those classes. While there may be some opportunity value in the membership fees paid by members of Fitness Centres, there is no reliable basis for concluding that members of Fitness Centres who do not attend fitness classes place any value on the use of music in those classes. It follows that it would be unreasonable to require Fitness Centres to pay a licence fee to PPCA for use of protected music in classes based upon the membership fees of persons who do not attend those classes. 290 The Tribunal also rejects the scheme proposed by Fitness Australia. That scheme is based upon the existing APRA and PPCA schemes. The rate derived from those schemes is said by Fitness Australia to be the "going rate". However, in the Tribunal's view, the rate in the existing Tariff V and in the APRA scheme is not reflective of a going rate. It was an amount agreed at a particular time by the parties following negotiation. It was not based on any economic analysis of the industry nor any examination of the users' WTP. It was simply a figure arrived at as a commercial compromise by the parties. It should not determine the basis of payment for all time. The scheme proposed by Fitness Australia is essentially to maintain the status quo, with very minor variations. The Tribunal does not accept that there is a "going rate" for copyright licence fees in fitness classes. Neither does the Tribunal accept that there should be no material departure from the status quo. 291 The Tribunal accepts the PPCA contention that there is no market rate or comparable bargain available. The Tribunal therefore proceeds on a process of judicial estimation which, as previously noted in the Nightclubs case, may overlap with a notional bargain rate. Obviously, the parties are before the Tribunal because they are unable to reach agreement on a rate. The Tribunal considers that if it fixes a rate which, on a basis of judicial estimation, it finds is fair and reasonable, that rate might also be a rate acceptable to the parties in a hypothetical negotiation between a willing but not anxious licensor and a willing but not anxious licensee. 292 In considering the fixing of a rate the Tribunal has taken into account the market position of PPCA, the need for an APRA licence in addition to a PPCA licence, the availability of substitutes for the PPCA repertoire, the "comfort" provided by a PPCA licence, the value placed upon music in fitness classes by those attending such classes and the relationship, if any, between the fees paid by individuals to attend fitness classes and the willingness of fitness centres to pay for music in fitness classes. The Tribunal acknowledges, in that connection, that the WTP for music of participants in fitness classes is not a perfect proxy for the WTP for music of fitness centres (see [122]-[124]). However, the Tribunal accepts that, because the WTP of fitness centres for music in fitness classes cannot be reliably discovered, the fixing of a licence fee for such music should begin with an examination of the value of that music to its consumers, that is, participants in fitness classes. 293 The Tribunal accepts that the licence scheme should include a fee for the playing of protected music in a fitness class calculated on a per-class basis. That is consistent with both the current Tariff V licence and the APRA licence and is one of the alternatives proposed by PPCA. 294 There are also strong arguments to support the fixing of a licence fee on a per-attendee per-class basis. That was an option supported by the ACCC, although the Commission chose not to make any submissions in relation to the particular terms of a proposed licence. A rate based on individual attendance in a fitness class most closely aligns the licence fee to the individual consumption of the service. It is most consistent with the principle that the user should pay. The evidence before the Tribunal indicates that the average attendance in fitness classes is between 12 and 15. That is an average figure. In some centres at some times, the numbers may be significantly larger. In others and at other times, the numbers may be significantly less. The fixing of a per-class rate provides a competitive advantage to the dominant or larger fitness centres who, through their extensive facilities and large membership base, are able to accommodate large numbers in a class. A per-class rate puts smaller or boutique centres at a disadvantage. A per-attendee per-class rate would be fairer in that respect. However, Fitness Australia strongly resists the fixing of a rate on a per‑attendee per-class basis because of the administrative costs it sees would be necessary to account for individual attendance in fitness classes. 295 The degree to which fitness centres monitor attendance at fitness classes varies considerably. While fitness centres maintain records of members who enter their premises, they do not necessarily maintain any reliable records of those members who, having entered the premises, choose to attend a fitness class. Of course, in the case of a fitness centre which only offers fitness classes, there would be no difference. However, the Tribunal saw material that indicated that class numbers are monitored in fitness centres to determine whether the continuance of a class is viable. Evidence showed that poorly attended classes were removed from the options available to members. This was hardly surprising but it does demonstrate that it is possible to maintain records of class attendance. 