Hong Yin Multimedia Technology Co., Ltd.

1315th Commissioners' Meeting (2017)

Case:

Hong Yin Multimedia violated the Fair Trade Law by adopting illegitimate means to impede market competition

Keyword(s):

Market dominance, karaoke machine, karaoke, MIDI
Reference:
Fair Trade Commission Decision of January 18, 2017 (the 1315th Commissioners' Meeting); Disposition Kung Ch'u Tzu No. 106007

Industry:

Operation of Audiovisual and Singing Facilities (9322)

Relevant Law(s):

Article 20(iii) of the Fair Trade Law

Summary:

  1. The FTC received a complaint about Hong Yin Multimedia Technology Co., Ltd. (hereinafter referred to as Hong Yin Multimedia) warning its distributors, karaoke machine lessors and karaoke operations using its products that if they were found to be using karaoke products from other companies, Hong Yin Multimedia would raise the rent for each MDS-655 karaoke machine (hereinafter referred to as MDS-655 machine) by NT$2,000. The informer pointed out the practice was in violation of Article 20 of the Fair Trade Law.
  2. Findings of the FTC after investigation:
    1. According to the distribution contracts signed between Hong Yin Multimedia and its distributors in 2015, the company would collect around 10% of the total sales of each distributor each year, paid by check, as the royalties for the “Hong Yin Selection MIDI.” It was also stipulated in the contract that Hong Yin could use a portion of the royalties as an incentive depending on the sales performance of the distributor. In early 2015, the company further established the operating regulations on the maintenance of preferential rentals and rate adjustments (hereinafter referred to as the operating regulations) which included the clause that “…2. For karaoke operators who have already rented the MDS-655 machines and are financially unable to rent karaoke machines of other brands, Hong Yin Multimedia will take into consideration the tough management situation of such operators and the job security of their employees and maintain the preferential rentals for them…” and demanded its distributors to abide by the operating regulations and turn in related forms they filled up every month. Distributors were told that the aforementioned contract provisions and the operating regulations would be adopted as one of the standards when the company performed administrative evaluations to consider whether it would issue incentives to distributors and to decide the amounts to be issued.
    2. The result of the interview, conducted by the FTC, with the distributors showed that most of them had already assumed at the beginning that they would not be get any of the aforesaid royalties back and were psychologically prepared to absorb the increased management cost or increase the rentals for MDS-655 machines on the machine lessors or karaoke operators. The said distributors also attested that Hong Yin Multimedia had indeed established the policy of increasing the monthly rental for each MDS-655 machine by NT$2,000 on karaoke operators that were also renting machines from the company’s competitors but would openly announce that increase was the result of cancelation of the preferential offer or resumption of the original price. Some distributors further pointed out that they had had to fill out the “Equipment List of MDS-655 Lessors with Unadjusted Rentals (Application for Maintenance of the Preferential Offer)” and the Equipment List of MDS-655 Lessors with Adjusted Rentals” and turned them in every month in order to show that they had complied with the abovementioned policy, distribution contract and operating regulations of Hong Yin Multimedia.
    3. The distributors for Hong Yin Multimedia in each district had all made it clear to their karaoke machine lessors or karaoke operators that Hong Yin Multimedia would start the implementation of the policy of raising the monthly rental for each MDS-655 in 2015 on those who also use karaoke machines of other brands. As a matter of fact, the distributors in some areas did carry out the policy. As karaoke operators were dependent on MDS-655 machines (and the songs they played) for their business, those who also use machines of other brands ended up paying higher rents or choosing to stop leasing karaoke machines of other brands.
  3. Grounds for disposition:
    1. According to the distribution contract, Hong Yin Multimedia collected 10% of each distributor’s annual sales in 2015 as the royalties for the use of its machines and would determine the amount of royalties to give back to the distributors as the rebate after it looked into the sales of each distributor. The company also established the operating regulations in which it was stipulated that the company would maintain the preferential rental rate for karaoke operators unable to rent karaoke machines of other brands. At the same time, distributors were required to fill out and turn in the equipment lists of operators applying for preferential rental rate and the equipment lists of operators subject to rent adjustment. The practice made the distributors demand machine lessors to increase the monthly rental for each MDS-655 by NT$2,000 on karaoke operators that were also using machines provided by the company’s competitors (or the distributors did so directly to operators). This would force karaoke operators to stop leasing machines of other brands. One of the findings indicated that the market rate for each MDS-655 was NT$300 to 600 per month. Therefore, the objective of the policy adopted by Hong Yin Multimedia was not to promote the songs the machines played or to reflect the cost of the machines or the songs therein. It was an illegitimate practice to prevent its competitors from competing with itself as described in Subparagraph 3 of Article 20 of the Fair Trade Law.
    2. Meanwhile, as a result of Hong Yin Multimedia’s distribution policy, the company’s distributors in some areas did enforce the policy to increase the monthly rent for each MDS-655 machine by NT$2,000 on karaoke operators using machines of other brands at the same time and such operators either ended up paying a higher rent for each MDS-655 or stopping their leasing relationship with the company’s competitors. In other words, the policy had obstructed its competitors from engaging in market competition.
    3. As the MDS-655 machines from Hong Yin Multimedia accounted for 90% of the market. The company’s distributors had definite dominance on the market. The dependence of karaoke machine lessors and karaoke operators on MDS-655 machines was extremely high. The aforementioned distribution contracts and operating regulations had indirectly led to the fact that the distributors also using machines of other brands (or the distributors did so to the operators directly) to demand karaoke machine lessors to increase the monthly rental for each MDS-655 by NT$2,000 on karaoke operators, forcing such operators to stop leasing machines of other brands. In consequence, consumers paying the same amount of money had a smaller selection of songs to choose from in some karaoke places. The conduct of Hong Yin Multimedia thus had a negative impact on competition in the karaoke product supply market and also the interests of consumers. It could lead to competition restraints and, therefore, was in violation of Subparagraph 3 of Article 20 of the Fair Trade Law.
    4. The sales on Hong Yin Multimedia in 2014 and 2015 were about NT$400 million. In addition, the company’s karaoke machines accounted for more 90% of the market and its market dominance was absolute. During the period in which the illegal practice lasted, the company had obviously reduced the business opportunities of other karaoke product providers and made it extremely difficult for products from these competitors to compete with Hong Yin Multimedia on the market. The extent of harm to the karaoke product market was quite immense. After assessing the degree of remorse of Hong Yin Multimedia and its cooperativeness throughout the investigation process, the FTC cited the first section of Paragraph 1 of Article 40 of the Fair Trade Law, ordered the company to immediately cease its unlawful act and at the same time imposed on it an administrative fine of NT$10 million.

Appendix:
Hong Yin Multimedia Technology Co., Ltd.’s Uniform Invoice Number: 04779781

Summarized by: Wen, Che-Chia; Supervised by: Chiou, Shwu-Fen