The 'Australia tax' and the report into IT pricing

Posted by Genevieve Watt and Paul Kallenbach

The question of IT pricing, and the perception that Australian consumers and businesses are overcharged for IT products, was referred to the House of Representatives Standing Committee on Infrastructure and Communications (the Committee) by then Minister for Broadband Communications and the Digital Economy, Stephen Conroy, on 18 May 2012.

Following a 12 month inquiry, the Committee released its report, entitled 'At what cost? IT pricing and the Australia tax', on 29 July 2013.

The referral letter for the inquiry pointed to the 'growing interest in the differentials that exist in prices for IT hardware and software sold in Australia', particularly in light of the increase in the value of the Australian dollar, and also highlighted the increasing importance of the internet to Australian consumers and businesses.   In this context, the letter raised a concern that Australian businesses' ability to compete internationally may be compromised if they are faced with higher prices for IT products (including hardware and software). The report also specifically discusses how IT pricing can affect low income consumers (including students and people with disabilities), noting that access to technology and the internet is central to participation in modern society.

The report analyses the various explanations generally given for the higher prices paid by Australians for IT goods, including our geographical remoteness, small and scattered population, and historically weak currency, while questioning whether there are in fact any structural or market-based reasons for vendors to charge higher prices.

The overriding conclusion reached by the Committee is that Australians are often charged higher prices than their counterparts overseas, and that in many cases this is not justifiable on the basis of the cost of doing business in Australia. Instead, the Committee found that, along with a range of goods in general, many IT products are more expensive in Australia simply because of regional pricing strategies (colloquially referred to as the 'Australia tax').

The inquiry

The terms of reference for the inquiry required the Committee to:

• inquire into whether a difference in prices exists between IT hardware and software products, including computer games and consoles, e-books and music and videos sold in Australia over the internet or in retail outlets, as compared with markets in the US, UK and economies in the Asia Pacific;
• establish what these differences are;
• determine why these differences exist; 
• establish what the impacts of these differences might be on Australian businesses, governments and households; and
• determine what actions might be taken to help address any differences that operate to the disadvantage of Australian consumers.

During its inquiry, the Committee received 133 submissions and 15 supplementary submissions, more than half of which were from consumers. The remaining submissions were from business and industry bodies. In contrast to the high level of participation from consumers, who expressed dissatisfaction at their perception that Australians pay higher prices for IT goods, certain industry players were less willing to contribute to the inquiry. As was widely reported at the time, the Committee ultimately took the unusual step of summonsing the Vice President of Apple Australia, the Managing Director of Adobe Australia and New Zealand, and the Managing Director of Microsoft Australia to appear and give evidence at a public hearing.

 

Report

 

It is clear from the content of the Report that the Committee relied heavily on evidence received via consumer submissions, including those that provided a comparison of prices paid for particular IT products across different countries. While the report acknowledges the limitations of such price comparison evidence, the Committee points out that there is a lack of statistics on IT pricing and e-commerce retail sales in Australia, as they are not currently collected by the ABS. While largely relying on consumer submissions for evidence of the existence (or otherwise) of price differentials, the report does carefully analyse many of the main arguments given to explain charging higher prices for IT products in Australia.

 

One such explanation is the idea that Australians face price discrimination because businesses price products based on what the market can bear, rather than on the basis of a mark up of production costs. According to the report, this type of price discrimination can arise when consumers in different geographic locations are willing to pay different amounts for particular goods or services, and those consumers can be practically separated into different markets. In other words, Australians are charged more because they are willing to pay more, and are unable to obtain goods from neighbouring markets at a lower price.

 

Some IT vendors admitted to such practices. Microsoft, for instance, stated that in a free economy it will set prices according to what a regional market would stand. Both Adobe and Microsoft also stated that if consumers are not happy with the prices they charge, they can buy a competitors' products, although Adobe also justified price differentials on the basis of the costs of doing business in the region and running a regional operation.

Such market-based justifications were not entirely accepted by the Committee, which suggested that certain software vendors 'digitally handcuff' customers to their products by making interoperability difficult. Consumer groups also rejected claims that market forces effectively impose competition restraints.

 

A related issue raised by the report is the imposition by certain IT vendors and rights holders of geoblocking techniques, which verify a consumer's location based on their IP or residential address or credit card details, and prevent Australian consumers from purchasing IT products from overseas websites at cheaper overseas prices. In defence of this practice, the report discusses the view of many IT vendors that geoblocking is a legitimate tool enabling them to set regional prices, which is often used to protect the rights of distributors who have exclusive rights in a particular territory.

 

In defence of setting higher prices in Australia, some industry groups and IT companies also submitted that their Australian prices are the result of a range of factors, including exchange rates, the local cost of doing business, relative market size, tariffs, parallel importing, regulations (including green schemes and warranties), wages and the supply chain. Some also pointed to the national warranty regime and Australian Consumer Law, which are more extensive and provide more protections to consumers than corresponding regimes in other countries. On the flipside, the report also notes that when Australian consumers do purchase IT products from overseas websites at cheaper prices, a question arises as to whether the Australian Consumer Law (or any equivalent regime of consumer protection) applies.

 

Some industry groups, including Adobe, also argued that IT prices are inflated due to the margin set by channel partners - the conduits through which goods and services are delivered to consumers in Australia - which they argued often deliver value added services to their customers, such as desktop support, which can increase prices.