296 The issue of whether the licence scheme should be based on a per-class rate or a per-attendee per-class rate or both has been a difficult one for the Tribunal to resolve. The licence scheme adopted should not unfairly burden fitness centres with administrative costs of compliance. Neither should the licence scheme provide an unfair competitive advantage to large centres over small or boutique operators. In its final submissions, PPCA submitted that a scheme that only included a per-class rate might not be easily applied to certain types of fitness classes and accepted that a menu licence is required, at least in respect of fitness centres offering certain types of classes. The Tribunal agrees that the fairest and most equitable approach is to provide fitness centres with the option of paying either a per-class rate or a per-attendee per-class rate. 297 The Tribunal also accepts the appropriateness of the condition on licences proposed by PPCA that an election of either a per-class rate or a per-attendee per-class rate made by a fitness centre should bind the fitness centre for a period of 12 months (see [112]). 298 The next question is how a fitness class should be defined. The Tribunal accepts that the present omission of a definition should be rectified. The parties are in dispute on several aspects of the definitions which they have proposed. Somewhat surprisingly, PPCA seeks to limit the definition to fitness classes conducted in a fitness centre, which is further defined in the amended Scheme. This is based upon a view by PPCA that the amended Scheme should only apply to fitness classes conducted in a fitness centre conducted on a commercial basis in dedicated premises, rather than to fitness classes conducted by community groups, employers, instructors not having premises of their own or other "non commercial" operations. Fitness Australia submits that the scheme should apply to everyone conducting a fitness class using PPCA protected music as otherwise commercial operations would face unfair competition from other providers. 299 It is likely that the PPCA view is not altruistic but reflects the cost and difficulty of administering a licence scheme applicable not only to commercial fitness centres but also to individual freelance providers, community groups and the like. The operations of the latter could be difficult and expensive to identify and monitor. However, PPCA is proposing a very significant increase to the present licence fee. A significant increase to the licence fee would impose a financial burden on fitness centres and it would be unfair to impose that burden on commercial fitness centres alone. As is noted at [37], the fitness industry is not limited to fitness centres. Fitness instructors or organisations who run a business of providing fitness classes otherwise than at fitness centres should also be subject to the licence. The application of the licence scheme to classes conducted by fitness instructors or organisations (whether in a fitness centre or otherwise) would also deal with the problem of fitness classes being conducted out of doors. PPCA proposed that the amended Scheme would only apply to fitness classes conducted out of doors by a fitness centre. That draws attention to the artificiality of a distinction between fitness classes offered by fitness centres and fitness classes offered by freelance fitness instructors or organisations other than fitness centres who offer fitness classes as a business and employ fitness instructors. 300 The burden should not, however, fall on community groups, local government bodies and the like which simply make premises available for use by fitness instructors and their clients. Where it is the instructor who is gaining the commercial advantage of using the PPCA repertoire then it is that person who should bear the licence fee. 301 A further point of difference between the parties concerns whether the definition of "Fitness Class" should be limited to classes directed by a fitness instructor. A separate licence scheme applies to background music played in fitness centres. The amended Scheme would relate only to protected music played specifically for fitness classes. There is some evidence of classes (for example, circuit classes) being offered by some centres without an instructor. These classes run more or less continuously and participants may enter or leave them as they choose. The classes are directed not by an instructor present in the class but by recorded instructions or automatically generated instructions in the form of words or sounds. The Tribunal considers that the presence of a human instructor is not essential to the definition of a "Fitness Class". The essential criterion is that the activity must take place in a class environment with direction as to the exercise which is being undertaken. That is the essential difference between a fitness class and individual exercise undertaken collectively. In the Tribunal's view, the licence scheme should apply to fitness classes conducted in or by a fitness centre or by a fitness instructor or organisation for which a fee is charged by the fitness centre (whether that is a membership fee or a fee for casual attendance) or by the fitness instructor or organisation. The burden of paying the licence fee in relation to the fitness class will fall on the person or body charging the fee for the class. 