INTRODUCTION1. This paper outlines the Consumer Council's response to a complaint regarding exclusive supply of music to large-scale chain karaoke lounges and the effect on competition in the relevant markets. BACKGROUND2. This issue was initially raised by a consumer who lodged a complaint that some hit songs, in the form of karaoke discs, were only available at a limited number of large-scale chain karaoke lounges. 'Karaoke lounges' are entertainment establishments that specialise in the provision of karaoke services. The complainant requested that the Council study whether the inability of accessing hit songs in some karaoke lounges was the consequence of some form of 'monopolisation' by certain market participants. 3. In the course of research, the Council held discussions with the Hong Kong Association for the rights of Karaoke, Entertainment & Catering Business (AKEC). Later, a concern group under AKEC also requested a meeting with the Council. During the discussions it was stated that the reasons behind the inability to access hit songs at all karaoke lounges were exclusive dealing arrangements between record companies and certain chain operated karaoke lounges, California Red, and Big Alliance, in the supply of karaoke discs. The concern group members were not part of either of the chains and termed themselves as 'independents'. 4. The concern group submitted that the exclusive dealing arrangements with the chains not only threatened the survival of independent karaoke lounges but also affected the prices paid by consumers for karaoke services. THE KARAOKE INDUSTRY5. There are four categories of participants relevant to this industry, i.e. karaoke establishments, recording companies, performance rights collecting societies, and commercial radio stations. Karaoke establishments6. Karaoke service providers can be divided into a number of categories. First there are karaoke lounges that are part of a chain of establishments that specialise in karaoke services. For example, Big Alliance, California Red and Neway. Some members of the chains also seem to operate on an individual basis to varying degrees. Second, there are restaurant chains that attract patrons by combining dining services with karaoke, for example, Golden Harvest. Third, there are other karaoke establishments that do not belong to the chains, but use karaoke as a main attraction. The extent to which they use services in addition to karaoke, to attract patrons is varied. Establishments in the last two categories termed themselves as 'independents' in that they were not tied to the karaoke chains. This latter category form the membership of AKEC, which informed the Council that it represented about 80% of the karaoke industry. However, having regard to the number of establishments that use karaoke as a form of entertainment to attract patrons, it is difficult to verify the above percentage. Recording companies7. Apart from long established recordings that endure on karaoke play lists, recording companies enter into contracts with singers to produce contemporary karaoke discs for sale - via retailers to individuals and via wholesalers to establishments such as karaoke lounges. The commercial value of the musical works depends to a large extent on the popularity of singers. Karaoke lounges form part of the promotional media, in addition to television and radio stations. 8. Provision of karaoke discs is largely from global recording companies such as Universal (formerly Polygram), Warner, EMI, Sony and a local company Fitto which specialises in producing karaoke discs. According to information provided by the concern group, there are now 14 recording companies actively providing exclusive previews of karaoke discs for public consumption. Electronic media9. There is also a role that commercial radio stations play in the promotion of recordings used in karaoke lounges. There are reportedly tie-in promotions between certain chain operated karaoke lounges and Metro Radio and Commercial Radio, where recording companies provide singers at no cost for pop concerts which are used for film footage in karaoke discs. Collecting societies10. Two collecting societies, Composers and Authors Society of Hong Kong (CASH) and the Phonographic Performance (South East Asia) Ltd (PP(SEA)L) administer the public performance rights of karaoke discs. PP(SEA)L is a subsidiary of the International Federation of the Phonographic Industry (IFPI). Members of CASH are composers, authors and music publishers whereas members of PP(SEA)L are recording companies. They assign the public performance rights of all their production or grant exclusive authorisation to the respective collecting societies to issue licences to users, in return for royalties based mainly on airplay usage. The distribution arrangement prevents a member from licensing performance rights in works directly to a user, even for works commissioned by that user. Karaoke lounges, as licensees of CASH and PP(SEA)L, acquire virtually the whole repertoires controlled by the collecting societies. The calculation of their license fees is based on the number of TV monitors and number of seats in the establishment. COPYRIGHT LICENSING SCHEMES11. The Copyright Ordinance provides that an organisation that is representative of persons claiming that they require licenses for the public performance of their work may refer the terms of a licensing scheme to the Copyright Tribunal. If the Tribunal decides to entertain the reference of the scheme, it can make an order either confirming or varying the scheme. If, while the scheme is in operation, a dispute arises between the operator of the scheme and a person:
