Why Everyone Is Deluded About The Australian IT Pricing Inquiry

Discussions about tech pricing make everyone angry, but rarely solve anything. Software and hardware vendors are kidding themselves if they think their flimsy justifications for gouging Australian consumers will stand up to in-depth scrutiny. Consumers are kidding themselves if they think that this is a universal phenomenon. And we're all kidding ourselves if we think that the current parliamentary inquiry will have any real effect on the issue.

The House Standing Committee on Infrastructure and Communications Inquiry into IT Pricing, to give it its full and wordy name, held public hearings in Sydney yesterday. There was considerable excitement when the inquiry was announced back in April, but the reality has been somewhat drabber. We've heard little in the way of coherent justification, and there's even less reason to believe much will happen as a result of what we have heard so far.

A total of 81 submissions have been tabled by the inquiry prior to the public hearing, the vast majority by individuals. From a broad industry perspective, the most notable submission is from the Australian Information Industry Association (AIIA), which acts as a representative body for big IT companies in Australia. Adobe, one of the most persistent offenders when it comes to jacking up prices in Australia, declined to make an individual statement, saying that its contributions to the AIIA report represented a broader industry view. Microsoft did offer up a statement; Apple made a submission but insisted it be kept confidential. From a consumer perspective, the most notable (and quoted) submission was from CHOICE, whose findings we have already looked at on Lifehacker.

The inquiry has bought the issue of the Australian tech tax to the attention of mainstream press. For those of us who are more heavily geeked up, it's hardly news that we've been rorted for years with some these prices, and seeing it recognised more broadly might seem satisfying. But the existence of the inquiry shouldn't give us a sense of false hope, nor an inflated sense of entitlement. While many of the arguments that justify the gap are palpably self-serving nonsense, not all are — some prices remain equivalent or cheaper, there are valid reasons why differences might exists, and you're not obliged to purchase any of these products in the final analysis. And regardless of your stance, there's no reason to believe that anything will change as a result of the current investigation.

Industry delusions: GST, warranties and distribution

The reasons we get given for higher prices in the AIIA report (and most of the other business submissions) cover familiar territory. It's not reasonable to directly compare prices because overseas costs are often tax-exclusive while Australia's are tax-inclusive. The cost of supporting goods under Australian consumer law makes life more expensive, as does having local support staff. In that area, property rental costs and wages are high. Partners selling the product also need to make a profit. Localisation can be an expensive business. Picture by Joe Radele/Getty Images

I can acknowledge the truth of all of these arguments, up to a point and in some contexts. I can see, for instance, that Australia's proximity to China and other major producers rarely translates into cheaper shipping for hardware coming to these shores. In this context, bulk definitely counts.

Products that are designed exclusively for the Australian market (in, say, accounting or HR areas) will need specific localisation, and that costs money too. Not everything is sold identically across the world as it is; Australia isn't unique in this area. But the majority of these arguments don't stand up to scrutiny when the scale of some price differentials are considered, or when you look at products which really are identical for everyone.

Let's dispose of the GST canard first of all. As we've noted before on Lifehacker, the price difference for all kinds of goods available overseas or in Australia (not just in the tech space) is often much, much higher than the 10 per cent GST rate. But even leaving that aside, the claim that it's not possible to make a direct comparison purely because we have GST is insulting and ridiculous. If we add 10 per cent to the US price, we'll have a very good indication indeed of what a GST-inclusive price would be. It's certainly not spectacularly difficult maths; I believe some software companies sell tools that can perform that task if you find it too arduous.

The notion that meeting the requirements of Australia's consumer regulations also jacks up the price doesn't pass the sniff test. Our consumer laws were tightened up and harmonised nationally in January 2011. High prices for tech products in Australia predate that by decades. You might also argue that the harmonisation into national laws should have made compliance easier, since different rules no longer applied in different states. If that has happened, no-one is shouting yet about passing the benefit on to consumers.