302 The Tribunal does not accept that any distinction should be drawn between yoga and pilates classes and other fitness classes. Although music performs a different function in yoga and pilates classes than in rhythmic classes the same is probably true of some other kinds of non rhythmic classes. The Tribunal takes the view that where music is played specifically in a fitness class for the purposes of the class it is integral to the exercise experience. In those kinds of classes where music is not essential to the class, such as yoga and pilates, it does not have to be played. Where music is played for the class, no distinction should be drawn. 303 The parties are also in dispute as to whether the definition of "Fitness Class" should include a reference to music being played as an integral part of the class. The current Tariff V is expressed to cover the use of protected sound recordings when used as an integral part of fitness classes. Fitness Australia seeks to maintain that wording. Fitness Australia would prefer the wording to appear in the definition of "Fitness Class". PPCA opposes using the words in the definition and would prefer to see them omitted altogether. The Tribunal considers that a variation on the present wording should be included in the scheme but the words are not necessary to include in the definition of "Fitness Class". 304 The reason why a licence applies to music in fitness classes that is different from the general background music licence is that the scheme applies to music which is played specifically in fitness classes. The Tribunal accepts that the licence scheme should identify that purpose. However, the Tribunal does not intend that the licence scheme would apply to only some of the music that is played specifically in fitness classes. Provided that music is played specifically in a fitness class (rather than simply being the general background music available in the rest of a fitness centre) the licence scheme will apply. The specificity of the music played reflects that it is integral to the conduct of the class. 305 The third and fundamentally important issue for the Tribunal to resolve is the rate which should be paid under the scheme determined by the Tribunal. The Tribunal has made a number of findings bearing upon that issue. It has rejected the Gyms Survey as a reliable measure of the WTP for music in fitness classes. It has also rejected the proposition that there is a "going rate" for a licence for protected recordings played in fitness classes. There is an existing rate in the current Tariff V and in the APRA licence scheme but if an existing rate is considered to be a "going rate" it is hard to see how any change could ever be justified. In the ABC casethe ABC asserted that the parties had, by a course of dealing over many years, established what a fair market value for the music at issue in that case was, and that there should be no change to that position. The Tribunal rejected that argument because the existing formula did not reflect the true value of the scheme. The position is the same here. 306 The Tribunal was referred to international comparisons but, while there are a range of licence fees applicable internationally, the Tribunal is not privy to the circumstances in which those rates were fixed or the basis upon which they were fixed. The Tribunal has taken the view that there is no "going rate" to which it can refer. 307 The Tribunal has found assistance in the Roberts Research study which preceded the Gyms Survey. The Tribunal has accepted on that evidence (and in general terms, the other evidence available, including the Gyms Survey) that it is valid to assume that playing recorded music in fitness classes adds value from the perspective of attendees and hence increases the profits of fitness centres. Music is integral to the enjoyment of fitness classes and the willingness of participants to attend them over a period of time for the reasons explained earlier. The Roberts Research analysis found that the value of music in fitness classes attributable to PPCA was $31.67 per class, representing a three way split between fitness centres, PPCA and APRA. The Tribunal proceeds on the basis that that figure is the only available starting point for the judicial estimation of a licence fee. The Tribunal recognises that the Roberts Research study was limited in its purpose and application. Accordingly, the figure derived from that study is a starting point only and cannot of itself be the basis for the fixing of a licence fee. 308 The Tribunal confirms that it does