the person may apply to the Copyright Tribunal for an order declaring the person is entitled to a licence on such terms as the Tribunal may determine to be applicable[1]. 12. This provision of the Copyright Ordinance only applies if the material for which access is being sought is covered under a licensing scheme that has been confirmed or varied by the Copyright Tribunal. If a licensing scheme in regard to the material to which hit previews apply has not been confirmed or varied by the Copyright Tribunal, then a dispute on access to the material, or the terms and conditions of access cannot be determined by the Copyright Tribunal. 13. The Council has been informed by IFPI that 'hit previews' have not been included in a licensing scheme referred to the Copyright Tribunal. Access to that music does not therefore come within the jurisdiction of the Tribunal. If the 'hit previews' are eventually released to the public under general release, the music will then become available for anyone to purchase and play; including karaoke operators. In these circumstances, anyone publicly performing or playing that music, and in dispute over access to material or the terms and conditions of a license would be able to refer the dispute to the Copyright Tribunal. SUPPLY OF KARAOKE DISCSExclusive previews14. In the past, recording companies approached individual karaoke lounges to promote their productions by first offering preview arrangements. New karaoke discs and recordings soon appeared on the market after the preview. 15. This developed to the point where some recording companies furnished their latest production of pop songs as a favour to certain large-scale chain operated karaoke lounges for exclusive preview. The concern group stated that karaoke lounges with exclusive preview subsequently had higher patronage. This put the other karaoke lounges, that only received delayed supply of the songs, at a disadvantage, and put a premium on the commercial value of the material. 16. Subsequently, several chain karaoke lounges formed a joint venture known as Big Alliance to jointly compete for exclusive preview of pop songs from recording companies [2]. As demand for exclusive preview grew, the price for access to exclusive previews was driven up, and some recording companies entered into exclusive dealing arrangements with certain karaoke lounge chains. Notwithstanding the demand, IFPI noted in comments to the Council that karaoke operators who applied for an arrangement to have exclusive hit previews were taking a financial risk in advertising the new titles (that came with the arrangements) as an attraction for patrons. It was said that just like any new titles of recorded music, the popularity of the music could not be guaranteed, and therefore a return on the investment from increased patronage might not be secured. 17. Nevertheless, the concern group stated that the karaoke chains paid a sum in the region of several hundred thousand dollars as promotional sponsorship for the limited production of a karaoke disc, in return for the right of exclusive preview for a duration from a few months to over a year. The concern group stated that 90% of the preview songs were unavailable other than from the two major chains. 18. According to the concern group, the above situation evolved to the large scale abandonment of reproduction of preview discs, suggesting that some so called previews of hit songs were being confined to release in karaoke chains and were simply limited production in the guise of exclusive preview. It appeared to the concern group that the recording companies were not using the karaoke lounges as a testing ground for the promotion of record sales but were producing karaoke discs specifically for distribution through karaoke establishments. THE RELEVANT MARKETS19. The answer to the concern groups' complaint (of detriments to their competitive standing) and that of consumers (in having a restricted choice of karaoke outlets) is found by examining the effect of the conduct in the relevant market and establishing elements of market power. Defining the relevant market and evaluating the degree of power in that market are in effect part of the same process. However, for the sake of simplicity of analysis the two are separated. Accordingly, a clear understanding needs to be made of:
Defining the relevant market20. The process of establishing a relevant market boundary, using standard antitrust practice, starts with an examination of the service that is the subject of study, i.e. karaoke services, to identify whether the service is substitutable for other services. 21. From the demand side, close substitutes would include all those services that customers would switch to in the event of a 'small but significant non-transitory increase in price' of karaoke services, above the competitive level. This is commonly referred to in antitrust terminology as a 'SSNIP'. 22. In the context of this study it is relevant to ask whether a hypothetical monopolist of karaoke services would be likely to raise the price for karaoke by a small but significant amount above the competitive level in order to maximise profit. If the answer is yes, the service constitutes a separate market, because the hypothetical monopolist is not deterred from raising price by the presence of what might be viewed as close substitute services; i.e. other entertainment services. If, on the other hand, the hypothetical monopolist considers that a small price increase would not be a profitable strategy because consumers would readily switch to other entertainment services, the market boundaries should be extended to include those substitutes. 