The fundamental premise of the "support and warranties" claim is also flawed, since it presupposes that we have massively more complex rules in Australia than anywhere else and that there are no costs associated with meeting consumer regulations in other markets. That's self-evidently not true. US laws vary hugely by state; European regulations are often stricter than Australian ones. And doing the right thing by your customers should be a good business practice, not simply a cost centre.

Pushing the "local support is costly" barrow also ignores the increasingly frequent reality: if you have a tech support issue of any complexity whatsoever and you contact the local branch of a global technology firm, you will be sent offshore with extreme speed (presuming you weren't sent offshore right from the start). That's doubly true if you use online support mediums. I've had tech support calls handled from the US, the UK, Egypt and India, but the only times I can recall serious interactions with local staff has been with ISP issues, which by definition aren't being sold worldwide.

Another "justification" that is also bought up in this context is the relative cost of living and Australian wage levels and economic prosperity. There's undoubtedly an element of truth there — Australia was far less impacted by the global economic crisis than comparable nations — but merely quoting minimum wage figures doesn't establish a real difference. Leaving aside whether or not most people in the supply chain who directly impact on the cost of IT goods are paid the minimum wage, that number also needs context (what's the tax rate? how much does housing cost?). And again, it doesn't make sense when the staff are increasingly offshore anywhere.

A digital example

The entire house of cards collapses spectacularly when it comes to digital distribution of software and media, which is where most of the future sales growth for technology products is expected. Let's compare a couple of products purchased directly from official company stores for Adobe and Microsoft for download:

  • The Master Collection edition of Adobe Creative Suite 6 costs $3948.75 for a business user through Adobe Australia. The identical product through the US site costs $US2599.
  • As the CHOICE report first highlighted, a copy of Visual Studio 2010 Ultimate with MSDN costs $6649 in Australia via Microsoft's site, versus $US3799 in the US.

In both cases you're getting an identical product, shipped digitally to the consumer, direct from the manufacturer, on a visually identical site. Shipping and manufacturing don't come into it. The only difference is what you pay, and that difference is much, much bigger than 10 per cent. (In these examples, it's above 50 per cent in the first case and 75 per cent in the second. Adobe also quotes the price ex-GST, by the way.)

You're dealing direct with the vendor, via "localised" sites that look almost indistinguishable from its US parent. In this context, I find it hard to believe that the Australian online store "operation" is a massively expensive undertaking sucking up large amounts of money. I suspect it's nothing more than a couple of variant settings in a database file and a local merchant account to pile up the takings in. There's certainly no commission paid to a third party in this scenario, so that's not a factor either.

I can actually think of some specific reasons why digital distribution might cost more in Australia. If a company sets up local mirrors of its site or pays content distribution networks (CDNs) for faster downloads, that might be a legitimate concern. But this argument, remarkably, doesn't get raised in the submissions I've seen; it's nothing but generic statements.

Microsoft's submission notes that "the costs of providing the services — including establishing, maintaining, supporting and advertising the services — needs to be recovered". No argument there. But it's a ridiculously massive leap from saying that to arguing that a downloaded copy of a software package should cost thousands of dollars more in Australia than in the US. The US operations also need all these elements. If the higher price not just shameless opportunism, then a much more coherent justification than what we've seen at the inquiry so far is needed. (That said, Microsoft deserves some credit for having the gumption to make a submission in its own right and share it with the world, which is more than you can say for Adobe or Apple.)

Consumer delusions: this doesn't happen all the time

CHOICE's submission provides a neat summary of the pricing variations seen in some major categories: music, hardware, games and software. As we've already seen, there are some massive differentials out there. But having recognised that, it seems worth pointing out that it's not a universal phenomenon. The same companies that argue that they must charge higher prices to meet local market conditions seem entirely capable of charging us very similar prices to our US cousins when the mood (or economic necessity) hits them.

