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Standing Committee on Infrastructure and Communications
Information technology pricing
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Standing Committee on Infrastructure and Communications
CHAIR (Mr Champion)
Husic, Ed, MP
Jones, Stephen, MP
Symon, Mike, MP
Neville, Paul, MP
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Content WindowStanding Committee on Infrastructure and Communications - 22/03/2013 - Information technology pricing
KING, Mr Anthony, Vice President, Apple Pty Ltd
Committee met at 09:29
CHAIR ( Mr Champion ): I declare open this public hearing of the House of Representatives Standing Committee on Infrastructure and Communications. The committee commenced an inquiry into IT pricing in Australia on 24 May 2012. Since that time 122 submissions, including seven supplementary submissions, have been received and the committee has heard from many interested parties both in public and in private. The committee welcomes the attendance of representatives of Apple, Adobe and Microsoft here today and welcomes anybody who is watching or listening to the broadcast. Before asking the witnesses to introduce themselves I remind members of the media who may be present or listening on the web of the need to fairly and accurately report the proceedings of the committee.
Welcome. Although the committee does not require you to give evidence under oath, I should advise you that this hearing is a legal proceeding of the parliament and therefore has the same standing as proceedings of the House. We have received a written submission to this inquiry from you—submission 62—and it was accepted as a confidential submission and later, with Apple's permission, made public. Do you wish to present any additional submissions or make an opening statement?
Mr King : Yes, I do.
Mr King : Thank you. Good morning chair and members of the committee. I am here today to respond to the committee's request to address stated concerns regarding Apple's hardware and software pricing and to help the committee better understand why there may be differences in the prices of Apple products sold in Australia when compared with other markets, including the United States.
Apple is proud to do business in Australia. Our goal is to provide our customers with the world's best products and services coupled with an unrivalled user experience. We sold our first computer here over 30 years ago and today have an enthusiastic community of customers and software developers across the country. We operate 18 Apple retail stores nationwide and, combined with our corporate office in Sydney, employ over 2,600 people. Apple's main corporate activities in Australia include the sale and distribution of our products through our channel partners located in over 6,000 sites across the country, our Apple retail stores, the Apple online store and the iTunes store. In addition there are over 160,000 app developers in Australia who are enjoying success around the world by selling their applications on the App Store. Many of these are individuals and small companies now competing head-to-head with the biggest names in the global software industry. We are delighted to have played a role in creating this new app economy.
The first point I would like to address today is the pricing of Apple products in Australia. When we launch and price an Apple product for sale, our goal is to offer equivalent pricing around the world. Setting aside the daily ups and downs of currency exchange rates, our Apple product prices here in Australia are not materially different from the Apple products sold in the United States. In fact, today the price for the new iPad with retina display and the iPad Mini are within one to five per cent of the prices in the US. The same is true of Apple's own software titles offered on the Mac App Store, including Final Cut Pro, Logic, iPhoto, iMovie and GarageBand. These products are all priced in Australia within one to three per cent of the prices in the United States.
When comparing prices it is important to remember that the US retail prices do not include sales tax. Here in Australia, of course, a price includes a 10 per cent GST. That fact alone is responsible for a great deal of confusion and has resulted in some inaccurate conclusions regarding our pricing. When pricing Apple products for the Apple online store and at Apple retail stores in Australia, price considerations must go well beyond simply looking up a currency exchange rate. For example, Apple must consider differences between countries in product costs, freight charges, local sales taxes, levies, import duties, channel economics, competition and local laws regarding advertised prices. This detailed financial analysis results in product pricing that may be either slightly lower or slightly higher than US pricing for the same product. As you can imagine, it would be unduly complex to administer and confusing to our customers to attempt to adjust every product price with the daily fluctuations in the currency exchange rates. Therefore, Apple re-evaluates and adjusts local prices to be in line with the US prices, among others, at the time of new product introductions.
However, primarily because of currency fluctuations on any given day, Apple product pricing may appear higher or lower when compared to prices in the US market. For example, based on exchange rates from last week, all of Apple's bestselling MacBooks and iMacs in Australia were priced within two to seven per cent of US prices. A few days prior, some of the products were equally priced to the US, including the iPad with retina display. Looking at our entire range of Mac, iPhone, iPad and iPod products, the average differential to the US pricing last week was just five per cent. The average differential for our Apple software product range was minus one per cent. This, of course, takes into consideration GST. None of this is to suggest that all of Apple's product offerings are exactly equal in price in Australia as in the United States. It is just that at any given time some Apple products may appear to be priced slightly cheaper or more expensive than comparable US retail prices.
I would also like to clear up some common misconceptions with regard to digital content pricing. As we have explained in person to the committee as well as in our written submission dated 6 July 2012, the retail pricing model for music, movies and TV shows made available on the iTunes store is different from the pricing model for Apple branded products. The iTunes store is a digital media store. Apple must pay the rights holders of the digital content—the record labels, movie studios and TV networks—to distribute content in each of the territories in which the iTunes store exists. The pricing of this digital content is based on the wholesale prices which are set through negotiated contracts with the record labels, movie studios and TV networks. In Australia they have often set a higher wholesale price than the price of similar content in the United States. Nevertheless, our own market analysis suggests that the price of digital content sold on the iTunes store in Australia is comparable to other Australian physical and other online stores. This would indicate that the rights holders are offering competitors similar wholesale pricing. The retail price on the iTunes store is based on the wholesale price and includes in part Australia's own statutory royalty payments, publishing fees and the GST. In both Australia and the US Apple earns a margin from the sale of movies, music and TV shows which is used to pay for the costs incurred to store, manage and serve all of the iTunes store offerings. To be clear: the iTunes store operates through the local Apple entity in Australia. As I have explained, the retail pricing of digital content is based on many factors and foreign exchange rates are not a major factor. The main differential is the wholesale price as set by the rights holder of the digital content. Our experience is that, if we can lower prices, we can drive a higher number of downloads.
