MDS Multimedia Corp. and Zui Ing Co., Ltd

Case:

Key Words:

Karaoke products, MIDI, distributor, restriction through exclusive dealing

Reference:

Fair Trade Commission decision of June 30, 2010 (the 973rd Commissioners' Meeting); Disposition Kung Ch'u Tzu No. 99078

Industry:

Sound Recording and Music Publication Businesses (5920)

Relevant Laws:

Article 19 the Fair Trade Law

Summary:

1. The FTC was informed that MDS Multimedia Corp. (hereinafter referred to as MDS) and Zui Ying Co., Ltd. (hereinafter referred to as Zui Ing Co.) demanded their distributors not to participate in any marketing activities of other companies selling karaoke products. Their conducts might be in violation of Article 19 of the Fair Trade Law.
2. Findings of the FTC after investigation:
   1. MDS and Zui Ing Co. convened the "2009 MIDI Distributor Meeting" in which they announced that "since all subcontractors, distributors as well as all collaborating business associates are expected to make all their efforts to promote karaoke products (from MDS and Zui Ing Co.) in designated areas, they are therefore advised not to undertake any activities in any form (including but not limited to agency, brokership, distributorship, etc.) to participate in marketing for the karaoke products of other companies otherwise…their contracts (with MDS and Zui Ing Co.) shall be terminated." The statement was again released on Aug.13 and 21 of 2008 respectively. In addition, the same stipulation could also be found in the contracts MDS and Zui Ing Co. signed with their regional subcontractors.
   2. In the contracts MDS and Zui Ing Co. signed with their regional subcontractors, it was stipulated that regional contractors could not rent out or distribute MIDI products at prices lower than the agreed rates.
3. Grounds for Disposition:
   1. The market involved in this case is defined as that of MIDI karaoke products because they use computer music coding formats different from those applied in VOD for unicast or multicast karaoke products and the authorization fees vary a lot. For the end users—the shops, there is no substitution on the market; whereas for agents for these products, the costs and marketing channels are also entirely different. As the market shares of MDS and Zui Ing are respectively 37% and 50%, they have rather considerable influence on the market.
   2. The conducts of MDS and Zui Iing Co. to restrict distributors from representing, brokering or distributing MIDI karaoke products of other brands are already in violation of Subparagraph 6 of Article 19 of the Fair Trade Law:
      1) Restriction on market competition through exclusive dealing is meant to block out the opportunities of existing or potential competitors from participating in competition. Intimidated by the market influence of MDS and Zui Ing Co. as well as to avoid having their deposits confiscated and contracts terminated, the downstream distributors had no choice but to turn away from karaoke products made by MDS and Zui Ing Co.'s competitors. The conduct of exclusive dealing of MDS and Zui Ing Co. could obstruct opportunities for their competitors to expand or obtain sales channels and thus block the market from their competitors. The result would be weakening or even eliminating "competition between brands," bringing substantial damage to market competition, and thus impose restriction upon market competition.
      2) MDS and Zui Ing Co. contended that if the distributors also distributed other companies' karaoke products, the distributors would have to increase the rental rate and the shops would be less interested in renting the products. In addition, it would be "more likely" to give rise to copyright controversies. However, the FTC's investigation revealed that when the distributors distributed only MIDI karaoke products from MDS and Zui Ing Co., the interest of the shops to rent the products did not necessarily increase. As a matter of fact, the only thing that happened was the opportunities for the distributors and the shops to choose karaoke products of other brands were greatly reduced. Also, the FTC found the argument regarding copyright controversies made by MDS and Zui Ing Co. to defend their exclusive dealing and restriction on the distributors unjustifiable.
   3. MDS and Zui Ing Co. violated Subparagraph 6 of Article 19 of the Fair Trade Law by setting limits on the rates at which the distributors could rent out MIDI karaoke products.
      1) It was stipulated in the contracts MDS and Zui Ing Co. signed with their regional subcontractors that the regional subcontractors could not charge users rental prices for the MIDI products lower than the rates agreed in the contracts, otherwise MDS and Zui Ing Co. would terminate the contracts. The FTC's investigation showed that each regional subcontractor had already given MDS and Zui Ing Co. a check as the deposit in accordance with the rental prices determined in the contract. The actual amount of sales was then deducted from the deposit. In other words, each regional subcontractor was already undertaking the risk that the subcontracted sets of products were not rented out, and the rental prices the subcontractor was to charge users were still stipulated in the contract. The intention to prevent their regional subcontractors from lowering pries to compete for business was obvious.
   4. As the regional subcontractors were intimidated by the market influence of MDS and Zui Ing Co., it was highly possible that they had to choose to follow the stipulated rental rates in order to avoid the result of contract termination as their punishment. In reality, the conduct already deprived the subcontractors the liberty to decide the rental prices on their own. Consequently, the retail rental prices would be all the same and this would reduce the "inner brand competition" that should be allowed when similar products compete through different sales channels. Although MDS and Zui Ing Co. contended that the said provision in the contract was merely a recommendation, the investigation showed that the contract had its definite binding force. On top of this, due to the market status of MDS and Zui Ing Co., having the contract terminated by these two companies would for sure have a serious impact on the business of any subcontractor. The subcontractors were indeed bound by the aforesaid threat of sanction. Even if MDS and Zui Ing Co. never actually enforced the said provision, the restriction did exist. Therefore MDS and Zui Ing Co. were fined 700 thousand and 1 million NT dollars respectively.

Summarized by: Chiou,Shwu-Fen Supervised by: Liao,Hsien-Chou

Appendix:
MDS Multimedia Corp.'s Unified Business No.: 04779781
Zui Ing Co., Ltd.' Unified Business No.: 97123274