I've been discussing the pricing inquiry a lot in recent days (I made two appearances on ABC Radio to talk about it yesterday). Invariably, almost the first thing that comes up in chatting with researchers is a comment along the lines of "Ah yes, Apple do that all the time." As I pointed out yesterday when discussing Apple's well-padded margins, that's not an entirely fair judgement these days.

Let's take two recent examples. When the latest iPad debuted in the US, the cheapest model was $499. In Australia, the price for the same 16GB model was $539. Factor in the 10 per cent GST and there really isn't anything to complain about, even before other vendors started undercutting Apple to sell the same product.

The same phenomenon was evident when Apple altered app pricing on the iTunes store back in July 2011. The cheapest apps ($2.99 and under) are now set at the same price in dollar terms, then there's a sliding scale of additional fees relative to the US. It's not absolutely equal, but the gap is much less pronounced than it used to be (especially given that volume apps sales are strongest in the cheaper categories).

The one area where we do unquestionably see a continuing clear price differential and restrictive marketing practices from Apple is in music and movies. Individual tracks costs more on iTunes in Australia than in the US, and the range of songs and movies we get access to is different as well. Apple won't talk about the difference in public (Apple won't willingly talk about any business issues in public), but it's generally assumed that the need to negotiate individual licensing agreements with copyright owners plays a part. As such a visible part of Apple's retail presence, it makes sense that consumers have noticed that difference, but it's a mistake to assume that translates across everything Apple sells.

We can also see evidence of price shifts from other companies. Microsoft, for instance, is charging the same dollar price for upgrades to Windows 8 in Australia as the US ($14.99 if you purchased a new Windows 7 computer after June 2 2012, $39.99 to upgrade from an existing Windows installation otherwise). That's much less than any previous generation of Windows software has cost for Australians. So obviously all those allegedly expensive marketing and local support and salary costs aren't always an issue. But consumers should also recognise that the Australia tax, in this example, simply isn't happening.

There's a broader issue for consumers to contemplate than the prices of individual items, however. ABC RN Drive host Waleed Aly put this to MP Ed Husic (one of the main forces behind establishing the inquiry)when I appeared on the show yesterday. OK, so we're being charged more for software/hardware/gadgets than other countries, Aly asked. So what? What makes us think that we're entitled to special or equal treatment? Since when have businesses ever done anything other than charge as much as they think can get away with?

Husic didn't really answer that question, and I don't blame him. There's a clear fairness argument to be made, but commerce is not about being fair. And the issue comes to the heart of the inquiry's problem: it can't enforce any solutions even if it can propose them.

Reality check: nothing will happen

As the Australian Competition and Consumer Commission (ACCC) frequently makes clear, its regulatory role does not mean it can dictate to businesses the prices they can charge. That's left to the market to determine. It will intervene if it thinks competitors are colluding to keep prices artificially high; it will remind companies not to make false claims about the basis for price rises. But outside of certain regulated markets deemed to be nationally essential (such as telecommunications or airports), it does not set pricing. In simple terms, the ACCC's attitude is this: if you don't like the price of Photoshop, buy it somewhere else or download a copy of The Gimp instead. Picture by Marcin Wichary

This is worth bearing in mind when we consider what the IT pricing inquiry might recommend. It could conclude that Australians are repeatedly being charged too much (though as we've seen, that's actually a variable phenomenon). It might explore some of the reasons behind that, though as we've seen the explanations are rarely compelling and their application by vendors seems arbitrary.

Regardless, it is not going to recommend that competition law be changed exclusively for technology products to ensure that we get the same prices as the US. It's legally unfeasible, politically difficult to imagine, and impossible to enforce in real terms. It's simply not going to happen.

Nor are we going to see legislation introduced demanding that overseas stores accept credit cards from Australia. Again, that would be unenforceable, and Australian law already allows businesses to accept or refuse payment on whatever terms they like. The logic is that if you don't like the terms offered by the business, you'll go elsewhere. That logic is often imperfect, but the assumptions underpinning it are not about to be ripped out of a century's worth and more of Australian legislation.

