Evidence of Universal Activities
262 Evidence was led from Mr Cameron, the Sales Director of Universal, who prior to the merger had been employed by PolyGram but around the time of the merger at least was employed by 6% Universal. After the merger, he was employed by Universal, that is to say, the entity that was previously PolyGram. The evidence of Mr Cameron was largely concerned with the activities of PolyGram and thereafter the merged company. There was no comparable evidence led of the activities of Warner. Much of the detail of Mr Cameron's evidence was confidential and confidentiality orders were made to protect that evidence. It is for that reason that some of the discussion which follows is expressed in generalities and omits specific financial details.
263 Retailers desiring to purchase supplies of Universal products are differentiated by that company into those which are key or major customers and those which are not. Account managers are allocated to key account customers such as Big W or HMV having regard to size and liaise with a Head Office Buyer who orders major releases from Universal for the customer and participates in marketing campaigns with them. In addition, there are account managers who deal with individual stores (usually, I would infer, more than one) in geographic areas. The account manager for a particular key customer, say HMV or the Leading Edge Buying Group, might also be an account manager for particular stores in a geographic area, such as northern Sydney.
264 The decision to release a title in Australia is made at monthly meetings of product managers on the basis of whether it is thought the release would be commercially viable in Australia. Matters that are taken into account include current trends, past sales history of the title overseas and of other recordings of the artist in Australia, the level of commitment on the part of the artist to participate in promotion, feedback from retailers and the subjective reactions of those making the decision. Release schedules, which include the release date, announcements of releases, advertising and marketing of titles that are to be released are also discussed. A sale plan is then prepared by Mr Cameron which includes target quantities for sale to the large and small customers and whether there are to be special discounts or other offers. Australian music accounted for between 17% and 25% of total sales or, in an average year, in the high teens.
265 When a particular album or single is released it will be advertised using media such as television, radio and glossy magazines ("front line advertising") for between 90 and 120 days. The front line advertising might extend in a number of phases over considerable time, for example, two and a half years, depending upon the success of marketing. Once front line advertising ceases, the title is treated as "catalogue" and may then only receive less costly advertising. Catalogue product might be the subject of more extensive advertising from time to time to coincide, for example, with anniversaries of the birth, death or tour of an artist.
266 A decision may be made not to release a particular product in Australia on the basis that such release would not be commercially viable. These are then made available for purchase through an indent scheme under which Universal will order at the request of a customer specific titles in specified quantities from overseas affiliates.
267 Universal has a large number of actual account customers. They fall into various categories, being specialist chains, for example, Sanity; department stores; mass merchants, such as Kmart and Big W; casual music outlets, such as service stations and the like who sell music as a part of their overall sales; and independent outlets, being owner/operator retail music operations, including one-off stores and small retailers.
268 In addition, Universal deals with various sub-distributors of which Bruce Ingram and Associates Pty Ltd and One Stop Entertainment Pty Ltd were mentioned in evidence. Sub-distributors are, effectively, treated in the same way as retailers and have account managers allocated to them, are afforded volume discounts, future release information and advertising material in the same general way that retailers, or at least the larger retailers do. However in cross-examination it emerged that at least one and probably all sub-distributors had agreed either not to supply to pre-existing customers of PolyGram, or at the least to advise PolyGram before doing so, making it difficult to see them as alternative sources of supply, at least for retailers who purchased or had purchased from PolyGram. As will be noted, the suggestion that there was a serious alternative source of supply to retailers of PolyGram products was made by Mr Cameron. I do not accept it. The real function of these sub-distributors was to supply retailers in areas which were not serviced by PolyGram, for example, some parts of Western Australia. It would have been quite unlikely that a retailer to whom PolyGram would not sell its products would have been able to purchase that product from a sub-distributor.
269 Customers wishing to deal with Universal were required to complete an account application, sign a copy of Universal's trading terms and place an opening order so as to ensure that a reasonable volume of Universal stock was held by that retailer. The various rebates and discounts available were generally negotiated on a yearly basis, although sometimes negotiations could be more frequent. As may be expected, rebates had regard to the sales volume of the customer. As other evidence demonstrates, and Mr Cameron confirmed, trading terms included SOR or SOE, and merchandising support such, for example, as trade fairs. The largest customers obviously had the best chance of exacting the best trading terms.
270 It is Mr Cameron's view that there is fierce competition between the record companies in areas such as advertising, trading terms, retail distribution, market share and competition to sign artists, as well as in poaching staff. Although I think it true there is competition between record companies for sales, I would treat Mr Cameron's evidence on this point and indeed other matters with some caution. First, there is a question of just how Mr Cameron is using the word "competition" in his evidence. Second, there is a question as to his credit which I deal with later.
271 The market share of PolyGram changed from time to time. It had been as high as 23% at one time but in the relevant period had slipped to approximately 17%. In the same period, Sony was market leader with 23% of the market, EMI and Warner had each 15-16%, BMG between 8-9%, 6% Universal about 6-7% and other manufacturers, such as the Festival/Mushroom group, Jive Zomba, Shock and Village Roadshow divided the remaining 15% among them.
