Friday, March 20, 2009

The Productivity Commission's Discussion Draft, March 2009

The Productivity Commission deserves to be congratulated for a generally calm, measured and robust draft report on the Parallel Importation Restrictions (PIRs).

There are some real weaknesses and confusions however. Allow me to address them in turn:


Publishers will not be happy about the removal of PIRs from the back list, and I can appreciate why. Many back list titles sell in very large volumes, frequently propelled as they are by new titles from popular authors. Publishers won't appreciate being told by the Commission, on no evidence, that back list titles generally sell in 'small volumes'. Many key titles, in Australia's trade paperback format, will suddenly get keen competition from far cheaper US paperbacks. The disruption here will quite possibly be much more serious than from any removal of the PIRs from the front list. Yet the Commission claims to be concerned about disruption.


The Commission makes far too much of Asia as a potential source of cheaper textbooks if the PIRs are abolished. The fact is that educational publishers have NEVER relied on the 30/90 day provisions since their establishment in 1991. They've never needed to. New texts published in the US or the UK are published at an optimal time for the northern hemisphere academic year. They are not flown into Australia in 'commercial' quantities for sale within 30 days, as the comparable Australian academic year starts six months later. If any copies are flown in and sold to customers they would be the exception, usually because the US or UK text is published later or earlier than normal, so catching a semester just starting in Australia. Usually a small number of copies are imported for distributing complimentary copies to academics to promote sales in six to eight months' time.

So supply from Asia could technically happen now, but it doesn't. Campus booksellers rely on the fine metrics of supply efficiencies for profitability. They are not going to throw these away for a possible few extra dollars of margin which may look tempting on paper but would be soon eaten up by supply realities. Secondly, if it did start to happen, global educational publishers would inhibit it very effectively by simply refusing to supply Asian-based wholesalers out of their Asian subsidiary companies (the only possible source of the lower-priced editions) any quantities in excess of identified Asian course needs. This happened very effectively a few years ago when certain Asian wholesalers began supplying texts online to individual students based in the US. The supply was effectively strangled, as it also was to supply out of the UK and Europe. Tertiary publishers are in the unique position of knowing precisely the ultimate customer destination of every text. They know each adoption everywhere, and the enrollments. That's the precision of the business.

Supply from Asia is a myth. Theoretically possible, but highly improbable.


The Commission misunderstands the effect of allowing remainders in, and it simply subverts its genuine desire to enhance competition when it argues that remainders are a legitimate source of it. Sure, authors don't get a royalty on remainder sales, but imported remainders could seriously undercut the normal royalty flow from continuing sales of the regular-priced Australian edition. This is the issue, not whether the author's royalty has encompassed the remainder end of a particular edition's journey. The critical point for Australia, without the PIRs, is the frequency, size and effect of the issue and whether it could it be mitigated by contractual , 'naming and shaming', or other ways. (By the way the draft misquoted my submission on this point. I was referring to possible non-remainder or buy-back clauses in rights contracts to inhibit any sale to a remainder dealer in the first place).


In arguing for 'prudence' on more thorough reform, the PC accepts too many assertions by the industry at face value, without subjecting them to rigorous analysis. As a result it puts far too much credence on disaster scenarios if the PIRs were abolished, and too readily accepts claims that significant local publishing activity, and thus cultural externalities, would be undermined.

It hides behind 'lack of up-to-date data' on the industry, when more data is not what is needed, rather clearer thinking. 'Better information' won't remove the claimed 'uncertainty about the significance of the impacts of the PIRs, how the industry would respond to their abolition, and how large the accompanying adjustment costs would therefore be'. There needed to be a recognition by the Commission that key players in the industry, as seen in the vast majority of the submissions, are conceptually confused on the fundamental issue of territorial copyright, how it is established, and the part played by the PIRs. As the Draft says at one point, in Section 3.2, 'by adding to what the holder of the publication and reproduction rights can control, the PIRs thus potentially add to the value that those rights might have in the marketplace'. Unfortunately most submissions are arguing for the retention of territorial copyright rather than the PIRs, as if they were one and the same. I would have liked to see the Commission address this confusion rigorously and analytically, much as it admirably did on many other issues, such as on the value and methodology of international pricing comparisons. In failing to do so I fear it has given too much weight to the possible 'disruption' that may be caused by the 'total abolition' option.