I am here today to represent Apple in an effort to assist the committee in better understanding why there may be differences in the prices of products sold in Australia when compared with other markets. I would like to reaffirm Apple's strong commitment to provide our Australian customers with the world's best products coupled with an unrivalled user experience at a fair market price. I will be happy to answer any questions you may have.
CHAIR: Thank you, Mr King, and I am sure your evidence will be of great interest to the committee and to all those who have been following proceedings. Before we get to more detailed questions, one of the things I would like to ask is: notwithstanding the evidence you have given about the wholesale price and the charges that are perhaps, in effect, out of your control, in the era of the global consumer what ethical and economic justification is there for segregating markets and segregating consumers through technological innovation or technological mechanisms?
Mr King : Perhaps to talk through that, I will use a song as an example
CHAIR: Indeed, I think we have some examples ourselves.
Mr King : A song is an asset. It is a piece of intellectual property. The rights associated with that song may vary from territory to territory or market to market around the world. In this digital age, the content industry still perhaps runs with old-fashioned notions of country borders, territories or markets. When that song is licensed by iTunes for distribution, a condition that we must honour is to match that song to the territory where the rights are applicable. The consequence of that is that we need to set up iTunes stores in many markets around the world to match the content with the applicable territory for that song, movie or whatever the digital content item may be. That is the nature of the industry in which iTunes exists.
To better understand this matter, we urge the committee to discuss this with the folks who own the content. That would be the record labels, the movie studios or perhaps the TV networks, because they are the parties who control the rights and understand where those rights are available. They are in the best position to be able to respond to your question.
Mr HUSIC: On that issue, we have had previous evidence—you made reference here about royalties, for example. APRA appeared before the inquiry in July last year at our first hearing basically pointing out that about nine to 10 per cent of the cost is attributable to royalties and that GST and sales taxes roughly even out on both sides of the Pacific. We heard that this was effectively a battle between the DSPs and the record labels. Your evidence suggests that there is a degree of fluidity in the market and that you have to negotiate. But you have set price points in your music depending on—this is how it appears to me and you can correct me if I am wrong—whether it is a hit that is in the charts at the moment or something that is older.
I think that one of the things that is hard for people to understand is that if an Australian purchases an Australian artist's track from the iTunes store in Australia they will be charged more compared to a US consumer buying that same Australian band's track in the US. You have these various price points. It is not necessarily fluid, and there are differences that cannot be explained. How is that the case?
Mr King : I will add some colour to this. I will break your questions down into a few components and we can drill into that. I will start with the components that go into the price of a song. The first building block within a song price is the wholesale price from the label to the retailer—I will come back to that. The second component is the publishing fees, which you have just mentioned, that are payable to industry associations. The third component for any retailer, including iTunes, is a cost recovery model to, in our case, cover the costs of running the iTunes store.
Mr HUSIC: Yes—marketing
Mr King : The fourth component is a tax. In the Australian example it is GST.
I will now drill-down into each of those. The first and most important building block is the wholesale price. That price is set by the owner of the content and is passed through to the retailer whether it is Apple, JB Hi-Fi or Sanity. As we look at the prices for music and movies across the Australian market and benchmark iTunes pricing to other retailers of music or digital content, the prices available in the Australian market are broadly similar, which suggests to us that the wholesale prices from the content owners to Apple are similar to the wholesale prices from the content owners to the other retailers. That is the lion's share of the cost equation for a song.
The next item is publishing fees. The nine to 10 per cent range that you cite is the number I recognise. We think those publishing fees are broadly similar in the Australian and the US markets. The costs incurred to run the iTunes store in Australia are broadly the same as running the iTunes store in the United States. There is no tax on that song in the US iTunes store, but there is a 10 per cent GST in Australia.
When you boil it all down, where may a price differential arise? It is in the difference in the wholesale price to the retailer. The other costs are either variable in nature, such as the GST, or comparable in nature like the publishing fees or the iTunes store management costs. Again, we urge the committee to talk to the rights holders to understand why there may be differential pricing to the extent that exists for one piece of content in Australia compared to the same piece of content in the United States or indeed any market around the world. That is a matter that is controlled by the rights holders. I do not have insight as to how they run their businesses or the unique costs that they may incur in running a business in Australia that are not the same as in the United States.
Mr HUSIC: We have two different groups of people who point the other way when it comes to responsibility for the price. You have indicated that the record labels need to be held to account. I am paraphrasing that, but you are saying to direct the questions to the record labels. The record labels say that they negotiate with Apple, Microsoft and other platforms that provide the music. Ultimately, from what we understand, 60 per cent of the cost is really driven by the digital provider—you in this instance. We have had evidence put to us that that is the case. If you are saying that there are roughly equivalent cost structures on both sides of the Pacific, why will you not open up the US iTunes site to an Australian user so that they are able to effectively use the internet to get better prices and make globalisation work in their favour?
