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.

Picture by Melinda Seckington

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 Kotaku.

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.

This article was originally published in Lifehacker Australia, republished with permission.

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