Fundamentally, there is a mismatch between the Commission's constantly repeated views of the negativities and costs of the PIRs and the timidity of their final recommendations. This is disappointing. They are confident and on firm ground in their economic analysis, but go to water in the face of specific publishing industry claims from participants that are allowed to stand without question.


Heather Choi said...

Hi Peter,
Just wanted to say I really appreciate your 'no nonsense' approach to this whole issue - I'm currently in the midst of writing of a law reform essay on this topic and your blogs do a great job in providing clarity to the chaotic mess of different perspectives I have to balance in my head!

Reading the lengthy draft, I got a sense that, essentially, the Commission sided with the 'rational economist' point of view. Even though they gave due consideration to the arguments of publishers, authors, printers etc, they seemed to focus on the economic argument that regulation should maximise the welfare of society as a whole - thus their emphasis on the whole 'cultural externalities' issue.

I agree that their recommendations are timid - but I can't really blame them because I think a stronger stance would be met with such passionate opposition that any chance of actual legislative change would be killed before it even reaches the Government.

The draft report does do a good job of laying all the issues and arguments on the table, but doesn't provide sufficient rationale for its proposed reform to calm the anxieties of the interested parties. The strongest, and therefore most powerful, voices in this debate are those of the publishers and authors, and therefore any attempt at reform should aim to develop an argument that ensures these key players that the PIRs aren't responsible for the success of the Australian book industry, and therefore their removal won't result in any serious detriment to the currently blossoming industry. I feel like authors and publishers will read the report and think "Well, I knew all this already, and reading it again doesn't make me any less worried!" But then again, I'm not sure if anything will change the minds of these players who seem so unmovingly attached to the status quo!

Anyway, thanks again for your quick response to the draft - I can't believe you managed to read AND analyse the 172 page document on the date of release!

Anonymous said...

Thanks very much for your considered response. You are so right. I think the Commission's half-way house will really only antagonise publishers and authors, probably even more than if they'd opted for total abolition. I say this because there is too much second-guessing of industry players on some critical issues. They demonstrate incredible naivete, such as suggesting publishers delay selling foreign rights until after the first 12 months! God, as if selling these things isn't hard enough! No-one can afford the luxury of waiting. Also, having conceded on the front list - on the disruption issue mainly - the Commission has nowhere to go when publishers point out - as they vociferously will! - that as much if not more disruption will arise from the suggested backlist reforms.

I really think the commission would have been better advised to go the whole hog - be hung for a sheep, etc - as this position would have maintained the economic logic of their rationalist position.

Brett said...

Hi Peter,

It's nice to find someone I can actually agree with, and although I was initially against change, the more I thought about it the more I think it's the right thing to do.

I think the recommendations reflect that the main game for parallel importation is not in first and second editions that are priced at $20+ but rather the mass market editions that get released a year or two down the track at US$10 or less. I'm not sure if this was the deliberate intention but certainly it pays lipservice to protection possibly to appear as a compromise (that has no practical impact).

It would be nice to see some protection retained for authors who are Australian citizens, who in the most are not highly paid as it is, but on the whole I'm happy to see something more than just empty rants about doom and gloom.

Peter Donoughue said...

I agree with your point about cheap US paperbacks being the main competitive threat to backlist sales in Australia. These high quality trade paperbacks, priced at around $US15 would sell here, if imported by booksellers, for around $A26. Some are cheaper, and you'd see them on shelves for around $A22. They have always been the elephant in the room in Australia. Our 30/90 day law effectively prohibits them, as it privileges the Australian and British versions, sold for $A32.95 or even up to $A35.
So what would happen, absent the PIRs? No surprises there. Australian publishers would prioritise a quality mid-sized paperback at $A22-$A25 and effectively compete. Guess who wins - the consumer! Which is the whole point!