Mr King : First, we would love to see lower content prices available for Australian consumers. We would love to see lower content prices be it for songs, movies or TV shows. That would drive a wonderful use of our products within the Australian market. I want to make it absolutely clear that it is in our best interests to see that take place.
Regarding the point of allowing an Australian consumer into the iTunes store in another market place, that goes to the rights tagged to an individual piece of intellectual property—the song or the movie. When that asset is licenced to iTunes for distribution, a condition of that negotiated agreement with the rights holder is that we make it available only for specified markets. Many rights are still, today in this digital age, on a territory by territory or a market by market basis. There are very few rights that are truly global. That creates confusion for customers and it is certainly something that we would suggest that you talk specifically to the labels or the studios about, rather than an industry association that sits in between those groups and the community. It is the folks who actually own the content that know this topic the best. There may be reasons for that wholesale price to be higher here than in another market. I am not aware of those reasons, and that is why I think it is best to direct this question to the folks who own the rights.
Mr HUSIC: So just coming back to that question: are you saying that the reason that Australian consumers cannot access the US iTunes store is copyright?
Mr King : Correct.
Mr HUSIC: Would you support, for example, harmonisation of those rights through trade agreements?
Mr King : That is really a question for the rights holders. We are a retailer of the music and so the conditions that we have to respect are the current intellectual property conditions that are between the rights holder and ourselves. Speculating on what may or may not exist in the future is not something that I am qualified to do.
Mr STEPHEN JONES: I will follow up with a similar line of questioning as Mr Husic, if I may. When I talk to farmers in my electorate—and there are a few—they complain about the relationship they have with their biggest client, which is generally Woolworths. They say: 'We've got no power in this negotiation. If you want to sell vegetables in Australia you've got to sell them to Woolworths. We can get a bit down at the local farmers' market, but, basically, if you're not selling to Woolworths you're not in the game.' I would be surprised if music wholesalers are not in a similar position when it comes to Apple. If you are not selling to Apple, if you have not got your product on iTunes, you are not in the game in the modern music market. You are not a minnow in the market, are you?
Mr King : I would suggest that we are probably not a minnow. The digital music industry is still a very nascent industry; it is still evolving. iTunes is not even 10 years old. The uptake of digital music in the past 10 years has been tremendous, and we are always pushing ourselves harder to think about what customers would enjoy more around digital content. To answer your question: we are not a minnow, but there is a very competitive landscape for music in Australia. Customers have lots of choices as to the way they may wish to buy their music. There are download services such as iTunes, there are streaming services—
Mr STEPHEN JONES: I get all of that, Mr King, but if you are an artist wanting to get yourself into the national or international market, you want your stuff on iTunes, don't you?
Mr King : We would hope so.
Mr STEPHEN JONES: I would suggest that that stands for itself. I just want to interrogate this issue that you are pretty much a price taker when it comes to the prices that you pay for access to digital rights in Australia. That just does not seem to pass the common-sense test. You are the biggest players in the market, surely you have some influence over the wholesale prices that you are paying for your video and music content in Australia.
Mr King : The content is not owned by Apple.
Mr STEPHEN JONES: I understand that fully, but you pay a price for it. I imagine every artist in Australia would want to get their gear on your site. The point I am making is that if you think that the landscape is not fair, or is not right from a consumer perspective, you have a bit of power in that, haven't you?
Mr King : We are a large retailer. We would never—
Mr STEPHEN JONES: But you are also a large purchaser, a very larger purchaser, and that is the point I am making.
Mr King : We do not purchase the music; we licence it for distribution. I go back to saying that the content is owned by someone else—that is, a digital rights holder that may be a label or a movie network. If you compare what is going on here to the way our pricing model works for the products that we own, we have a very narrow differential with the Apple-branded products compared to the United States. We would love to see lower prices on content in the Australian market—we are very serious in making that observation—and the difference in a price will stem from the difference in a wholesale price from the owner of the rights.
Mr STEPHEN JONES: Yes, I understand that. But I go back to the point that I made in the Woolworths versus the farmer analogy.
Mr King : Mr Jones, we are not Woolworths.
Mr STEPHEN JONES: It is an analogy, Mr King, and I think you understand the analogy that I am making. I will go to a second line of questioning. The genius behind the Apple digital distribution model for your apps and your Apple-branded apps is that it is too cheap to cheat. At somewhere between 99c and $1.99 for your standard app, why would you bother cheating? That is within the price range of anyone. When customers are looking at these large price differences between what they would pay in Australia and what they would pay in the US for video and music content, doesn't that break down the genius of the philosophy that lies around apps? Isn't it almost an invitation to cheat?
Mr King : Clearly the greatest demon that the content industry has faced for 15 to 20 years has been piracy. When we brought the iTunes store to the market almost 10 years ago, our business model was to strike this balance between a fair return for the content owner, or indeed the artist, and a price that consumers felt good about. We do acknowledge that there are some differentials in content pricing on the Australian iTunes store compared to the US store. We would point to where the source of that differential arises—that is, in the wholesale price. We would love to see lower prices for content on the Australian store, but we would urge the committee to talk to those folks who own the content, because there may be reasons why that content is priced the way it is in Australia. Again, I am not aware of those reasons.