23. The process of extending the market boundaries continues until there is a gap in the chain of substitutes and the hypothetical monopolist finds that profits would be maximized by imposing a SSNIP. The karaoke industry24. Karaoke is a popular form of entertainment in Hong Kong where people sing to video discs of popular songs. Demand for karaoke services is usually satisfied in restaurants, bars, clubs, or what are known as karaoke lounges. Restaurants, bars and clubs provide karaoke services in addition to a range of entertainment services, such as meals or other games and entertainment. Karaoke services in these establishments might be provided without the need to pay specifically for the karaoke service, or a nominal fee, in addition to payment for other services such as meals. 25. Karaoke lounges on the other hand, do not serve meals but only drinks and light refreshments. Karaoke services are offered as the primary, if not sole attraction, and patrons pay fees in order to have that form of entertainment. Persons seeking a karaoke experience therefore have two options available, i.e. going to a restaurant, bar or club where karaoke is provided in addition to other services, or a karaoke lounge where a fee is paid for the karaoke service and a degree of karaoke specialisation is offered. 26. Karaoke appears to have developed as a service catering not only for a wide range of persons patronising restaurants, bars and clubs, but also for a specific demographic demanding and paying for karaoke as the primary, if not sole form of entertainment. Having regard to the SSNIP analytical process, it can be observed that persons faced with the choice of either not having karaoke services; or having those services for free or at nominal cost at a restaurant, club or bar, have been willing to pay for karaoke services at speciality establishments. On this basis there is a strong assumption that there is a separate market for karaoke services as a sole source of entertainment, within the wider category of entertainment services on offer. However, the boundary between a market for karaoke services, and other entertainment services would be tenuous, given the pace at which fashions for entertainment services can change. 27. Accepting that there is a separate market for karaoke services, the question that next arises (in light of the inability to access hit previews) is whether there is a further contraction that indicates a separate market for the supply and demand of exclusive preview hit songs to karaoke lounges. 28. The concern group claims that the inability by a karaoke lounge to obtain supply of exclusive hit previews deprives it of an essential product to compete in the market. By implication they are not only claiming there is a separate market for karaoke lounge services, but that karaoke lounges playing so called 'hit previews' constitute a separate market. One way of testing the veracity of this claim (as per standard antitrust market analysis) is to examine the price sensitivity of demand for karaoke lounges with exclusive hit previews as compared to karaoke lounges that do not have hit previews. Price differences for exclusive preview karaoke lounges29. As noted previously, karaoke lounges can be classified as either 'chain-operated' or 'independent'. There are two chain operated karaoke lounges in Hong Kong, i.e., Big Alliance and California Red, that have obtained exclusive preview contracts with record companies and that make up around 70 to 80 outlets. Independents make up around 60 to 100. Chain-operated karaoke lounges are claimed to have a larger scale of operations than independents. Monthly turnover of the former is estimated to be over $2,000,000 per outlet, whereas that of the latter is around $500,000 per outlet. It is estimated that annual consumer spending on karaoke lounges is about $2,000 million to $2,500 million, where over three-quarters of the total revenue goes to chain-operated karaoke lounges. 30. The concern group has provided information that California Red, for example, charges nearly $50 per head on nuts and snacks (minimum expenses) and over $30 per non-alcoholic drink. Differential rates apply between weekdays and weekends, and time of the day. For example, depending on the time and day, a serving of nuts and snacks for two persons in a chain operated karaoke lounge could cost nearly $100, and non-alcoholic drinks over $30 per glass. 31. Star Moon Karaoke Lounge on the other hand, which is an independent and does not have access to exclusive previews of hit songs, has set its charges at only $25 per head inclusive of one drink, nuts and snacks in order to attract patrons. Typical charges among some independent karaoke lounges are $25 per head all afternoons before 9:00 p.m. and $35 per head after 9:00 p.m., inclusive of one non-alcoholic drink. Each additional non-alcoholic drink cost $10. It was claimed that similar price discrepancies could be generally observed between the other chain operated karaoke lounge, Big Alliance, and those independents without exclusive hit previews. Definition of 'hit previews'32. As noted earlier, there is a question as to whether the so called 'hit previews' are actually previews of material to be subsequently released for general sale, and thereby available to independent karaoke operators, or whether they are in fact being produced for playing in selected karaoke lounges. The Council sought information from IFPI on the number of exclusive preview arrangements with the karaoke chains that have access to hit previews, and of those, how many were provided to independents after the period of exclusivity had finished. IFPI's reply to the Council did not provide details on the preview arrangements, and noted that the timing for the release of material in retail versions varied from company to company. It also noted that recording companies would also be karaoke producers as well. 33. Having regard to the fact that