My inner cynic suspects that the report will be tabled in Parliament, noted and then ignored so that our representatives can return to scaremongering and slagging each other off. My inner optimist hopes that in parallel with that happening, tech companies will recognise that they need to price their goods fairly before consumers get hopelessly pissed off and look elsewhere, either to illegal downloads or alternative providers. Complacency has never been a good business strategy, but in this century it feels like a potentially fatal approach.

Republished from Lifehacker Australia


Comments

    I'll take one point where the logic is clearly flawed - "But it’s a
    ridiculously massive leap from saying that to arguing that a
    downloaded copy of a software package should cost thousands of
    dollars more in Australia than in the US. The US operations also
    need all these elements." What you are ignoring here is the
    relative size of each market. The US market is around 12 times
    larger than ours, so economies of scale will have a massive impact.
    i.e. Spend a million dollars on promotion in each region and sell
    just one-twelfth as many licenses, requiring you to make 12 times
    as much money off each to make it equally profitable. That's not
    50% or even 75%, it is 1200% which could very easily account for
    all of those enormous price differences. There are plenty of other
    factors, too, like variable exchange rates. No company is going to
    risk losing money because the exchange rate dips mid-year, so they
    will all set a decent buffer to make sure they don't rip themselves
    off. The fact that will always work in their favour is something we
    just have to live with. Realistically, the only companies that I
    believe have a real case to answer are those that lock you in to
    local pricing, like Autodesk. If you buy a license for 3DS Max, for
    example, from the US they will not allow you to register/authorise
    it here, so you will only get to use it for the 30 day trial
    period. They do it because they require their resellers to provide
    a lot of their first-line support and don't want resellers
    undercutting one-another and lumping someone else with the support
    burden. To make it fair on everyone, their policy is for local
    pricing to be based on their US price, plus some padding for
    exchange fluctuation. That all very well in principle but 3DS Max
    is only US$3500 but here they charge Au$5995. There is just no way
    around it, if you want to use 3DS Max in Australia, you pay six
    grand. That, to me, is completely unfair but for the rest of it, if
    you're not happy with the local price, go and buy it somewhere else
    or buy a different product.

      I think you're still thinking in the old economy. You argue that
      there are two markets - but the Internet merges the Australian and
      US markets, there are no longer geographical market boundaries for
      products like Windows. What marketing works on Youtube happens
      across the world all at once. So economy of scale argument doesn't
      work here. Your argument on exchange rates doesn't hold true too.
      As a US company I just charge the USD sale price - by doing so I
      don't take the currency risk, that's for the consumer, because at
      the end of the day I always get my sale price, but the consumer
      might pay more or less. What's really at work here is a company's
      ability to sell at whatever price they can get away with, but I
      suspect that there is a problem with long-term distribution rights
      that cannot be unwound, which is restricting the sale. It would not
      surprise me that a local contract with the producer overseas has
      established a long-term contract that prevents the producer from
      undercutting the distributor of a physical box in a retail store.
      So the inquiry really should try to see if it can expose these
      contracts.

        The issue here is that the difference is so extreme for one individual product. If Motormouth's 'logic' applied, there would be a more consistent pattern in all MS products. (And good luck finding that particular product in a physical store.)