To use your milk farmer analogy, there will be costs for the milk farmer when doing business that they are careful to take into consideration. Unilateral observations on pricing models will run parties into difficulty in drawing conclusions. My strong suggestion is that all of the elements of the food chain, so to speak, are brought in for discussions in this area. The Australian music industry is an incredibly vibrant music industry, and we have just recently seen some wonderful recording artists do incredibly well overseas. They are wonderful, humble folks who have done a brilliant job celebrating their craft on the world stage. I would hate to see moves taking place in the content industry in Australia that stopped that next recording artist coming through.
Mr STEPHEN JONES: I could not agree more, Mr King, which is why this second line of questioning I am pursuing with you is about the sustainability of an industry structure. I will ask you straight up: do you think this geovariance in pricing is sustainable over the long term? Is it something that you have built into your medium-term business model? Because it strikes me that, when one in three Australians is jumping on a plane every year and having their holidays in new regions, they can bank up their purchasing choices for that holiday—and it is not just Hawaiian shirts and thongs that they are going to be bringing home, it will be a lot of their entertainment as well. Does Apple believe that this is a medium-term, sustainable business model?
Mr King : I will point you to the pricing model that we use with the products that we own. They are our hardware and our software. Our software products are priced today essentially at parity with the same products in the United States.
Mr STEPHEN JONES: You have made that point well, I think.
Mr King : Frankly, we would love to see lower content prices around the music and movie areas, but it is difficult for me to walk into this room and talk on behalf of the labels because I am not the labels. But there is a balance—I completely agree with you that a balance needs to be struck.
Mr STEPHEN JONES: Thank you, Mr King.
CHAIR: Just following Mr Jones's analogy, it might not be a farmer dealing with Woolworths so much as two big parts of a market. We are talking about artists, but we are more often talking about big record labels which have similar corporate arrangements to Apple with an Australian subsidiary of an international company. Recently we have seen the governments of New Zealand and Australia say to the telecommunications industry, 'If you don't lower global roaming prices, the governments will take steps to make for more competitive markets.' I wonder what your thoughts would be if the government said to industry, 'Look you have got address this issue; you should address this issue.' Do you have any thoughts about that?
Mr King : Are we sticking to digital content?
CHAIR: Yes, Mr Jones said that you have made the point well about that on other matters.
Mr King : Bringing the folks who own and control that content to the table to talk to why there may be differences in pricing is critical, because there may indeed be reasons why a song or a movie or whatever the asset may be may be priced here at a different price to New Zealand or the US or the UK. It is really a question for other folks.
CHAIR: Should Apple be at the table while the content providers are at the table? Should you all be at that table? I guess that is the question I am asking.
Mr King : I am here today, certainly, to answer all the questions. Everyone should get their day in the sun, so to speak. If there are follow-on questions for us that come out of that session, then I would be delighted to respond.
CHAIR: Ably answered, Mr King.
Mr SYMON: Although you are here for your day in the sun, it has actually taken the committee quite some time to get you here. I was wondering why the reluctance of Apple, and indeed others today, to appear at a public hearing. What normally happens with public hearings on the many committees that we all serve on is that people or companies are invited to appear to put their case, and we have struggled to get you to this table and have your day in the sun. I would like to try to understand some of the reasoning behind that.
Mr King : It is indeed rare that Apple makes a public appearance, particularly to talk about public policy matters. However, back in July we provided a submission to the committee. That was a confidential submission, and we later agreed to make that public. We also attended a private meeting with the committee to answer questions, and I think that was a fairly constructive meeting. Today I am here to answer any other questions that the committee may have.
Mr SYMON: I shall have some of those 'other questions'. I would like to go back to what we were talking about with the other members with regard to music. You have described yourself as a retailer of music. My problem here is the issue of parallel importation. A music retailer who sells music physically recorded in Australia has for many years been able to import that product from elsewhere. There was a time when it had to be produced in Australia. That changed. We now seem to have got back to where we used to be, except it is in the digital sphere rather than someone having to go down a local record shop and buy an LP. Why, in your view, is it the case that digital is treated differently, in minds of the rights holders, to the physical product?
Mr King : I do not know the answer to that question. This is a great question to ask the folks who own the content. We are a retailer of content in the same way that JB Hi-Fi or Sanity would sell content. We are the same retailer as a bricks-and-mortar retailer. I would ask that you address that question to the people who understand the content story far better than I do, and they would, I am sure, be able to give you a good answer to your question.
Mr SYMON: Okay. Switching over to hardware products, I have noted in your submission that prices for hardware are now as good as or similar between us and the US. I know that was not always the case, and the question I want to ask in that area is: is that because that was the price that it was thought the market could bear, or was that, as you were talking before, about the need for a higher margin in Australia because of added on-costs? In other words, what are your company's costs in Australia that cause, or have caused in the past, that price to be higher than in the US?
Mr King : I will just draw you to the last paragraph on the second page of my opening statement where I have listed for the committee the costs that we take into consideration with all of the Apple owned hardware and software products. I will start with the exchange rate, and I might come back to that in a moment. The other key areas will be freight, any duties that may or may not be applicable on a product, the economics of running channel or partner organisations, right through to advertised prices. For example, advertised prices in Australia, as we know, must include a GST. We do, and have, for as long as I can remember run an overall model where we offer equivalent pricing on our products around the world. We establish that equivalent price at the time we introduce a product to a market. In the last 12 months we would have updated, launched new products, perhaps 100 times across all the individual skews and products items that we have for sale in Australia. We are doing that times all of the different countries that we operate in around the world. That is an incredibly complex pricing model to run, so we do need to bring simplicity to that model as we are managing dozens and dozens of countries around the world times many, many different products and product prices.