not accept that there is any correlation between "favourite music", also examined in the Roberts Research study, and PPCA music. Rather, it is necessary to consider by reference to the evidence what discount should be applied to the PPCA share of music as valued, recognising that not all recordings played in fitness classes are protected within the PPCA repertoire. The evidence on what proportion of music played in fitness classes is on PPCA records was equivocal and, to some extent, controversial. The most detailed analysis was that of Ms Small and her evidence came under sustained attack from Fitness Australia. Ultimately, PPCA was willing to concede that up to 40 per cent of music played in fitness classes is on unprotected records. Fitness Australia thought the figure could be as high as 60 per cent but that view, in the Tribunal's opinion, depends heavily on an assumption that the use of popular Les Mills recordings in fitness classes does not require a PPCA licence (see [72]). Fitness Australia conceded that the figure could be as low as 40 per cent (see [29]). 309 Taking a cautious approach, the Tribunal concludes that a discount of 40 per cent should be applied to PPCA's share of the value of music in fitness classes, as found in the Roberts Research study. This produces a figure of $19 (just below the figure of $20 sought by PPCA in Option 2 of the further amended reference). The Tribunal regards the figure of $19 as somewhat high, taking into account the limitations on the Roberts Research study and the other factors referred to earlier bearing upon the process of judicial estimation. The Tribunal has concluded that a fair and reasonable per class rate would be $15. 310 The other question concerns an appropriate rate for individual attendance in a fitness class. The evidence indicates that the average attendance in fitness classes is as high as 15. While lower estimates were also available, the Tribunal prefers to take a cautious approach of using the higher figure of 15. On that basis, the appropriate rate on a per-attendee per-class basis is $1.00. 311 Fitness Australia proposes that there should be no cap on the rate fixed in the licence scheme. The Tribunal agrees. However, the Tribunal rejects the PPCA contention that there should be a minimum amount per class as that would be inconsistent with the principle that a per-attendee per-class rate is necessary to provide fairness in the case of small class numbers. A class may comprise one or more participants. 312 Fitness Australia also proposes that the rate for flexibility or stretching classes (eg yoga and pilates) should be half that for rhythmic classes. The Tribunal accepts that the evidence establishes that music plays a different role in flexibility classes than in rhythmic classes. For practical purposes, music is essential to the conduct of rhythmic classes. While providing benefits in flexibility classes, it is not essential. The Tribunal does not accept that a reduced rate is justified. As already noted, music is integral wherever played specifically for a fitness class. However, as also already noted, music is not essential to yoga and pilates classes. A person or body conducting yoga and pilates classes who does not want to pay a licence fee for music can avoid payment of the fee altogether by not playing music. There is no need for a discounted fee. The evidence does not support a discount as the only evidence, derived from the Gyms Survey, was that the difference in WTP for the use of recorded music in rhythmic classes and yoga and pilates classes was relatively small. 313 The Tribunal is aware of the fact that these amounts are considerably higher than the amounts payable under the present licence arrangements. However, this application to the Tribunal has permitted the first comprehensive examination of the use of music in fitness classes. It has revealed that recorded music is an essential accompaniment to such classes. Without it the classes would not function in the manner in which they are presently conducted and which fitness class attendees have come to expect. No evidence was provided of satisfactory alternatives to the provision of music as an accompaniment to the classes. In the Tribunal's view, the amount currently being paid does not reflect this essential nature of music in classes. The Tribunal believes that it is appropriate that users of recordings in fitness classes should pay an amount that reflects the value of music to such classes. 314 This is not the first occasion on which licence fees have been significantly increased by the Tribunal. The licence fee determined by the Tribunal in the Nightclubs case was described by the Full Federal Court in Australian Hotels Association v Copyright Tribunal [2008] FCAFC 37 at [4] as "a huge increase over those fixed by the previous scheme which had operated since 1994". The size of the increase was not a material factor for the Court. The Court noted at [24] that the statutory mandate of the Tribunal is to confirm or vary a scheme "as the Tribunal considers reasonable in the circumstances". That is what the Tribunal in this decision has sought to do.