        "What you are ignoring here is the relative size of each market.
        The US market is around 12 times larger than ours, so economies of
        scale will have a massive impact. i.e. Spend a million dollars on
        promotion in each region and sell just one-twelfth as many
        licenses, requiring you to make 12 times as much money off each to
        make it equally profitable. That’s not 50% or even 75%, it is 1200%
        which could very easily account for all of those enormous price
        differences." Really? C'mon - How much radio and TV advertising do
        you see for CS6? It's all online. And in your model, wouldn't it be
        effectively 1/12th as much in that case. You'd make one site and
        spam the World with it through various marketing agencies, then
        social media and blogs do the rest of the work for you. Adobe know
        perfectly well they have a Global product available from one source
        (though you may rent several servers World Wide to distribute from,
        but this would be factored into the overall pricing as you couldn't
        guarantee sales in any region) and you're telling me that it cost's
        50-75% more to make the Australian market aware of the new product
        and download it? Also - who's to say the actual market is 12x
        larger. It might not even be the product of choice in that region.
        It might have it's largest sales total/per capita in Japan for
        example. Or, is the product pirated less in Australia, therefore
        they figure the price isn't 'perceived' as too expensive for this
        region and continue to sell at such a high price 'because they
        can'? Variable exchange rates is a bit of bollox - it would have
        more to do with local Tax laws/rates. Exchanging currencies is
        minor compared to the price hike applied - and you can be sure that
        such a company would float their shares/business in many
        countries/currencies to maximize revenue return and also tax
        breaks. I think there's more to this than we'll know. If I was
        selling something, like an App, then I'd figure I could charge more
        in a more economically prosperous/financially stable country.

    Whats the point of this pricing inquiry if no-one, not the ACCC or
    anyone else can do anything about it? Seriously, its just jerking
    off the hopes of the individuals. And Adobe etc wonder why people
    pirate their software - they freakin deserve it.

      The point is for some senator to raise his public profile using taxpayer money to throw around some populist sentiment.

      And reading the comments here and on Delimiter, it seems that it has worked.

      Seems that the money would be better off teaching basic economics, rather than blatantly appealing to our own baseless sense of entitlement.

    Motormouth. I think you are also assuming that advertising costs
    are more here than overseas which is not always true. The cost of
    creating the advert may be a majority of the cost and then the ad
    is dubbed or altered slightly for each region to make it
    appropriate, so the assumption that the profit is less here does
    not apply necessarily. You also seem to think that an alternative
    can be purchased. In the case I sent to the ACCC, a music download
    I wanted was US$7 and AU$21 the download was region locked from
    multiple vendors in the us and Europe and I could not get the
    product at an equitable price. Compared to little used products
    such as AutoCAD and 3dstudio (volume of sales inAU) the profit
    margin is insanely high and unfair. As stated in the article the
    sites are usually simple conversions of the international site. The
    pricing could be as easily converted based on exchange rates in a
    similar method.

      Why should it be? The price, for you, is $21. You either value it at $21 and buy it, or you don't.

      What someone else can potentially pay for it is completely irrelevant. And you probably shouldn't use words unless you actually know what they mean - like 'equitable', for instance.

        Hi Jack, thanks for weighing in... re-reading the equitable statement you are probably correct, I really meant fair price. I am sorry you didn't understand what I meant and needed to point that out in such a constructive and forthright way.
        The point I was making is that the product which is a digital download is no more costly to the vendor on the US website or the Au website, which is also the point of this enquiry as I perceive it. Artificially inflating a price with no justification and forcing local consumers to buy it from the inflated source is the problem here. Whether it is illegal or merely opportunistic is up the the ACCC I guess.
        If someone else can buy this cheaper than me and I am not happy about that then it does matter. I then have the choice of buying it anyway, not buying it or pirating it. With so many copyrite owners complaining of infringements I would think that removing an excuse for pirating would be worth consideration.

        Raising the profile of a popular issue is a grab at votes, as you point out in your other posting, but so is just about anything in a public arena.. if you want to break it down that way.

        Ranting in a forum because you wish to seem better than others and belittle opinions from the another person is your prerogative. It may also be the type of attitude that forces people to 'shut up and take what you are dealt' but it is not exactly the Australian way, or a way that I want to accept for my purchases when I know I can get a better deal.
        You may also believe that this is capitalism at it's best, but also we don't have to accept it. Raising the public profile on us getting unfair pricing is a way to assist in reducing costs for items that many people use. I this I agree with SeanC.

    It's to bad everyone couldn't just get together and boycott their
    products for awhile - that would sure bring the prices down.