Simply put, we offer an equivalent pricing model rather than the model you are suggesting about what a market may bear. We start with a US denominated price. We do take into consideration some costs of doing business in a market. That may be in the area of freight. The per unit freight charge of an iMac, for example, is more expensive to bring into the Australian market than it is to other markets. Again, as we distribute that product around this vast country, it is more expensive to air or truck those products around the country compared to a market like Singapore, for example. They are the things that we take into consideration. It is a cost model rather than this other model that you were referring to.
Mr SYMON: Following on with hardware, we have spoken about music and therefore, I suppose, software having regional coding or regional rights. Do you have any hardware products that only work in particular regions? Are they geo-blocked so that they cannot be taken from one country to another?
Mr King : We will have slight permutations in hardware that need to be compliant with regulations in certain markets. There could be cellular requirements that differ on a market-by-market basis. Broadly speaking, our products of the same around the world.
Mr NEVILLE: Mr King, you make some reference in your submission to GST as if that were some defining matter in Australia and that there is no sales tax in the United States. I presume you are talking at the federal level?
Mr King : I am purely talking about the way in which prices are advertised. In Australia, of course, we have to include GST in the advertised price. It is not the same in America. It will be included in the final bill but, if you go to a website in America, the sales tax will not be sitting there within the advertised price. The price references that we have put forward today exclude taxes in Australia and in the US.
Mr NEVILLE: That is not quite what you have said. You have said:
It is important to remember that US retail prices do not include sales tax.
You did not say 'advertising them does not include sales tax'; you make the statement that they do not include sales tax.
Mr King : I will make the correction. That should include 'advertised'. But in the—
Mr NEVILLE: Is it not also true in the United States that a number of states have sales taxes or VATs?
Mr King : My understanding is that in America there are both state taxes and city taxes in some areas.
Mr NEVILLE: And you pay those in the normal course of events?
Mr King : Yes.
Mr NEVILLE: And is it not true that there is a higher level of VAT type tax in the United Kingdom and in New Zealand?
Mr King : That is my understanding as well.
Mr NEVILLE: Doesn't it strike you as strange then that Australian prices seem to be so much out of whack with US, Canada, UK and even, in some instances, New Zealand?
Mr King : Apple branded products are not out of whack with the US or these other markets. The numbers I have put forward to the committee today are on a basis that does not include tax. It is a like-for-like basis, so we do not have to factor in a GST or a VAT that may exist in other markets. That is the way I presented the information today to be as clear as possible. However, some jurisdictions around the world, in terms of advertised prices, choose to have laws in place that include or do not include their local indirect taxes.
Mr NEVILLE: I have a scale here of various products of popular music items: Carly Rae Jepsen, we pay 67 per cent more for a single in Australia; Florence and the Machine, 49 per cent; Led Zeppelin IV, 85 per cent. Are you saying, and it is certainly the drift in your evidence, that those disparities are imposed on you by the wholesale price of the owners or the distributors of that product?
Mr King : Yes, I am.
Mr NEVILLE: Can we then take it that those prices are a direct correlation with how much more you are paying at the wholesale level? Or are they just that you are going to pay a bit more in Australia? If we took the Led Zeppelin item, for example, could we say that you would be paying 85 per cent more in Australia than you would be paying in the States? Is there a direct correlation between what Australians are buying and the wholesale price you are being charged?
Mr King : Yes is the answer to your question.
Mr NEVILLE: In percentage terms?
Mr King : So if you were to lower the wholesale price of the Led Zeppelin album or song to be the same as the United States, we would see that come all the way through the pricing model to provide a parity situation.
Mr NEVILLE: At a direct correlation level?
Mr King : Correct. The area that I am not an expert in that may come into play here would be whether there are variances in publishing fees for that song in the United States versus Australia, so that is a good question for those folks. Obviously we have talked about the taxation point—that needs to be taken into consideration—and then the Apple costs would be similar in the two scenarios.
Mr NEVILLE: Could you describe, for the purposes of the committee and the gallery, what type of product the Apple Time Capsule, the ITB?
Mr King : The Time Capsule is a backup product to store your information.
Mr NEVILLE: And is that one of your in-house products, as distinct from a product that you resell?
Mr King : Correct. It is a product that Apple owns.
Mr NEVILLE: Well why do you charge 29 per cent more for that in Australia? If it is not being imposed on you by a wholesaler, why would you charge 29 per cent more in Australia than you would elsewhere?
Mr King : As I went through in my opening submission, I took the committee through how we establish a price, and we do hold that price until the time that we transition the product. So we will—
Mr NEVILLE: Yes, but as a cushion against transitional costs, 30 per cent is pretty hefty, isn't it?
Mr King : And we have seen, in other time periods, the reverse scenario, where we have prices in Australia be 20 or 30 per cent lower than prices in other markets around the world when the Australian dollar has fallen.
Mr NEVILLE: And how often do you adjust these? The Australian dollar has been around parity or higher than the American dollar for some time now. Have you sought to adjust that in any way?
Mr King : Our global model is to adjust our prices at the time that we transition or update the product. That applies to all of our Apple branded hardware and software.
Mr NEVILLE: That will do for the time being, Chair.
CHAIR: Thank you, Mr Neville. I guess 'the song remains the same', as Led Zeppelin said.