THE ROLE OF THE ACCC 315 As has previously been noted, this is the first occasion on which the ACCC has taken advantage of s.157B of the Copyright Act which provides as follows: The Tribunal may make the Australian Competition and Consumer Commission a party to a reference or application made under this Subdivision if: (a) the Commission asks to be made a party to the reference or application; and (b) the Tribunal is satisfied that it is appropriate that the Commission be a party to the reference or application. The section was enacted in 2006 as part of the Government's response to the Copyright Law Review Committee Report on the Jurisdiction and Procedures of the Copyright Tribunal. 316 On 30 April 2007 the ACCC sought leave from the Tribunal to be joined as a party to the reference and filed an affidavit in support, which stated relevantly that: Due to its statutory function the ACCC is ideally placed to assist the Tribunal to take account of any market power that can be exercised by collecting societies and balancing the public interest in public access to copyright material with the legitimate interests of copyright owners; In light of the ACCC's statutory function in preparing and issuing pricing principles and guidelines, the Tribunal's consideration of this Reference is likely to influence the way in which the ACCC performs that function in the future; and The ACCC is able to offer the Tribunal independent assistance in the public's interest, in the course of the Reference, without advocating any existing party's position. As a consequence of its statutory function the ACCC is in a position to assist the Tribunal with a number of issues that arise in Copyright Tribunal proceedings, including: (a) providing an independent critique of the economic arguments put to the Tribunal by the parties; (b) providing its own independent economic evidence; (c) making submissions to the Tribunal in respect of the economic evidence. 317 During the course of the hearing, both orally and in writing, PPCA expressed concern about the role being played by the ACCC. To some extent, those criticisms of the ACCC were not criticisms of its conduct, but of its submissions. Nevertheless, PPCA submitted that the ACCC exceeded its role, especially in the cross-examination of PPCA witnesses who were not economists. In particular, PPCA became concerned that the scope of the cross-examination of certain witnesses indicated that its blanket licence and repertoire were contested by the ACCC. That was, however, not borne out in the ACCC's closing submissions. 318 The ACCC made the following submissions bearing upon its status as a party: 9. As with all other respondent parties to a reference, the Commission's joinder derives from a process of intervention. As a party it has both the benefits and burdens of a party. There is nothing in subsection 154(2) that provides for a differential status dependent on the mode of a person's joinder or for the incidents of that status to differ in any way. Indeed, regulation 34(2) of the Copyright Tribunal (Procedure) Regulations 1969 mandates that the Tribunal shall give every party to a proceeding before it an opportunity of putting a case. So, too, subsection 154(4) mandates that, in a reference under section 154, the Tribunal must give the parties to the reference an opportunity of presenting their cases. 10. The Commission's status as a party is to be contrasted with other, more limited, forms of participation. The Commission does not appear as, or have the status or role of, an amicus curiae; nor is its intervention circumscribed by specific rules: compare, for example, O 58 r 3 FCR which provides that the Commissioner of Patents may appear and be heard, but is not a party to, proceedings in the Federal Court of Australia, other than for certain appeals. 11. In Corporate Affairs Commission v Bradley (Commonwealth Intervener) [1974] 1 NSWLR 391 Hutley JA at 396 said: A person accepted as an intervener becomes a party to the proceedings with all the privileges of a party. Thus he can appeal, tender evidence and participate fully in all aspect of the arguments. His position is quite different from that of an amicus curiae. 12. The status and role of an amicus curiae was discussed by a Full Court of the Federal Court of Australia in United States Tobacco Company v Minister for Consumer Affairs (1988) 20 FCR 520 at 533-539. An amicus curiae has no entitlement to lead evidence. The role that an amicus curiae plays is a matter entirely within the discretion of the court: see, also, Bropho v Tickner (1993) 40 FCR 165 at 172-173. 319 The ACCC submits that it has articulated its case consistently with its proper role. 320 The Tribunal does not consider that the ACCC acted inappropriately in this matter having regard to its status as a party. Counsel for the ACCC was entitled to cross-examine those witnesses made available for cross-examination and exercised restraint in doing so. While some questioning of certain PPCA witnesses gave rise to a concern in the mind of counsel for PPCA that the ACCC's interest in the proceedings may be broader than had been anticipated, the ACCC's submissions to the Tribunal were appropriately limited to matters bearing upon the reference before the Tribunal. The Tribunal has been assisted by those submissions. 321 It is appropriate, given that this is the first occasion on which the ACCC has appeared as a party, to make some general observations on the Tribunal's view as to the appropriate role to be played by the ACCC. First, the purpose of joining the ACCC as a party to a proceeding before the Tribunal is to assist the Tribunal in the performance of its functions under the Copyright Act, not to assist the ACCC in the performance of its functions under the Trade Practices Act 1974 (Cth). While there may be no conflict between the statutory interests of the ACCC and its role in assisting the Tribunal to perform its functions, the ACCC should be cautious to ensure that the performance of its role does not give rise to a perception that its involvement in a particular proceeding before the Tribunal is part of a broader interest or objective than that which appeared from the terms of a particular reference. There is a risk that any blurring of the distinction between the role of the ACCC in assisting the Tribunal and its broader statutory interests might leave the ACCC open to the criticism that it was involved as a partisan player. 322 Secondly, while no artificial restraint should be placed on the evidence that might be brought or tested, or the submissions that might be made by the ACCC in a particular matter, the Tribunal will be most assisted by receiving evidence and submissions from the ACCC which deal with matters about which the ACCC has particular expertise, namely competition policy, economic theory and practice and technical issues bearing upon the consideration of a market rate, a notional bargain rate, comparable bargains or judicial estimation in the determination of a reference. 323 The Tribunal is satisfied that the role played by the ACCC in this matter was consistent with the observations set out above. Nevertheless, the Tribunal is mindful that recent proceedings before it have been quite lengthy and complex, and at substantial cost to the parties. The length and complexity (and hence the cost) of proceedings is likely to be increased where the ACCC chooses to be represented throughout a hearing, and to participate in the introduction and testing of evidence. If there are deficiencies in the cases presented by other parties it should not be necessary for the ACCC to make good those deficiencies. The ACCC might in the future consider whether its role could be performed effectively through written submissions.