    There is absolutely NO incentive for ''companies (to) recognise
    that they need to price their goods fairly before consumers get
    hopelessly pissed off and look elsewhere''. If an Australian
    customer wants a specific product and ''looks elsewhere'', the most
    they can do is buy it from another country. But even then , the
    global manufacturer still makes the sale. They don't care whether
    their Australian subsidiary or international subsidiary makes that
    sale. So they may as well continue to fleece local customers too
    ignorant or lazy to buy overseas. (Those who wish to pirate
    software will do it anyway, regardless of any local price
    differential or not.)

    Actually, the government could do a number of things to address
    discriminatory pricing if it was sufficiently irked and saw enough
    votes in it, and they don't necessarily require legislation. The
    government has significant buying power in its own right , and
    could choose to take its business elsewhere. It has introduced
    purchasing rules with 'blacklists' for all sorts of things,
    including suppliers who do not meet workplace equity requirements,
    so it is not beyond the realms of possibility it could do it for
    tech companies. School laptop programs anyone? Also, if the Govt
    can effectively exclude Huwei from the NBN tender, how grumpy do
    they need to get before they look at similar ways to deal with
    predatory pricing? I'm not saying that national security and
    national interest are the same, but the same tool could be put to a
    different use. The there are also less direct methods of
    persuasion. The software companies continually lobby the govt to
    sign up to all sorts of anti piracy treaties and conventions. Care
    to guess what sort of reception they are likely to get if they
    don't play nice? Also, the inquiry allows the government to shine a
    light into places the companies would rather didn't see the light
    of day. Issues like standard pricing models for songs via iTunes
    (unlike apps, which have a choose your own pricing model), and the
    relationship between Apple and the local music publishers (who are
    the main reason we pay more) for one. My free advice to the tech
    industry would be to never underestimate a Government in the lead
    up to an election, and to note that the Government is usually more
    than happy to intervene where it sees a failure of the market to
    effectively regulate itself. That is, after all, one of their key
    roles.

    What I've never seen anyone acknowledge is that the simple act of lifting the public profile of this issue could have a very real effect on pricing, in the long term..

    If Australian consumers search out better prices and actively pressure these vendors for a fairer deal I believe it will effect the local price eventually..

    I also do not understand the agressive attitude I've seen from some posters here against this enquiry over the last few weeks. Honestly, if you go to a retail store and ask them to give you a better price for anything (not necessarily just tech items) they can either reduce the price or not.. But if you don't ask, they absolutely won't so surely this enquiry can be thought of the beginning of the consumer push back against these practises?

    Saying to these companies "we've seen what you're doing, and now so has anyone that keeps up with local affairs" may not have an immediate effect or reduce the local price to parity with the overseas markets but it is now more likely that it will have some effect where as before there is no way it would..

    Although everyone seems to think there is nothing the government can ethically do without unfairly regulating a supposedly "free market" there is one thing they can do that will not only make prices more competitive but also to make the market less restrictive and encourage small business and local online retail markets at the same time...
    i.e. create or amend legislation to ensure that a product (including digital products) may be resold following initial purchase without the threat of violating trademark, copyright or other intellectual property laws... this would protect the right of consumers and resellers to obtain products from whichever source or market is genuinely the most competitive.

    Currently many large multinational companies use the threat of trademark infringement to force resellers into purchasing from local / authorised distributors instead of purchasing from whichever distributor can offer the best deal to the reseller (including so called grey market sources)... in many cases the large profits created in the process are funneled out of the country under the guise of trademark / brand licensing or royalty fees payable to the some parent company who happens to be conveniently incorporated in whichever country happens to be the tax haven of the day (Ireland, Holland etc.)

    Making these sorts of changes to legislation would also enable new and smaller merchants to compete locally and thus generating more jobs and would also help to curb the ability of multinationals to use trademark royalties and licensing as a way of avoiding paying local taxes... the result would be a market where local business would be encouraged to maximise profits (and thus generated tax) by sourcing from the cheapest / best available distributors without gouging the consumer.

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