272 The extent of music sales was governed by marketing and advertising by the record companies, designed to get customers to purchase particular titles through retailers. Some television advertising in particular also identified or "tagged" particular retailers. Radio airplay also had a significant part to play in promoting titles, as did exposing new product to other media. Marketing, on the other hand, concentrated upon the artist. I accept Mr Cameron's evidence that record companies such as Universal created demand for their product, particularly by promoting the image of an artist, and that the creation of that demand was important not only to Universal but to the retailers. I accept also that a considerable part of the CDs that are now imported are titles which are advertised in Australia at the expense of the Australian record company.
273 Mr Cameron expressed the view that retailers who could not obtain product in the Universal catalogue from Universal would mostly be able to obtain it from other sources, for example from large overseas wholesalers or from sources in South East Asia and South America or from sub-distributors as earlier discussed. No doubt this is literally true, although there would be some titles that were not available overseas because the artists were Australian and for whatever reason a decision was made not to release the title overseas. But the evidence ignores both the landed cost of importation (which depends not merely on transport costs but also on relevant exchange rates which fluctuate) as well as the time it would take from order to delivery in Australia.
274 According to Mr Cameron, there have been substantial changes in trading terms since the advent of parallel importing and in favour of Universal's customers. In the result, while the list wholesale price remained the same, the price actually realised on sale after discounts and rebates was reduced. The level of discounts and rebates, etc depended, Mr Cameron said, on the volume of sales of the retailer and in part on the skill of negotiators and in part upon general market factors. However, a confidential table showing discounts and turnovers per customer prepared by Universal did not support what Mr Cameron said. In cross-examination he was forced to admit that there was no real correlation between size of turnover and the rebates and discounts given to customers. It is also difficult from the table to see that discounts and rebates were significantly increased after parallel importing was legalised, although this would be expected to have happened at least so long as Universal took no action to prevent parallel importation by its customers by threats of reprisals etc. The table shows in total only a small increase in overall rebates and discounts, hardly a significant increase and thus reduction in overall price. It may be that the table does not reflect the cost of other assistance given by Universal, such as advertising subsidies etc and so does not reflect the real position. I am unable to find one way or the other whether there was any significant overall increase in discounts and rebates and thus, as Mr Cameron claimed, a reduction in the real wholesale price.
275 At least when Mr Cameron was involved in negotiating trading terms, the possibility of parallel importation was used by customers in an attempt to negotiate better deals. It is not so clear whether Mr Cameron was actually moved by any threat of this kind to afford customers better trading terms than would have been given had the threat not been made. Certainly he does not say that he was. However, it is true, as appears from the evidence of Mr Agostinelli, that Sanity reduced its purchases of Universal product to pressure Universal to give better trading terms (and were successful) and that some pressure was put upon Universal by Big W in negotiating better trading terms by the retailer pointing out its ability to import from overseas. I accept, however, as I have noted, the evidence of Ms Kells of Big W that parallel importation was not specifically used as a threat by that company.
276 At this point, however, it is necessary to keep in mind, when assessing Mr Cameron's evidence, that there is another view of the negotiations between Universal and the large retailers, particularly that of Big W and Sanity. To the extent that there is a conflict, I prefer the evidence of those from Big W and Sanity to that of Mr Cameron. Mr Cameron made an attempt to suggest in his evidence that Universal was not in any strong bargaining position and that Sanity had all the bargaining chips. In doing so he attempted valiantly to avoid answering questions, the answers to which were almost self-evident, and in so doing and in the way he gave his evidence generally, he gave quite an unfavourable impression, to the point that I would treat with considerable care the evidence he gave, particularly where it was self-serving (or, at least, serving the interest of his employer), as indeed much of his evidence was. In my opinion, Mr Cameron, to the extent that he personally participated in negotiations with the large retailers, knew that Universal had, ultimately, the dominant position by being able to refuse supply and knew that both practically and economically it would be impossible for retailers to obtain supplies of recordings of Australian artists not available overseas or some parts of the back catalogue to retail at a competitive price. In a memorandum dated 13 March 2000, Mr Cameron spoke of his hope that there would be an influx of hit singles which would provide Universal with leverage over Sanity at a time when Sanity was, at least temporarily, not purchasing Universal product. The point is that over time the major record companies did have leverage over retailers, precisely because retailers needed to stock those new releases as quickly as possible. On the other hand, it is clear both from correspondence and from the evidence of Mr Hazell that HMV used the potential of parallel importation as a bargaining card and did, as a result, achieve better terms.
