Vendors won't let Aussie tax go: analysts

Multi-national vendors have been accused of riding a wave of excessive profits in Australia, but even with a parliamentary inquiry set to happen, it's likely that vendors will hold out to the last minute before taking action, according to industry analysts.
Written by Michael Lee, Contributor

Multi-national vendors have been accused of riding a wave of excessive profits in Australia, but even with a parliamentary inquiry set to happen, it's likely that vendors will hold out to the last minute before taking action, according to industry analysts.


(Australian Coins and Notes Macro image by Martin Howard, CC BY 2.0)

On the weekend, the Minister for Broadband, Communications and the Digital Economy Stephen Conroy promised a parliamentary inquiry into the high costs of IT products.

Telsyte senior research manager Sam Yip said that it is more than likely that the discrepancy between Australian and overseas prices for software and hardware was an opportunistic move on behalf of vendors.

"If Australians are already paying that much compared to the rest of the world, that just means increased margins, and that increased margin starts to get implemented into people's KPIs [key performance indicators] locally and it's just opportunistic. I think they've been riding the wave of this, and now as Australians start to consider the digital distribution of software and these things sort of increase, people start to wonder, 'What's the difference? Whether I sit here in Australia or I sit in the US, there's no difference. It's still the internet; it's still the same distribution system. Why are we paying more?'"

Yip welcomes the inquiry, saying that he is in favour of the consumer, but IBRS advisor Guy Cranswick worries that the inquiry could go the way of the former inquiry into petrol pricing.

"[It's] hard to say who will win, as each side will put their best case forward and use lots of caveats, but little will be established with clarity," Cranswick said.

In order to gain any clarity, Yip said that the inquiry needs to drill down into what other aspects of product pricing are responsible for the difference in vendors' recommended retail prices here and off-shore.

"Preliminarily, we need to look at things like exchange-rate differences, work out how much more labour costs are in Australia versus overseas when it comes to the distribution and marketing of products and see how big the true difference is. You've got to consider all the other costs when distributing and selling and also marketing a product. Marketing in Australia are extremely high compared to other geographies and we have to count that into that number as well, whether it's point of sale, whether it's digital marketing, we need to account for that," Yip said.

Cranswick said that how vendors reveal their pricing will be interesting, stating that they will do so with "a lot of detail to show that their prices are comparable in real terms relative to purchasing power, etc, in other markets".

"When rational explanation isn't working, then obfuscation can be put to work," he said.

Australians willing to pay

Cranswick pointed to a recent study by UK Centre for Research on Socio-Cultural Change (CRESC), "Apple Business Model — Financialization across the Pacific", which breaks down the cost of making the Apple iPhone 4 and shows major pricing discrepancies across different countries.

"Assembled in China, the total cost of putting together just one phone was $178.45. Compare that with a sale price (including downloads) of $630, and Apple makes $452 on each phone: a whacking gross margin of 72 per cent," Cranswick said.

"Chinese labour accounts for a tiny proportion of the company's costs: $7.10 for each phone, which accounts for about eight hours of assembly. So what would it cost to make the same iPhone in America? The CRESC team took the average wage in the US electronics industry of $21 per hour, and calculated that the total production cost would increase to $337.01. That is a big jump — but it still leaves Apple with a gross margin of 46.5 per cent on each iPhone."

But despite the giant margins, which have been shown to vary by region, Cranswick said that consumers will be happy to pay them.

"Given Apple's dominance of the market and its price relative to others, it's fair to generalise that this issue is not really hurting Australian wallets. They pay for what they want, and they like a higher-priced, branded product," Cranswick said.

Yip agrees.

"As long as you provide a good product, users will buy it, even if there's a reasonable difference," he said.

It is this long-set expectation that the market will continue to accept higher prices that has led both analysts to believe that vendors will be reluctant to move on pricing.

"We're so used to the big differences and the margin that have been set by these companies — unique margins for Australia — I think [vendors will] sit it right out to the end [or] close to the end. I wouldn't say it will happen only when it's forced, but they'll try to ride the wave until the wave slows down a bit," Yip said.

However, while Cranswick is of the opinion that the government's inquiry won't yield a result, Yip is more optimistic.

"If the case is right, then vendors will respond with revised pricing. Their objective is to keep long-term customers that they can bring through all their products and right through all their products' lifecycles. I don't think it's an option to fight against consumers, especially now that it is quite [easy] to obtain products legally or illegally — they have to consider that. If you get on the bad side of consumers and don't have a real reason based on your pricing, you could very well lose your consumers to piracy or lose them to innovative methods of getting them off-shore," Yip said.

"Change [could] occur when a particular vendor wants to be an early mover in terms of innovating. There could very well be a vendor that might take the hit and say, 'Fine. This has been the case, but we're going to be the first ones; we want to be the good guys in the industry and be known for that, so we're going to take the hit and say yes, here we go, we're going to be the first mover'."

However, few vendors appear to be willing to do so at this early stage.

Sony and Microsoft told ZDNet Australia that they are aware of the inquiry, but are waiting for the terms of reference before making any response. Canon stated that it "welcomes a debate centred on the issues of globalisation with a view to resolving them", but, likewise, is waiting for the terms of reference. Adobe declined to comment.

Apple, Salesforce, Netsuite and Lenovo did not immediately respond to requests to comment.

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