 

These arguments are, of course, contrary to the issues highlighted by many consumer submissions. Consumers raised a particular concern about the price differentials for products that are digitally delivered (such as software purchased online), with many of them noting that in this case there appears to be less justification for charging Australians higher prices, as the cost of doing business is no higher. In justifying its price differentials for digitally delivered products, however, Microsoft pointed to the local cost of providing services including maintenance, support and advertising, associated with those products. Apple also pointed out that it has to pay rights holders, including record labels, movie studies and TV networks, and that these entities often set a higher wholesale price in Australia. ARIA similarly stated that record labels incur their own costs in producing music, such as talent sourcing and marketing, and that it is not correct to assume that digitally delivered products are cost-free; while MacMillian Publishers Australia stated that e-books involve many of the usual costs associated with publishing (such as paying the author, commissioning writers and content, editing, designing and marketing) and that there are additional costs associated with digitisation and combating piracy.

 

Not all IT vendors relied on the above arguments to justify their Australian pricing. In contrast to Microsoft and Adobe, for example, the Vice-President of Apple Australia stated that Apple has an overall model of offering equivalent pricing around the world, and that in the case of many of its recently released hardware and software products, US and Australian prices differed by only one to five percent. Even where there was a price difference, Apple pointed out that published prices in Australia include a GST component, whereas in the US the sales tax is added at a later stage.

 

The report separately discusses the issue of IT pricing and copyright infringement, recognising that Australia has some of the highest rates of online piracy around the world. The Committee also, however, acknowledged the opposing views that despite piracy, the entertainment industry experienced significant growth in the last decade, and that infringement sometimes stems from lack of availability of affordable online content. The Committee also noted the view of many consumers that copyright law provisions and techniques like geoblocking have unduly restricted their rights to access copyright material, and accepted that technological protection measures, designed to prevent unauthorised access to copyright material, can restrict competition in copyright markets by preventing consumers from accessing legally acquired content. Balancing the opposing perspectives, the Committee recommended certain amendments to the Copyright Act, which are set out below. These recommendations have been among the most controversial of the Report's results.

 

Finally, the Report analyses ways to increase competition and protect consumer rights, noting that existing competition problems in copyright markets could perhaps be even worse in a case where content is only available in digital form. The report also notes the view of some observers that the balance copyright seeks to strike between the interest of rights holders and promoting the creative industries, and the public interest in accessing copyright material, has swung too far in favour of rights holders.

 

Recommendations

 

As is clear from the above summary, consumer dissatisfaction with the 'Australia tax' was found to be high, despite the justifications offered by some IT industry players. Following the inquiry, the Committee made the following ten recommendations in its report (which perhaps indicate that the Committee, overall, was more persuaded by the consumers' arguments):

1. that the ABS develop a comprehensive program to monitor and report expenditure on IT products, hardware and software, both domestically and overseas, as well as the size and volume of the online retail market;
2. that, considering the importance of IT products to education, and in the interests of greater transparency in this area, the Australian Government, in consultation with Universities Australia and CAUDIT, conduct a comprehensive study of the future IT needs of and costs faced by Australian universities in order to provide clearer financial parameters for negotiations;
3. that the Australian Government consider a whole-of-government accessible IT procurement policy, to be developed by relevant agencies including AGIMO, and in consultation with relevant stakeholder groups including ACCAN;
4. that the parallel importation restrictions still found in the Copyright Act 1968 (Cth) (Copyright Act ) be lifted, and that the parallel importation defence in the Trade Marks Act 1995 (Cth) be reviewed and broadened to ensure it is effective in allowing the importation of genuine goods;
5. that the Australian Government amend the anti-circumvention provisions found in section 10(1) of the Copyright Act to clarify and secure consumers' rights to circumvent technological protection measures that control geographic market segmentation;
6. that the Australian Government investigate options to educate Australian consumers and businesses as to the extent to which they may circumvent geoblocking mechanisms in order to access cheaper legitimate goods; the tools and techniques they may use to do so; and the way in which their rights under the Australian Consumer Law may be affected should they choose to do so;
7. that the Australian Government, in conjunction with the relevant agencies, consider the creation of a 'right of resale' in relation to digitally distributed content, and clarification of 'fair use' rights for consumers, businesses, and educational institutions, including restrictions on vendors' ability to 'lock' digital content into a particular ecosystem;
8. that section 51(3) of the Competition and Consumer Act 2010 (Cth) (CC Act) be repealed;
9. that the Australian Government consider enacting a ban on geoblocking as an option of last resort, should persistent market failure exist in spite of the changes to the CC Act and the Copyright Act recommended in the Committee's report; and
10. that the Australian Government investigate the feasibility of amending the CC Act so that contracts or terms of service which seek to enforce geoblocking are considered void.

Response to recommendations

 

Unsurprisingly, some of the Committee's recommendations have been met with controversy, foremost among them the recommendations in relation to amending the Copyright Act. In particular, the recommended introduction of a right of resale for digital content has been criticised by industry figures on the basis that resellers can sell a product that is for practical purposes brand-new, for second-hand prices, and illegally make and resell multiple copies of a digital product that was purchased once.

 

It will indeed be interesting to see which, if any, of the Committee's recommendations are adopted (particularly by the new Federal Government) and what effect this may have on IT pricing for Australian consumers and businesses.