there is a strong assumption to be made that not only is there a separate market for karaoke services as a sole source of entertainment, within the wider category of entertainment services on offer, but there is a separate market for the provision of karaoke services with hit previews. 34. The question that next arises is whether the market power possessed by karaoke lounges with access to hit previews is durable in the long term and will lead to a loss of consumer welfare. Such a loss would be found through non competitive prices being charged to consumers, and or any other diminution of the product and performance aspects in the relevant markets. CONSUMER WELFARE35. Having established (as far as can be currently ascertained) the boundaries of the relevant markets, and the existence of market power, the next step is to assess the effect of the conduct on consumer welfare. Consumer welfare (as far as competition theory is concerned) will be maximised in circumstances where the price, product dimensions, and performance standards are set at a level determined by competitive rivalry between market participants. Price, product and performance36. While the prices offered by hit preview karaoke lounges is significantly higher than that offered by independents, there is no information offered by the concern group indicating a lack of competitive behaviour between the hit preview karaoke lounges, or between the recording companies to market their product. 37. A high market concentration amongst hit preview karaoke lounges would raise concerns due to the fact that conditions for tacit collusion or co-operative behaviour would be present [3]. However, the extent to which this is problematic depends largely on the presence of barriers to entry in the market. 38. Barriers to entry in the market for the supply of karaoke services are not substantial. The main costs are decoration, rental, labour, karaoke equipment, and importantly, access to music. It is access to music and the countervailing market power by recording companies (as the suppliers of karaoke discs) that is an important factor to take into consideration. 39. It is in the interests of recording companies to attract as many patrons to outlets for their products as possible. The existence of karaoke lounges as outlets would therefore play an important part in the recording companies' overall marketing strategies. It would seem unlikely that recording companies would construct a distribution channel for their product where maximum output of the product would be at risk through patrons of karaoke lounges being deterred from using the karaoke lounge services because of excessively high prices, poor product availability, and poor quality of service. 40. It is acknowledged that there is pressure from recording companies to extract as much as possible from karaoke lounges through fees. However, the competition that can be assumed to exist between recording companies, in getting exposure for their material, could be expected to put downward pressure on fees paid by hit preview karaoke lounges, and to reach a competitive market standard. 41. It is acknowledged that the price patrons pay for the services at karaoke lounges with exclusive hit previews is higher than at karaoke lounges without. However, in the absence of any evidence of collusion on the part of the karaoke lounges with exclusive hit previews, or dominant firm price leadership [4], it can be reasonably assumed that the prices charged are a reflection of the competition that exists between them. Even if the hit preview karaoke lounges were owned by recording companies, it could be expected that the competition between recording companies would still mean that prices charged for karaoke services at the hit preview lounges are a reflection of the competition that exists between them. EFFECT OF CONDUCT ON COMPETITIONImportance of karaoke as a business input42. The concern group initially suggested that independent operators without access to exclusive previews would be forced to leave the market. It submitted that many independent karaoke lounges found it difficult to make ends meet, and some 20 of them might soon face the inevitable fate of closure. AKEC informed the Council that independents have attempted to meet the competition from the hit preview karaoke lounges by promoting exclusive previews of Taiwanese hit songs. AKEC also noted that many of their karaoke lounges are now upgrading services to include Internet access and video games in addition to karaoke, to broaden their appeal, and cater for changing patterns of entertainment demand. This tends to reinforce the notion of a tenuous market boundary, between karaoke and other forms of entertainment services. 