277 Finally, it may be noted that Mr Cameron suggested a doomsday scenario resulting from what he saw as the possibility of a significant decrease in Universal's revenue following upon the opening of the Australian market to imported CDs. He said that Universal's ability to operate its business would be in jeopardy. Ultimately it would be caused to cut back on marketing expenditure, employment would be affected, fewer new artists would be signed, the number of new releases would be reduced, price would become the significant factor and the range and scale of recorded music would diminish and specialist retailers and independents would almost totally disappear. Of course the scenario was dependent on the premise that there would be a significant decrease in Universal revenue. It ignores what would also be a reality, that there would be a transfer of profit from the Australian wholly-owned subsidiary of an overseas organisation to the parent or another related organisation so that looked at on a group basis the need to advertise would continue, as would the need for new signings. I do not find the scenario particularly compelling, especially where there is a real likelihood of transfer pricing. Although Mr Cameron did not appear to have much knowledge about what happened overseas, it was clear from his evidence, for example, that some overseas marketing costs were at least up to 50% in fact paid for by artists out of royalty shares, at least where the title was successful and royalties became payable to artists. Global costs of marketing including video clip production, samples, posters and displays, some advertising and promotional tours by artists were, it seems, in part recouped from royalties if ultimately payable to artists.
278 Mr Cameron in the course of cross-examination agreed that he knew that during the second half of 1998 PolyGram had adopted a policy of reserving the right not to supply to or to change terms of trade of those who parallel imported. He conceded that the news of the closure of the Delaney's account by PolyGram went around the retail industry like wildfire, that accounts closed were only those of small independent retailers and that he knew that the closures would have a serious effect on the business of those retailers. He saw the closure of Mrs Delaney's account as being an over reaction.
279 Evidence was also given by Mr Sullivan, the Group Finance Director of Universal since January 1999. Before that time Mr Sullivan had been Finance Director of the old 6% Universal. The merger occurred, according to him, in April 1999 as a result of the acquisition by the Seagram company, a public company listed on the New York Stock Exchange, of the worldwide operations of PolyGram Australia in December 1998. Again the detailed figures were the subject of confidentiality orders and are therefore excluded from my reasons.
280 His evidence detailed the relationship, at least in part, of the international group of companies of which Universal is a member. As a result of inter-group licence agreements Universal is now the licensee for Australia of Universal titles which include the international repertoire of largely UK and US artists. For some titles an artist might grant copyright only to the Australian company for the Australian territory, leaving it open for the artist to deal with the overseas copyright. As a result of licence agreements, royalties are paid on each album sold of which Universal is the licensee to a Netherlands company which is part of the Universal group. Presumably taxation reasons govern the choice of Netherlands incorporation for that purpose. Details of royalty arrangements, the manner of calculation and the like which Mr Sullivan gives in his affidavit do not appear to me to have any real significance in the case.
281 As would be obvious, sales to retailers account for the significant part of Universal's income and of that the highest proportion is the international repertoire. According to Mr Sullivan, and in contrast to the evidence of Mr Cameron, in the period from 1998 to 2000, a high percentage of Universal's income came from international releases. Mr Sullivan gave in evidence details of production and other costs which need not be here repeated. His evidence shows that production costs for domestic artists were significantly greater than production costs for international releases. However, his evidence showed also that, at least where a title is successful, recording costs will be borne by the artist and are payable from royalties earned as are other additional costs including initial art designs and the like. Obviously only a small number of releases will be successful. Artists receive an advance as a non-recourse loan repayable from royalties. While I accept that costs associated with a new release will be high, it is not correct that the record companies necessarily pay all these costs. Some costs of production of Australian music will be recouped from the artist out of royalties. Likewise, promotional costs of international repertoire may often be recouped from royalties payable to the artist.
282 Mr Sullivan's evidence also discussed the spending by Universal on marketing, including television advertising and on point of sale displays, cooperative advertising etc. A strategy document prepared in February 1998 by 6% Universal suggested that the major companies on average spent approximately 15% of turnover on marketing and promotion, with 6% Universal spending around 12%. Interestingly, and in conflict with Mr Sullivan's evidence, the document suggests that there is no difference in the amount spent promoting domestic repertoire and that spent promoting international repertoire.
283 The overall thrust of Mr Sullivan's evidence was that costs relating to Australian recordings were considerably greater overall than those relating to releases of international repertoire. He exhibited figures which also showed, according to his affidavit evidence, that discounts in respect of PolyGram products increased over the period from 1995 to 1999 and again from 1999 to June 2000 so that while the published price to dealer remained more or less static over time (but for the reduction in price brought about by the abolition of sales tax and its replacement by GST at a lesser effective rate) the actual price realised reduced. In cross-examination, Mr Sullivan accepted that there was no significant price reduction as a result of discounts etc in relation to full price PolyGram product. It would seem that for PolyGram full-priced CDs, significant increase in discounting did not happen until May 1999 with parallel importing being a factor as well as competitive pressure in the market place, perhaps brought about by retailers or at least the big retailers having in their negotiation armoury the threat of importation.
284 While Mr Sullivan agreed with Mr Cameron that it was likely that Universal would reduce investment in local artists if it suffered a decline in revenue, any decision to do so would be made overseas consequent upon a serious threat being reported in writing to head office. He conceded that no such report had been made by him when parallel importing was legalised. In cross-examination he agreed that total units of PolyGram products sold actually increased after parallel importation became legal and that discounts for full priced products remained relatively constant to 1999 with any significant level of discount increasing after that time. Expenditure on domestic repertoire increased after legalisation of parallel importation.