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.


Comments

    This is why I smiled in that part of The Dark Knight Rises when the 'rich' were getting dragged from the homes. Look after your consumers, and they will look after you. Press them for too long, and everything crumbles.

      I think you kinda missed the point of that scene...

        Yeah, it was the prisoners who were running Gotham, genuine bad
        guys dragged the rich out and spoilers them. Bane was running the
        show, but he didn't do it and couldn't do it by himself.

    Great article that sums up my feelings on the issue - it's a bitter reality in which nothing will most likely eventuate from the review, but my inner optimist would be pleased with (some) form of positive outcome.

    Great article. The inquiry, even if it serves as nothing more than alerting companies that people are aware of the price difference, will have served its purpose. With any luck, it'll tell them "the jig's up, lads", and encourage them to be a little fairer to consumers.

    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.

    Which is a fairly weak attitude when you take into account the industry-wide practice of region-locking software either digitally or physically, and the dearth of quality competitors - few people operating at a professional level would choose GIMP over Photoshop, all other factors being equal.

      This is why for a period of time (i am seriously not getting into this argument again, Domino might be around), the law stated that modchips on consoles were legal because they allowed imported games. It's no longer the case but if region locking comes back, the ACCC will fight it again i imagine.

        They won't be able to. The 'free trade' (lol) agreement with the US that the Howard government signed us up to had a provision that Australia had to adopt the anti-circumvention measures of the US's DMCA law. Regioning systems are tied into copy control systems / DRM and so are illegal to circumvent. This is how eg the first PS3 jailbreak systems were shut down in Australia before they could go on sale.

          The ACCC didn't fight the PS3 jailbreak system because the PS3 was until last week region free. (1 game is now region locked).

          I guarantee if region locking comes back big time teh ACCC will reccomend to government this needs to stop.

          The FTA is a bloody sham. Australia got rooted big time by it.

            The 360 is mostly region locked though...

              Seen any 360 modchip cases recently? Nope? That'd be why. 360
              modchips exist. Microsoft tends to seem to not care about them due
              to the fact they cant get on Live to an extent.

    Surely there should be an argument somewhere that these companies are prohibiting trade to outside countries on their international sites, specifically that you cannot purchase a copy of the software from the US site if you live in Australia, therefore discriminating based on nationality. It's one thing to sell from the US and then insist that this product and the support thereof is supplied only from the US, etc. It's another entirely to insist that an Australian resident cannot purchase from that site and must instead shop at another site entirely. That brings to mind things like segregation and apartheid.

      Your comment is ridiculous and you should feel bad.

    When consumers get more savy and start stepping around the Aussie market completely, like many of us already do, there's really only one thing that the Australian government does - not making sure prices are fair and entice us to shop locally again, no way that's logical. They'll enforce import duty to discourage us from doing it, maybe make a law to make it some kind of tax dodge or simply use it as one more excuse that we need some kind of isolationist filter in the networks and stronger enforcement of import trade restrictions. You know, for jobs and retailer stability.

    Basically you can only count on them looking at what benefits corporate interest, sorry for sounding all conspiracy nutty, but that's pretty much how Australia works... profit motive alone (ahem*mining industry*).

    The funniest (or scariest) thing i saw in the report from CHOICE i think it was about Microsoft software. It was cheaper to fly an employee business class return to the US and buy teh software than buy it locally.

    At that point, you know its bananas

      ^ THIS. i get the argument for and against but its THIS kind of
      disparity thats so highly questionable. Look at xbox live, id LOVE
      to buy retail games digitally but they are so appalingly overpriced
      it isnt an option. Somthings out of whack when i get the same game
      sent from europe on the other side of the world and delieverd by
      air mail for 5 pounds or less than a tenth of the domestic going
      rate.

        I just want the price of points brought into line with America -
        like our dollar for two years already.

    I thought this was covered in that FTA australia signed with the US in 95 or 96. That there will be no price discrimination on digital goods?

    I completely agree with this article and how as australians we seem to be ripped off and shorthanded in prices of technology and technological resources, i.e broadband speed. Also as a student programs that we need for assignments and technology i.e. Keyshot 3 for rendering 3d models from sketch for example, are further away and drop our usual standard of work. Ikea is also another example which prices are reasonable but could be better for our region.

    For all the talk of righteous justice against the tyrranny of price-gouging retailers on this forum and the many others like it, you're only demonstrating that you don't get it. Look at the person to the left and right of you; chances are they're luddites or simply just don't know or care. They'll comment on rising prices from time to time but still buy a Mac for full price from Myer because it's pretty and easy to use. We're being marketed to in ways that we don't even realise. Ask a person if they're prepared to pay $90 now for something they see and want or wait a week and pay $60 and a reasonable proportion will pay $90. Don't forget that *value*, not price is the prime motivator for making a purchase, and convenience and customer service are prime factors alongside cost.