Mr HUSIC: I was going to come back to a point you made earlier. Apple compared itself to JB Hi-Fi, but, with respect—if I can just play a role I am very comfortable with of a contrarian—JB Hi-Fi is not the largest company on the planet in terms of market capitalisation. Apple is. What is suggested here today, Mr King, is that Apple does not have the power to influence prices, that this is set by the record labels. But it is a fact that there are three price points that are set in place and that Apple does have enormous market power to be able to influence it. It may be lack of comprehension on my part, but I do not think anybody is really any wiser as to why it costs more for an Australian consumer to purchase an Australian artist than it does for a US consumer buying the same artist or track and yet Apple is saying that it cannot influence that.
Mr King : We have seen the price of digital content slowly reduce in Australia. We have seen that. We would love to see those prices continue to come down. I have made this statement several times: we would love to see lower prices for digital content—and that is not just music; it would include TV shows and movies. But the cards, so to speak, are in the hands of the folks who own the content. They are not in our hands to play. And so we would urge the committee to talk to the content owners, to understand why there may be differential pricing, because it is not a matter for us to control. We do not own the products, other folks own these products.
Mr HUSIC: People have been listening to your responses and they have raised, via Twitter, this issue: they have compared Justin Timberlake's latest album that has been released—they are comparing the prices per track between Apple and BigPond, where you are charging $2.19 a track versus BigPond's $2.05. I know it is not a massive differential, but it does come back to the point about why is there that difference? You are saying it is wholesale, but you have people competing against each other that are charging differently.
Mr King : We operate in a competitive retail environment, absolutely. I do not have an insight as to how BigPond runs its music business. I am sure that, if I went through and did an analysis of the pricing of individual songs and albums between Bigpond and iTunes, there would be puts and takes throughout the entire analysis. So I leave that to a question that you perhaps could ask the folks at Bigpond. I do not have an insight into their pricing model.
Mr HUSIC: I go to the issue of copyright. Particularly for the US, which is a massive innovator, you will want to protect your content, and copyright is there to do it. Understood. But through the years we have seen, including in legal decisions that have been carried out this week, that you cannot use copyright as a mechanism to protect your economics. That is, you cannot regionally price or put in, in effect, regional mechanisms that prevent consumers from using your product. Yet Apple still region codes. For instance, I have purchased a MacBook Pro from the United States a few years ago because, with respect, while I agree that the prices have moved to parity they were not a few years ago. If I go to use a US DVD in a MacBook Pro, I am only given a few opportunities to use a US one before I am told I am going to have to revert to the market or region that I operate in. Under the US-Australia Free Trade Agreement we have prevented region coding and the blocking of content, so why is it that it is still maintained that way?
Mr King : We take great care to protect intellectual property, be it ours or other parties', to the extent that, if any of those items take place with any Apple product, it will be in response to the protection of intellectual property at a market level or at a global level if that is the case.
Mr HUSIC: In terms of the channel economics that you referred to earlier, do you set guidelines to people who have relationships with you in the channel for how they offer your product?
Mr King : We establish a price on the Apple online store and through our retail stores for a product, but our partners are free to set their prices as they see fit in the market. Indeed, in any given week or month we see very highly competitive offers taking place with our channel partners across Australia. We have 6,000 sites that are within our rich ecosystem, and our partners are constantly driving innovation around the way that they provide value to customers. That will manifest itself in anything from a bundle to an offer and in some cases a discount, but that pricing is purely in the court of the retailer. It is their decision.
Mr HUSIC: So you are saying definitively that Apple does not set the price with the channel; it only sets the price going in, and what comes out is up to the reseller.
Mr King : Absolutely.
Mr HUSIC: Okay. I think people who are listening to the broadcast would express a different view: when they go to buy Apple products, they see everything, from the way the product is displayed in a store at JB Hi Fi or elsewhere through to even the actual price listings themselves as standardised. More importantly—I am not interested in the font but am interested in the price—the prices between stores, differently from how you have outlined, are pretty much harmonised between stores.
Mr King : We would take great interest in the font.
Mr HUSIC: I understand that.
Mr King : We take great interest in the way our products are displayed across the market. It is something we are very passionate about. But the number that goes into that display that sits on the table is entirely in the hands of our retail partner. It is not set by Apple.
Mr HUSIC: You are saying that you track the prices of the 6,000 outlets that operate within your channel and that there are large degrees of variation within those 6,000 outlets.
Mr King : Every week we see partners doing wonderful things with the way they represent our product in the marketplace. If they choose to do something with the price of our product to the market, that is their decision and their decision alone.
Mr HUSIC: It is fair to say Apple does not manufacture its own product here. You do not contract anyone do any manufacturing here, do you?
Mr King : We do not do any manufacturing of Apple hardware in Australia.
Mr HUSIC: R&D?
Mr King : We do not do any research and development in Australia; however, we provide assistance to the enormous community of app developers who are developing apps for the app store, which has created this wonderful new market for many developers in the Australian market.
Mr HUSIC: Yes, you fund it. That has been a massive transformation. So it would be an agreement between you and your Apple US parent in terms of obtaining hardware to sell here. iPads, iPhones, MacBooks are all purchased from your overseas parent?
Mr King : Correct. Apple Australia would purchase hardware and software from Apple overseas.
Mr HUSIC: So the price is set between the two. Where would you import the product from?
Mr King : The majority of the product would come from manufacturing sites in China.
Mr HUSIC: So how are the negotiations for the purchase price determined?
