The next stop in the IT price inquisition

Labour’s political meltdown may have dominated the news agenda but there were equally compelling, albeit less melodramatic, scenes played out in Canberra last Friday as Apple, Microsoft and Adobe finally testified to the IT price inquiry committee.

After almost a year of prevarication, this was the day of reckoning for the three biggest offenders as they faced the music for their price gouging. But did the big three attempt to repent for their sins, or did they once again manage to evade the real issues?

Overall, the event didn’t disappoint. It was highly entertaining to watch the tech giants squirm under scrutiny and their suffering didn’t go unnoticed. The price inquiry hashtag (#FairIT4Oz) trended for most of the day on Twitter.

However, ardent IT price inquiry followers may feel disappointed by the responses as there was no ‘silver bullet’ on offer to justify why consumers continue to be ripped off. There was ample spin on display and at times it seemed the parliamentary committee knew more about the company’s products than their representatives. That is, with one exception, Nationals member Paul Neville who at one point seemed convinced that Adobe sells digital music. Neville’s confusion aside, there was much to be gleaned from each company’s testimony, particularly when it comes to predicting what the inquiry's next move will be.

Apple’s perplexing costings argument

The vice president of Apple’s Australia division, Tony King, really had the easiest job in defending his company from the wrath of the MPs.

With most of Apple’s product line priced similarly around the globe, King only had to justify the company’s iTunes pricing model, the very model which is been consistently touted by consumer watchdog group CHOICE as the pinnacle of unfair region-based pricing.

“Just last week, AC/DC finally hit iTunes with a 54 per cent difference, that’s $80 difference, between the local and US prices for the ‘complete collection’,” CHOICE head of campaigns, Matt Leavy said in an earlier statement.

“Unfortunately for those about to rock, this is far from an isolated example, and it is one reason why some music fans have taken to setting up US iTunes accounts to access legitimate, cheaper music.”

King’s response to this claim was simple: if you want to see cheaper music on the iTunes store, blame the record labels not the distributor.

“We would love to see lower prices for content on the Australian store, but we’d urge the community to talk to the folk who own the content to lower the price,” King said.

But before we applaud Apple’s sentiment, consider this: Apple makes a rather hefty profit from its iTunes business.

Asymco analyst Horace Dediu recently pointed out that of the $US4.3 billion Apple made off music sales in fiscal year 2012, $US3.4 billion was paid to record labels. The rest goes in Apple’s pocket and the figures would suggest that the company makes a healthy 20 per cent profit from iTunes sales.

It’s a common fact that Apple operates on a basis whereby it keeps the profit margin of all of its products at around 20 per cent. So if it’s not setting the prices, then how is it hitting such a nice rounded figure with its iTunes profits?

Adobe’s smokescreen continues

Adobe Australia's MD Paul Robertson had a much tougher time justifying his company’s pricing policy to the inquiry. Over the past year, Adobe has been the poster child for price gouging as it continues to charge Australians almost double of what it charges its US consumers for most of its products.

For instance, Adobe charges Australian consumers $1137 for access to its CS6 photo editing software. In the US it costs $US749. And as its products get more expensive, the discrepancy gets even worse. With that in mind, many were keen to hear what Robertson had to say.

What they got was a train wreck; a testimony replete with unusual contradictions and marketing double-speak.

Robertson said that one of the reasons why Australian consumers pay more for Adobe’s software was for the localisation of its website and its products. But then later went on to say that aside from warranty obligations, the company has no qualms with consumers flying to the US, buying an Adobe product, and bringing it back to Australia.

It wasn’t until the end of the session that we finally got a relevant answer out of Robertson in relation to the company’s pricing strategy. He said that as long as Adobe sells retail versions of its product, the downloadable equivalent will always match the price of the physical product.

As for why its cloud-based subscription product is cheaper and more universally priced than both the boxed and stand-alone digital product, Robertson said:

“The cloud doesn't require the media to be created, the box to be built from cardboard, to be wrapped in plastic, to be put on a pallet, to be put on some form of transportation, to be shipped to the country, to be shipped out to retail partners that employ bricks and mortars and staff and training to sell it onto end customers”

The whole pricing structure is confusing to say the least. And it all seems formulated to tempt consumers onto Adobe’s cloud product which locks consumers into paying an ongoing month fee. And with 76 per cent of the company’s Australian customers already on the “creative cloud” service, Adobe’s strategy appears to be working.

Microsoft to customers: go try one of our lesser known rivals

With Microsoft’s domination in the software space well documented, the managing director of its Australian division, Pip Marlow, joined the fray with the view that if the company was truly overcharging its consumers, they should vote with their wallets.

Marlow pointed to a number freeware and open-source software hitting the market, saying that “small businesses in this country have a choice”.

She added that in her 17 years at Microsoft, this was the most competitive time in the company’s history.

It’s hard to believe that Microsoft is threatened by freeware, given its branding and credibility in both the consumer and enterprise IT markets. And it seems the competition hasn’t seen it lower its prices. Not even its partners are spared from company’s gouging.

One Microsoft’s channel partners (a company that retails Microsoft software to other companies for the tech giant) anonymously wrote into the inquiry saying that it pays 50 per cent more than one of its US counterpart for the ability to sell the company’s software in Australia. The partner added that it has to pass on this cost to its enterprise customers. And those customers will more than likely pass that cost onto consumers.

Never was there a more perfect example of MP Ed Husic’s point that IT price gouging is having a flow on effect through the Australian economy.

However, if you take Marlow’s word for it, there’s hope on the horizon. She says that that rise of cloud-based distribution models will force Microsoft to reconsider its pricing strategies.

What happens now?

As the inquisition pauses for breath, it would seem that the MPs chairing the inquiry have been left holding more questions than answers. The overall aim of their investigation is to determine whether direct policy intervention is necessary to drag down Australia’s IT product prices, and the next major step of the inquiry will contemplate this idea. For now, they have a few extra ideas but no concrete solutions.

One thing the inquiry panel will pay attention to is cloud computing, which could provide a solution of sorts. Adobe and Microsoft have both flagged that the cloud could see them reduce their Australian prices but is this promise enough to convince the panel to leave things the way they are? It’s a serious consideration and one that could yet allow the likes of Apple, Adobe and Microsoft to get away with murder.