      This guy gets it.

      Agree completely. But it's also worth noting that the consumer
      perception of value is changing, faster than ever before, thanks
      mostly to the internet providing better information about what
      everyone else is paying. That's why local retail is suffering, why
      importing is on the rise, why TV is being increasingly torrented
      and why we're having this investigation today. And if local
      businesses don't respond to that (e.g. by importing themselves,
      bypassing traditional distributors), they'll find themselves out of
      the market. And that's fine - so long as consumers are not blocked
      from making other market choices. Where blocks exist, consumers
      will increasingly turn to illegal choices instead.

    Im all for reasonable prices not rip off prices as they currently. I now rarely buy games locally, I import thru ozgameshop. I don't understand why the publishers have such a high cost price for retailers. I think it's reasonable for a new release game to have a max rrp of $79 for example. But I think digitally we are getting screwed as its not as easy to find a cheaper alternative. For example, 3DS eshop, why are games $3-$5 more? Why are DLC tracks $1.50 for Theatrhythm but $1US and $1 Euro!!

      Why are PSN prices more expensive? Why are some games on Steam
      double the price? etc etc (I know the whole "publisher sets the
      local costs in line with retail...but its a load of garbage if you
      ask me)

    It's a weird situation. It just sort of happened back when it made
    sense and now the people selling are afraid lowering their prices
    will somehow break their business model but have no real reason for
    staying where they are.

    "... 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."
    Before? "consumers" are already doing this. Why do you think that
    the piracy rate in Australia is one of the highest in 1st-world
    countries?

    I think more people really do need to start buying stuff online
    from overseas before things will change here. One of the big
    concerns that people have with that though is that they won't be
    covered by a local warranty. I think that that US a short suited
    way of looking at it. I have been buying goods online for 6 years
    now, and I estimate that I have saved around $2000 from doing so.
    With the money that I have saved, I could easily buy a replacement
    product and still be ahead.

      Damn predictive text.

    I don't think I've ever seen more ignorance of economics in one
    spot (I'm including both the article and the comments). It's
    amazing how the author can spout such ignorant (and completely
    wrong) arguments and yet write in a way as to infer that he knows
    anything about what he's talking about.

      case in point: "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. " No shit sherlock. Because there
      are MULTIPLE reasons contributing to the higher prices. Your
      argument imagines some world where there is one reason and because
      the prices aren't 10% difference GST can not be a possible
      contributing factor. And then you later on lecture about simple
      maths but demonstrate clearly that you have barely a simple grasp
      on maths yourself.

        At the risk of engaging a troll: show me how all those factors add up to a 75% markup (and why that doesn't apply to all MS products, not just some) and you'll have a case to make. I think you missed the bit of the article where I point out that it's not universally true that we get ripped off. Your inability to read does not equal an ability to criticise my maths skills.

    You know what pricing needs to be fixed? Lego. its way too high.

      So buy MegaBloks instead. Since the LEGO patents expired, they lost
      their case, and now LEGO-compatible bricks are available at much
      cheaper prices.

    That's what makes me so ridiculously angry. There doesn't seem to
    be ANYTHING we can do about it. I don't even think taking a shit on
    the faces of the people making doing this price gouging would make
    a difference (would probably make it worse...). Someone in the
    industry needs to make a move to make competition a factor. The
    problem is that Australians don't have much of a choice. Take
    digital music downloads for example. Rip offs at every Australian
    online retailer and region locks on those that aren't Aussie. It's
    shit. What the hell are we supposed to do?

    "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." I don't
    want to call you out as being incorrect, but can you clarify this
    please? Firstly, the US has state-based sales taxes that are
    usually not added until the sale transaction; the reason Amazon and
    the rest don't add it to their list prices is because the tax rates
    are a dogs breakfast ranging from less than 1% to 10%+ (check it
    out on Wikipedia, it's all over the place). The UK has the VAT
    (same as our GST) which is currently at 20%; we don't pay this when
    we buy from the UK as exports are exempt, resulting in 'cheaper'
    prices. Locals don't have that luxury. Also, lets keep in mind that
    the market for anything is constrained by the ability of customers
    to pay. In 2010 the median annual wage in the US was $26,364; an
    article I found on an ABC website showed the median annual wage in
    Aus for 2011 to be $54,750 (could be higher though). That's a *big*
    difference in spending power and shows that Aus wage levels could
    reasonably be a big input into these price differences. Also
    curious to hear from anyone who's worked for a big retailer. From
    my personal experience, margins were in the 15-20% range, which
    covered costs and allowed for growth.. Keep in mind, most of that
    money goes back into employees' pockets; staff make up the biggest
    regular outgoings of any large retail chain (and most other
    companies).

    I wish all of Kotaku's articles were this good. Interesting read, well written and researched. TY Kotaku AU.

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