Mr King : We are very clear in the way that our revenues, cost of sale and any of our local operating costs are registered to the Apple Australian entity. We have very robust and deep accounting systems in place to ensure that all of the revenues associated with doing business in Australia are fairly reported and all of the cost of sale in terms of the hardware, transformation costs and shipping costs are fairly reported—as indeed, are all of the local operating expenses in doing business in Australia. And those numbers are considerable: we employ 2,600 people around the country. We have 18 retail stores. We have operating leases. We have considerable costs incurred in the sales and distribution of our products within the Australian market.
Mr HUSIC: So you itemise all those costs in the course of the negotiation with the US arm and then determine a price from that?
Mr King : Our product costs are a function of many component and transformation items. I am not privy to all of those numbers that might come together within our global financial systems.
Mr HUSIC: What I am asking is: is it, in effect, a fluid negotiation where you work out with the US parent what the price will be, or does the US parent basically set the price and you import at, effectively, the transfer price?
Mr King : Certainly at a global level we are setting consistent product costs for internal use around the world. Those are a function of a number of different things, but I am not privy to the underlying details within the product costs.
Mr HUSIC: So there is an overall price set for those factors you mentioned before, but do you then factor in to the US parent the types of costs that you claim you have to face here, including taxation?
Mr King : In terms of the way in which we set a price for a product—I think that is where you are headed—I draw you to the last paragraph on page 2. They are the factors that we take into consideration in the way that an Australian dollar price point will be set for a piece of hardware. That will start with the product cost. It will then take into consideration—
Mr HUSIC: The product cost which is the uniform global cost?
Mr King : Correct. That will then be translated into local currency based on prevailing exchange rates. We then take into consideration whether there are any unique characteristics associated with doing business in a market. That might be freight—whether something will be moved by sea or by air; the distance we need to cover. We have great experience in this area, so we know how much a freight charge will be for a product freighted from China to the US versus Australia. Whether a levy or a duty is applicable for a particular market will be taken into consideration, and then we get down to the local costs within a marketplace as well—for example, is there anything that is unique in Australia that needs to be taken into consideration? Then we get into indirect taxes—for example, the GST.
Mr HUSIC: To be more specific in my questioning: is the global cost that you mentioned earlier the cost that you purchase at from the US or do you, through a process of discussion with your US arm, factor in those types of costs that you have mentioned and then is that the price at which you transfer product to Australia?
Mr King : The product cost may vary slightly market by market. For example, a computer coming to Australia has a slightly different plug to connect to our sockets, etcetera, compared to a product going to the United States. There may be elements like that that would vary on a product bill of material country by country, but they will be small variations. If I work with your example to say the product costs would be broadly similar. There may or may not be some puts and takes but I think it will be broadly similar across markets.
Mr HUSIC: How many iPads did you sell—iPad2 or iPad3—last financial year in Australia? I am not asking about revenue, but volume or number.
Mr King : That is not a number that we discuss in public. I would be happy to discuss that in camera.
Mr HUSIC: Okay. If, for example, you had a million iPads, what price would you purchase them for? Would it be the global price that you work out with your US parent or is it the global or harmonised price plus all the add-on costs? What is the exact point at which there is an agreement on transfer price between you and the US?
Mr King : It starts around a discussion of a unit of one. So, the volume consideration is not there. It is a unit of one consideration. We have product cost, translation to the local currency and then these other factors that may or may not be relevant in a market like import duties or GST or other factors like that.
Mr HUSIC: So the US says: 'We take into account that and we are selling you this product via a transfer price agreement at X.' Is that what happens?
Mr King : The product cost is set at a level that is broadly consistent in markets around the world in US dollars and then translated in local currency.
Mr HUSIC: Who translates it?
Mr King : We have a global team who looks after all of our product pricing around the world and they are based in the US.
Mr HUSIC: Mr King, I am not understanding this. Who makes the final decision on price? Is it the US parent or is it you?
Mr King : We set our prices worldwide from Cupertino with input from the local team for factors that may be relevant for the Australian market. We have a global equivalent pricing model that is established at a worldwide level.
Mr HUSIC: I don't think I will get an answer.
CHAIR: You can ask another question.
Mr STEPHEN JONES: Apple, as a large transnational corporation, would have some control over what costs are borne in a particular jurisdiction by a particular entity within the corporate structure. Is it the case that the costs that are booked against doing business in Australia are uniquely Australian costs?
Mr King : We have two broad levels of costs. One is the cost of sale, the cost of the hardware, the transformation or the product cost, as we have just discussed. The second line item is all the local operating costs. There will be headcount in Australia, facilities in Australia, the cost of generally doing business in the Australian market.
Mr STEPHEN JONES: The Australian entity within the Apple global does not pay any more or, presumably, any less for any of those corporate services that they receive all benefits that they receive from Apple HQ than any other entity around the country? If I were to look at, line item by line item, the charge that is described in your books for services that you receive from Cupertino and I was to then check that against what was being credited in Auckland, I would see, line item for line item, the same charge.
Mr King : Mr Jones, to the best of my knowledge, that is correct.
Mr NEVILLE: How do you operate in Australia? Do you operate an American company selling a product in Australia or do you have a wholly owned Australian subsidiary?
Mr King : We have a wholly owned Australian subsidiary, Apple Pty Ltd. I have worked for that company for 10 years.
Mr NEVILLE: Does that company report to the Australian Stock Exchange?
Mr King : We file annual accounts with ASIC but it is not listed on the Australian Stock Exchange.
Mr NEVILLE: I take your point. What proportion of your international market does Australia represent?