43. In subsequent discussions with IFPI, the Council was informed that current industry practice is that the exclusive period for "first run karaoke usage usually expires in less than three months". IFPI further stated that it was imperative for those who fail to negotiate for first run usage to negotiate in advance for the subsequent periods, an initiative which, it was claimed, the complainant karaoke operators did not seem to take up. 44. Notwithstanding the recording companies response on the availability of product, it seems clear to the Council that the members of the concern group have not been adequately informed of the policy of individual recording companies; and it is this uncertainty that needs to be addressed. Whether Government intervention justified45. In jurisdictions where the application of general competition law prohibits a refusal to supply product to competitors, because the refusal has been proven to have a detrimental effect on competition, the remedy is to seek a court order obligating the supply. The order would have to indicate the particular price or other terms and conditions that would address the competition concerns, because merely obligating supply would be meaningless if the price at which a product is supplied makes resale commercially not viable. Supply at a price that is not commercially viable is usually termed 'a constructive refusal to supply'. 46. A course of action along these lines would be a serious intervention in commercial arrangements between market participants. It would only be justified where the product being refused is plainly an essential input into a market and where the refusal will inevitably result in a substantial lessening of competition and long term detriment to consumer welfare. 47. The clearest example of a justifiable use of government intervention to set input prices and otherwise determine terms and conditions of supply, which currently exists in Hong Kong, is the mandated arbitration role exercised by the Telecommunications Authority (TA) under the Telecommunications Ordinance. In those circumstances the TA can determine network access prices for competitors in telecommunications markets. The justification for this intervention rests, in general terms, on whether or not a market participant has the ability to, and in fact does, set input prices for competitors:
48. The facts of this matter do not demonstrate market circumstances similar to the above. Accordingly, there is no clear justification for government intervention to address the concerns of the complainants. There are a number of factors that raise a doubt that competition, and in turn, consumer welfare, will be diminished. They are:
THE WAY FORWARDAbsence of competition law remedies49. In jurisdictions with a general competition law that allows for private action, the complainants would have the option of pursuing the vertical restraints imposed by the recording companies, and if considered worthwhile, taking action themselves. There are no such laws of general application in Hong Kong. Moreover, the Council is not a government competition authority with any of the statutory information gathering powers available to competition authorities typically found in comparable advanced economies. Powers of that nature could be used, if appropriate, to require the provision of information; thereby clarifying some factual issues that may remain unresolved. Neither does the Council have an investigative role similar to competition authorities where a legislative framework is in place on which to base competition inquiries on vertical restraints by suppliers. 50. The Council's role is governed by its function under the Consumer Council Ordinance to promote the interests of consumers by disseminating information concerning goods and services, examining complaints by consumers, and encouraging business associations to establish codes of practice to regulate the functions of their members [5]. Code of Practice51. The Council has produced this report in accordance with its function of examining consumer complaints, and disseminating information on matters that affect consumers. As far as codes of practice are concerned, the Council is aware of a code that exists in Australia that may have relevance to this matter. The Code was instigated by the Australian Competition and Consumer Commission (ACCC) and is administered by the industry itself (with rules to refer disputes to the ACCC). The code is the 'Code of Conduct for Film Distribution and Exhibition' which provides for a set of rules that film distributors follow, in terms of supplying movie prints to exhibitors, on a picture-by-picture basis, in first run, second run; or whether the product is supplied at all.. In some respects the code relates to similar issues faced by the independent karaoke lounge operators in Hong Kong, where there are disputes over first release broadcasting rights. A copy of the code is attached to this report. 52. The Australian code provides for an administration committee that appoints an independent conciliator, who is an expert mediator of recognised integrity and stature commanding respect from all sectors of the industry. The conciliator's role is to act in good faith as a neutral, impartial facilitator of constructive discussion between the parties on the causes of a dispute, relating to supply of material. The intention is to assist the parties in reaching agreement on a mutually acceptable solution (see Section 14 of the code). 