Uncategorized

Why Do Videogames Cost So Much In Australia?

As a general rule there are three things that Australian video game publishers will not talk about: rumour, speculation and the price of games in the Australian marketplace.

But at the moment the pricing issue is at the top of the list – a topic publishers avoid like the plague. Even those that have the leeway to approach the debate, like Sony’s Michael Ephraim, refuse to be drawn on the specifics.

But as exchange rates continue to trend in Australia’s favour, with the Aussie dollar now above parity compared to its US counterpart, importing from overseas is slowly becoming a more cost effective way of purchasing videogames – and as it becomes more prevalent, local pricing will eventually become an unavoidable issue for Australian publishers. Sooner or later they’ll have to address it, or face the consequences of being forced out of their own market.

Parallel Lines
“This is an interesting issue,” said Dr Mark Melatos, Senior Lecturer at the University of Sydney.

At a loss with the dead silence from video game publishers on the issue, we contacted Mark, a PhD in economics, for comment on the reasons why videogames cost almost twice as much here as they do in the US, despite currency parity.

Mark’s area of expertise is international trade policy and theory, so we figured he might know a thing or two – turns out he does. Apparently the boogie man may be a thing called ‘parallel import restrictions’.

“One of the main reasons things like books, software, and DVDs cost more in Australia than overseas is something called ‘parallel import restrictions’,” claims Mark. “These rules stop someone buying the product cheaply – but legitimately – overseas and importing it themselves to sell locally at a higher price, but still less than what current suppliers charge.”

This may not directly affect the price of games, but when retailers aren’t been given the opportunity to undercut prices via imports, publishers suddenly don’t have the motivation to price competitively. It’s the nature of business – if there’s nothing to stop you from selling a product at a higher price, why sell the product for less?

Competition essentially drives prices – which is why giant retailers like Big W purchasing games in bulk has been good for game prices in general, forcing specialist retailers like EB and Game to drop prices in some cases. But still, compared to the US and Europe there simply isn’t the same level of competition, especially when importing is restricted.

Mark agrees. “There may be less competition in Australia among game sellers than there is overseas,” he claims. “If there are fewer local vendors, they might be able to charge higher prices.”

The Villain Of The Piece
So who’s the villain of the piece? Who is responsible? It can’t be the retailers. Speaking to Mark Langford earlier this month, he revealed that the margins on video games at retail are low, and selling a new game at $79.95 is essentially equivalent to selling at cost price.
Is it the publisher? Well, common sense would suggest that if the retailers aren’t scooping the cream then the distributor must be raking it in from the extra dollars consumers pay in stores.

But during off the record conversations with people in the games industry, we’ve been informed that Australia is far from the highest performing region when it comes to profit.

It begs the question: where is all this money going?

Michael Ephraim is the one industry figure who has been most outspoken regarding the issue, but even he won’t get into specifics.

“From a business perspective, there is a lot of complexity involved,” claims Ephraim, “from very volatile exchange rates, to taxes and duties, distribution and transit costs, marketing and operational costs, size of market and so on. We try to be as comparable as possible within these parameters.”

According to Dr Mark Melatos, there may be veracity to that claim; higher operational costs in Australia may be part of a rolling set of circumstances that result in more expensive videogames.

“The other side of the coin,” begins Mark, “is that local vendors may face higher operational costs – higher wages to staff, and higher business taxes.”

These extra costs may still not be enough to explain the huge disparity in pricing.

“My gut feeling however,” says Mark, “is that these issues are unlikely to explain much of the price difference.”

Taking Stock
None of this really explains anything. Publishers aren’t making money over the odds and neither are retailers, yet the consumer still bears the burden of additional cost.

Another explanation may be in the way that local distributors do business with their overseas counterparts. Australian distributors, particularly when they represent another company (Mindscape, for example, distributes Konami games in Australia and Namco Bandai distributes Bethesda titles), will often buy their stock directly from their partners in overseas territories like Europe. The cost price of that purchase then determines the retail price in Australia.

We put this question to Mark Melatos – do international companies regularly over charge specific territories for stock? And what would be the benefit of doing that?

“There shouldn’t be much difference in the consumer price whether the games publisher sells direct into Australia or via its local subsidiary,” claims Mark. “However, there is a thing called ‘transfer pricing’ which multinationals often engage in to minimise their tax bills.

“For example,” he continues, “imagine Australia has a higher corporate tax rate than the US. Then a US multinational may try to maximise its profit in the US and minimise its Australian profit, thus reducing its overall tax bill.”

It seems very unlikely that this is the reason for the difference in prices – there are a number of tax laws that regulate this kind of trading, and all trading must be within market standards.

Australians Have To Regulate
It turns out that a very real culprit may just be regulation costs.

“Things like how the game is rated can affect the price,” claims Mark. “If a game in Australia must be rated MA15+, whereas overseas it can be sold with a PG rating, then the price is likely to be higher in Australia because the potential market is smaller – a lower rating makes the game available to more potential buyers.”

But then Mark says something that forces us to stifle a chuckle…

“Is the rating regime stricter in Australia?” Mark asks innocently. “Do the same games get rated differently in different markets?”

Yes Mark. Yes they do.

So it could be possible that the manner in which games are rated in Australia, with all the extra costs involved (particularly with more violent games), may be responsible for the increased price of video games sold locally in Australia. Getting games rated in Australia is a substantial expense, particularly if the game is refused classification or requires more attention for whatever reason.

But is it enough to justify the huge increase? Probably not.

The End Game
The final answer, as vague as it sounds, is probably a combination of all of the above, in varying measures – that and the fact that Australian consumers are generally used to paying over the odds for goods in general.

“Australian gamers may be prepared to pay higher prices for the same games than overseas gamers,” speculates Mark. “In ‘economics speak’, Australian gamers may have ‘more inelastic demand’ for overseas titles. That is, Australian gamers may value the same games more highly (and, hence, are prepared to pay more for them) than their counterparts overseas.”

But that is changing, especially as the importing becomes easier, accessible and, more importantly, cheaper as the Aussie dollar goes from strength-to-strength. Australian consumers are starting to question the higher prices we have to pay for certain goods, and they’re voting with their hard-earned cash – overseas. Ironically, the parallel import tax, which exists to protect local retailers, may end up scuppering them in the long term, as they struggle to compete with import prices.

Ultimately the market must adapt – and adjust in order to compete on an even keel. That may result in video games becoming cheaper.

Mark Melatos agrees.

“Of course,” begins Mark. “The competition and parallel imports issue should be less of a problem now that we can buy stuff like software over the internet. Over time this should reduce the price differences.”

Time will tell.