Conclusion 324 The amended Scheme in the further amended reference should be varied by the adoption of Options 2 and 3, with the licence fees determined as stated above and the amendment of the definitions as indicated above. It should be called the Fitness Class Licence Scheme. These variations and amendments are detailed in Appendix 2. PPCA should bring in short minutes to give effect to these conclusions. I certify that the preceding three hundred and twenty-four (324) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Tribunal.

APPENDIX 1 FITNESS CENTRE LICENCE SCHEME Tariff Category Fitness Class Use Centre Type Rate V1 The use of Sound Recordings by a Fitness Centre for Fitness Class Use Full Service Fitness Centre Where C is the total number of Fitness Classes per month at the Fitness Centre Where P is the total number of PPCA Classes per month at the Fitness Centre

NOTES: 1. Tariff V licences will be issued subject to PPCA's Standard Terms and Conditions for Licences for the Public Use of Protected Sound Recordings, as set out below. 2. Fitness Centre means a fitness centre (including, without limitation, gymnasiums, health clubs, aquatic centres, recreation centres, leisure centres, sport centres, incidental fitness amenities and specialty centres) including offering periodic memberships (whether called by that name or any other name) which entitle its Members to attend Fitness Classes. 3. Fitness Class means a: · structured form of exercise conducted in a Fitness Centre; · accompanied by sound recordings; · which may or may not be directed by a fitness instructor; · and includes, without limitation, the following types of classes: · aerobics, · circuit, · dance, · cycle/spin, · strength/resistance, · circuit, · hybrid, · boxing/combat, · flexibility/stretching/abdominal, · specialty, · aqua, and · age/lifestage. 4. Fitness Class Use means the use of Sound Recordings to accompany Fitness Classes. 5. Sound Recordings means sound recordings the copyright in which includes the exclusive right to cause the recordings to be heard in public under the Copyright Act 1968 and the Copyright (International Protection) Regulations 1969. 6. Member means a person who is entitled to attend the Fitness Centre periodically or during a given period at any time (eg monthly membership). Typically membership involves payment of a regular set fee (eg a monthly payment). · Note: if a Fitness Centre facility is located in a larger membership facility but has a different membership for its Fitness Centre, a Member is one of the latter class of members. 7. Active Member means a person who is entitled to attend the Fitness Centre periodically or during a given period at any time (eg monthly membership) and is not subject to a temporary disentitlement owing to their entry into an arrangement with the Fitness Centre to suspend their membership. Typically membership involves payment of a regular set fee (eg a monthly payment). · Note: if a Fitness Centre facility is located in a larger membership facility but has a different membership for its Fitness Centre, an Active Member is one of the latter class of members. 8. Full Service Fitness Centre means a Fitness Centre which offers both Rhythmic Type classes and Yoga Type Classes. 9. Pay Per Visit Attendance means attendance at a Fitness Centre on the payment of a once off fee by a Casual Attendee, not being attendance on a membership basis. 9. PPCA Class means a Fitness Class in which Sound Recordings comprising part of the PPCA repertoire are used (either for the entirety of the class, or part only). 10. Casual Attendee means a casual attendee who is not a member (ie. neither an Active Member, nor a member subject to an arrangement with the Fitness Centre to suspend their membership). 11. Rhythmic Type Class means a Fitness Class which is conducted in a rhythmic tempo and involves keeping time with a beat or pace, whether synchronously or asynchronously. 12. Specialist Rhythmic Only Centre means a Fitness Centre that only provides Rhythmic Type Classes. 