53. Whether it is necessary for a code of practice to be developed in the Hong Kong karaoke industry to resolve the complaint made by the independent operators, is ultimately a matter for the Government and industry to decide. The Council's analysis indicates that from the perspective of preserving competition, the rationale for developing the code is not clear. Whether the Council is correct in its competition analysis may be disputed. In any event, markets are not static phenomena but evolve over time. Accordingly, new facts might emerge in the future that may cause the Council to reconsider its position. In jurisdictions with competition laws, the final arbiter of whether a refusal to supply is anti-competitive is usually a court of law, or a specialist competition tribunal. 54. It is illustrative to note that the Australian Code of Conduct for Film Distribution is not predicated on the basis that a refusal by a distributor to supply a certain exhibitor with first release rights is a breach of Australian competition law. The objectives of the Code are to avoid the costly and time consuming processes involved in private parties testing whether a refusal to supply is a breach of competition law. For example, Section 2 of the Code states that its objectives are:
55. The Hong Kong Government noted in its Statement on Competition Policy, issued in May 1998, that it would work together with the Council to encourage the private sector to adopt pro-competition measures, such as self regulatory regimes that preserve and enhance free competition; and to monitor and review business practices in sectors prone to anti-competition behaviour. 56. The Competition Policy Advisory Group (COMPAG) was established to review policy issues related to competition, and it was noted in the Statement that alleged restrictive practices may be referred to the concerned policy bureau or government department for consideration. This reflected the Government's sector specific approach to addressing any competition problems that might arise, and the preference for administrative or self regulatory solutions to competition issues. COUNCIL RECOMMENDATION57. Accordingly, the Council refers this matter, the Council's analysis, and the attached sample code of practice to COMPAG for its consideration and referral to the relevant government entity or entities with responsibility for competition in this economic sector. The Council considers that if recording companies clearly specify their intentions as to:
the complainant's concerns would be alleviated to some degree. 58. In practice, it might make little difference whether recording companies spell out their own particular supply procedures as an obligation to do so under a code of practice, or whether they do so individually of their own volition. However, the important point is that some documentation on supply procedures, which an obligation under a code of practice could require, as well as a dispute resolution mechanism administered under a code of practice, would make it clear to the complainants where they stand. Clarifying the procedures would also provide essential information for anyone intending to enter into a business that provides karaoke services, about the supply arrangements for an important business input. 59. With regard to codes of practice, the Hong Kong General Chamber of Commerce recently issued a 'Chamber Statement on Competition' that encouraged specific industries to develop, through their respective associations, statements or codes of practice to promote competition within their own sectors. Of particular note in the Chamber's statement is the following clause: "The Chamber encourages specific industries to develop, through their respective associations, statements or codes of practice to promote competition within their own sectors. These codes should address common complaints and concerns about practices specific to the industries. Where possible, they should include a complaints-handling procedure as well as provisions to deal with non-compliance of their members."[6] CONCLUSION60. The approach to the Council by the AKEC concern group, for the Council to consider this matter, reflects some improvement in awareness of competition policy in Hong Kong and the need for competition complaints to find an appropriate forum for analysis. Promoting and maintaining this awareness on the part of the public and private sector requires constant effort. The Council will continue to monitor and review alleged restrictive practices that are referred to it, or which it decides to consider of its own accord. 61. However, there is also a need for the Government to ensure there is a publicly identifiable and transparent mechanism for the assessment of such matters; and for their resolution. The Government's Statement on Competition Policy notes at paragraph 13 that alleged restrictive trade practices may be referred to concerned policy bureaux and government departments. It is important for the Government to ensure that the means by which this is achieved is clear to the general public, for the purposes of:
Notes: 1. Section 158 of the Copyright Ordinance Cap 528. 2. Karaoke lounges under Big Alliance at the time were Big Echo, Advance, T-Arts and Energy - a total of 4 firms. 3. See the Consumer Council's December 1999 study into the Hong Kong motor gasoline, diesel and LPG markets - 'Energizing the Energy Market', Chapter Nine, for commentary on oligopolies and cooperative behavior, paragraphs 9.7 to 9.10. 4. Op Cit Consumer Council Study, paragraphs 9.11 to 9.13.2. 5. Section 4 Consumer Council Ordinance CAP 216. 6. See Hong Kong General Chamber of Commerce website http://www.chamber.org.hk/memberarea/chamber_view/environment/comt_state.asp |
- Consultation Papers
- 2000.11.30
