CD WOW in the Dock

Hong Kong based CD and DVD retailer CD WOW are to face legal action from the BPI in the High Court on the 2nd of February. The case revolves around the issue of parallel imports: under European copyright law and agreements with European music companies it is illegal to sell CDs from outside of Europe to European customers. This is the way in which European record labels ensure that there is price consistency. UK supermarkets fell foul of the law when they were selling CDs imported from Eastern Europe at discounted rates.

The case with CD WOW is slightly different in that they argue they are not importing from outside the European Union but that their customers are. This is because CD WOW use the postal service to deliver goods and under international postal law once the goods enter the post they are no longer the property of the deliverer.

Putting the specifics of the case aside, there are a couple of interesting issues here: firstly, CD WOW is sourcing its CDs from South East Asian divisions of the very record labels who comprise the membership of the BPI. Whilst the Asian division is pocketing the revenue for CDs, which they know contravene parallel import restrictions, the UK divisions are backing legal action. It would seem sensible that a little bit of internal corporate communication should be taking place to ensure all divisions are on the same page. Also, there is an issue for the labels of revenue protection: UK EMI, for example, have spent the money developing Robbie Williams and his copyright is created in the UK, yet EMI in Hong Kong is just picking up the revenue without shouldering the costs. This sort of internal politics isn’t necessarily CD WOW’s concern yet it lies at the heart of the BPI’s concerns.

Ultimately CD WOW’s competitive differentiator is price. I have frequently commented on the overly inflated prices of CDs in the UK and that factor is central to creating a market opportunity for CD WOW. However high street prices are coming down, driven by supermarkets, heavy discounting from retailers and special release discounting. The BPI’s latest figures suggest that the average cost of a CD is now down to about £10. That narrows the margins for CD WOW – for example, CD WOW sell “The Diary of Alicia Keys” for £7.99, that compares to £8.99 at Amazon and £8.99 at HMV and £8.99 at Tesco and £9.99 at Virgin Megastores. The days of the £13.99 new release CD are drawing to a close.

The bottom line is that CD WOW sell CDs that make money for the record labels. But the way that they are undertaking this contravenes existing law and practice. At a time when the music industry is just beginning to haul itself out of a sales slump any significant sales channel should be welcomed. The best solution for all parties here would be for CD WOW to secure local agreements with the European divisions of the record labels to sell cheap CDs. However one hurdle that CD WOW would have to negotiate is VAT (which CD WOW currently avoid through a UK Customs and Excise loop-hole which they legitimately exploit). Currently all UK music sales are taxed at 17.5 percent. Without that tariff the HMV Alicia Keys price would come down to £7.42, but with it, the CD WOW price would go up to £9.38. The BPI has been campaigning hard to have recorded music exempt from VAT jut in the way that other ‘cultural’ products like books are. The £1.57 may generate revenue for the government but if it is at the expense of the UK music industry’s ability to compete then is it worth it?

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