13. Specialist Yoga Centre means a Fitness Centre that only provides Yoga Type Classes. 14. Yoga Type Class means a Fitness Class which is not a Rhythmic Type Class and includes classes such as Yoga, Pilates and Stretch classes. 15. This tariff is applicable from the date ordered by the Tribunal (the Commencement Date) and the rate specified is GST inclusive. 16. The Consumer Price Index (CPI) means the index of that title All Groups Australia published by the Australian Bureau of Census and Statistics or any authority substituted by Statute, related to the year 1989-90 equals 100, and Most Recent Available Quarter means the most recent quarter year CPI figures available. 17. Fees for all licences issued under this tariff will increase on 1 July each year by the percentage increase in the CPI between the Most Recent Available Quarter and the corresponding quarterly figure for the previous year. 18. The rate specified is current as at June 2009 and is subject to adjustment for CPI which is to apply from June 2009 in order to provide the tariff applicable at the Commencement Date. 19. This tariff does not cover the public exhibition of music video clips, including DVD, or any other similar medium (Tariffs "W" and /or "W-E" are applicable). 20. This tariff is subject to Special Conditions A and B. Special Condition A: (1) The Fitness Centre agrees that PPCA may in writing, notify the Fitness Centre that it wishes, on a day specified in the notice, being an ordinary working day of the Fitness Centre specified in the notice not earlier than 7 days after the day on which the notice is given, to do such of the following things as are specified in the notice: (a) assess the amount of public performance of Sound Recordings comprising part of the PPCA repertoire carried out at the premises of the licensee; (b) inspect all the relevant records held at those premises that relate to the public performance of Sound Recordings comprising part of the PPCA repertoire; (c) inspect such other records held at those premises as are relevant to the assessment of the amount of equitable remuneration payable by the licensee to PPCA. (2) Where PPCA gives a notice, a person authorised in writing by PPCA may, during the ordinary working hours of the relevant Fitness Centre on the day specified in the notice (but not before 10 a.m. or after 3 p.m.), carry out the assessment, or inspect the records, to which the notice relates and, for that purpose, may enter the premises of the Fitness Centre. (3) Fitness Centre shall take all reasonable precautions, and exercise reasonable diligence, to ensure that a person referred to in subpara (2) who attends at the premises of the licensee for the purpose of exercising the powers conferred by that subsection is provided with all reasonable and necessary facilities and assistance for the effective exercise of those powers. Special Condition B: Fitness Centre to provide to PPCA on a quarterly basis month-by month reports indicating the number of Fitness Classes conducted at Fitness Centre, the number of PPCA Fitness Classes conducted at Fitness Centre, the number of Active Members at Fitness Centre, the number of Active Members attending and not attending Fitness Classes at Fitness Centre, the number of Pay Per Visit Attendances at Fitness Centre and any other supporting documentation PPCA may reasonably require to verify the per member per month rate applicable to Fitness Centre.

Fitness centre licence scheme Tariff Category Fitness Class Use Rate V The use of Sound Recordings by a Fitness Centre for Fitness Class Use $20 per PPCA Class

[Note: the conditions, other than Special Condition B, are the same for this option.] [option 3] Fitness centre licence scheme Tariff Category Fitness Class Use Rate V The use of Sound Recordings by a Fitness Centre for Fitness Class Use $X per Attendance per PPCA Class

[Note: the conditions, other than Special Condition B, are the same for this option.]

Tariff Category Fitness Class Use Rate V The use of Sound Recordings accompanying a Fitness Class conducted as a business by a Fitness Centre, an organisation other than a Fitness Centre employing fitness instructors or a Freelance Fitness Instructor $15 per PPCA Class Or $1.00 per attendance per PPCA Class

NOTES: 1. Tariff V licences will be issued subject to PPCA's Standard Terms and Conditions for Licences for the Public Use of Protected Sound Recordings when used specifically for Fitness Classes, as set out below. 2. Fitness Centre means a fitness centre operating on a commercial basis as a business (including, without limitation, gymnasiums, health clubs, aquatic centres, recreation centres, leisure centres, sport centres, incidental fitness amenities and specialty centres) including offering periodic or casual memberships (whether called by that name or any other name) which entitle its Members to attend Fitness Classes. 3. Fitness Class means a structured form of exercise conducted in a class environment in or by a Fitness Centre or other organisation conducting fitness classes on a commercial basis as a business or by a Freelance Fitness Instructor: · accompanied by sound recordings; · which is directed (whether by a fitness instructor or otherwise); and includes, without limitation, the following types of classes: · aerobics, · circuit, · dance, · cycle/spin, · strength/resistance, · hybrid, · boxing/combat, · flexibility/stretching/abdominal, including yoga and pilates, · specialty, · aqua, and · age/lifestage. 4. Fitness Class Use means the use of Sound Recordings to accompany Fitness Classes. 5. Freelance Fitness Instructor means a fitness instructor who provides fitness instruction on a commercial basis as a business, otherwise than at a Fitness Centre or as an employee of an organisation conducting Fitness Classes. 6. Sound Recordings means sound recordings the copyright in which includes the exclusive right to cause the recordings to be heard in public under the Copyright Act 1968 and the Copyright (International Protection) Regulations 1969. 7. Member means a person who is entitled to attend the Fitness Centre periodically or during a given period at any time (eg monthly membership). Typically membership involves payment of a regular set fee (eg a monthly payment). · Note: if a Fitness Centre facility is located in a larger membership facility but has a different membership for its Fitness Centre, a Member is one of the latter class of members. 8. PPCA Class means a Fitness Class accompanied by Sound Recordings comprising part of the PPCA repertoire which are used either for the entirety of the class, or part only. 9. This tariff is applicable from the date ordered by the Tribunal (the Commencement Date) and the rate specified is GST inclusive. 10. The Consumer Price Index (CPI) means the index of that title All Groups Australia published by the Australian Bureau of Census and Statistics or any authority substituted by Statute, related to the year 1989-90 equals 100, and Most Recent Available Quarter means the most recent quarter year CPI figures available. 11. Fees for all licences issued under this tariff will increase on 1 July each year by the percentage increase in the CPI between the Most Recent Available Quarter and the corresponding quarterly figure for the previous year. 12. The rate specified is current as at the commencement date and is subject to adjustment for CPI which is to apply from that date to provide the tariff applicable at the Commencement Date. 13. This tariff does not cover the public exhibition of music video clips, including DVD, or any other similar medium (Tariffs "W" and /or "W-E" are applicable). 14. This tariff is subject to Special Condition A, and either Special Condition B or C at the election of the licensee. An election may not be varied for a period of 12 months after having been made. Special Condition A: (1) The licensee agrees that PPCA may in writing, notify the licensee that it wishes, on a day specified in the notice, being an ordinary working day of the licensee specified in the notice not earlier than 7 days after the day on which the notice is given, to do such of the following things as are specified in the notice: (a) assess the amount of public performance of Sound Recordings comprising part of the PPCA repertoire; (b) inspect all the relevant records that relate to the public performance of Sound Recordings comprising part of the PPCA repertoire; (c) inspect such other records as are relevant to the assessment of the amount of equitable remuneration payable by the licensee to PPCA. (2) Where PPCA gives a notice, a person authorised in writing by PPCA may, during the ordinary working hours of the relevant licensee on the day specified in the notice (but not before 10 a.m. or after 3 p.m.), carry out the assessment, or inspect the records, to which the notice relates and, for that purpose, may enter the premises of the licensee. (3) The licensee shall take all reasonable precautions, and exercise reasonable diligence, to ensure that a person referred to in subpara (2) who attends at the premises of the licensee for the purpose of exercising the powers conferred by that subsection is provided with all reasonable and necessary facilities and assistance for the effective exercise of those powers. Special Condition B: The licensee is to provide to PPCA on a quarterly basis month-by month reports indicating the number of Fitness Classes conducted by the licensee, the number of PPCA Fitness Classes conducted by the licensee and any other supporting documentation PPCA may reasonably require to verify the per class rate applicable to the licensee. Special Condition C: The licensee is to provide PPCA on a quarterly basis month by month reports indicating the number of attendees in Fitness Classes conducted by the licensee, the number of attendees in PPCA Fitness Classes conducted by the licensee and any other supporting documentation PPCA may reasonably require to verify the attendee per class rate applicable to the licensee.