Mr King : We do not break the Australian numbers out in our worldwide accounts, but we do publish our Australian revenue, so you can probably back into the number. The Australian business would roughly be three per cent of Apple's worldwide business.
Mr NEVILLE: Is it more or less profitable than your other markets?
Mr King : Mr Neville, I am not familiar with the P and Ls for all of the Apple entities around the world, so I would find that difficult to comment on.
Mr STEPHEN JONES: I am sure that, when you go back to Cupertino for your annual love-ins, there is a bit of competitiveness and bon homie amongst your equivalents in other parts around the world. I would find it very hard to believe.
Mr King : Mr Jones, we enjoy wonderful competition within the company and we have great fun challenging our friends in Canada and other markets to all sorts of friendly challenges. We may talk in terms of revenue, but that is all we ever talk about in terms of benchmarking entities internally. I am a sales guy so that is what I focus on.
Mr STEPHEN JONES: I would find it very difficult to believe that you would not have a pretty good understanding of how you are performing against some of your other colleagues around the world.
Mr King : In the context of revenue, I would have a good understanding, but I am not familiar with the full P and Ls for any of our entities around the world.
Mr NEVILLE: Are any of the South Pacific countries supervised by the Australian subsidiary? Do you look after, for example, Papua New Guinea, Fiji, New Zealand? What is the extent of your territory?
Mr King : As I said in our opening statement, I look after Apple's activities here in Australia and in New Zealand and in some of the countries in South Asia.
Mr NEVILLE: How much tax do you pay in Australia each year?
Mr King : Our income tax expense numbers are not on the public record in the same way that any other company in Australia does not have their tax details on the public record, nor does any individual. I will give you some colour as to how our tax returns, so to speak, might sit.
Mr NEVILLE: Are you giving us that publicly or confidentially?
Mr King : I am happy to talk in generalities around the components of our tax return and the process that we go through with the Australian tax office every year. That process is very open, rigorous and transparent. We report to the ATO all the revenue that we derive in the Australian market. We report to the ATO all the costs of doing business in the Australian market, from product costs to all of our operating expenses. That brings us down to a net profit number. That net profit number is a number that we are very open about with the Australian tax office. They know our revenue, they know our costs and they know all of the details about the way in which we have financial affairs running in any particular year. Against that net profit, we apply the 30 per cent corporate tax rate for Australia and we pay our tax expense. We pay our taxes when they are due—not only income tax expense but GST, payroll, FBT and any other tax that might be incurred in doing business in Australia.
Mr NEVILLE: I am still bewildered as to why in the music and iTunes field Australia pays so much higher than other countries. You have said in evidence that the retail price bears a direct correlation to the wholesale price that you are being charged. As other members of the committee have said, you have enormous muscle at an international level. Have you ever challenged those companies on the wholesale price they are charging in Australia? What is your take on why they would single out Australia? If there is a direct correlation—and the other companies we are seeing today have had a similar experience—we are probably talking between only three and five per cent of the international market. Why would they single out Australia for special attention?
Mr King : I would urge you to address that question directly to the labels, but I will give it a go. We would love to see prices of the digital content being lower here. We do make that point to the labels as we meet with them on a continuous basis. We have seen a slow but steady drop in digital content pricing in Australia over the last couple of years. But your question is best directed at the guys who own the content and the music. They will be able to give you an answer to this question, I am sure.
Mr NEVILLE: Are most of the major labels represented in Australia?
Mr King : I believe so.
Mr NEVILLE: I know they all have representatives at the desk-selling level but, when we are getting into downloading and other matters, do they have a full structure on the electronics side of their business in Australia?
Mr King : To the best of my knowledge, absolutely yes. They have a local operating or representative office of some description and would have teams that could talk to both the physical and the digital sides of their businesses.
Mr HUSIC: Can I go back to something that we started talking about, Mr King, and that was about the way you set your prices. I also want to touch on something that Mr Neville, the deputy chair, covered off with you. We are all friends in here. I know you did not want to necessarily indicate the tax bill, but it was reported earlier this year as a result of information obtained through ASIC that on the basis of generating here in Australia $6 billion in revenue Apple paid only $40 million in tax. Apparently that is two-thirds of one per cent of your turnover. You do not manufacture here. You do not conduct R&D here.
I am going to put something to you, which I would welcome your response to. It is not all these other add-on figures that are set. On the issue I was referring to earlier, about where exactly is the point at which you set the prices: is it set by the US before it agrees to a transfer price on product? You set your prices based on what you believe is in the best commercial interests of the company, obviously; but taking into account taxation as well. I put it that the reason why Australian consumers pay more has more to do with your transfer price than anything else.
Mr King : I would disagree with that statement. I would start with the observation that our software is essentially priced at parity to the US market. Our hardware today is marginally above the prices for the same hardware in the US market. With respect to taxation, we pay all of our taxes in Australia—
Mr HUSIC: I am not doubting that, Mr King. I am not suggesting that Apple does not pay tax. I am saying that the way you set up your arrangements—
Mr King : And those arrangements, so to speak, are quite simple, Mr Husic. We clearly record and report the revenue that we derive in Australia. We report to the ATO all of the costs associated with doing business in Australia. The ATO is the referee, so to speak, in the middle of this. We have a very open, frank and candid dialogue every year with the ATO about our tax affairs, which includes, like any company, our revenue and our costs down to our net income. They are really the three items that are relevant for our discussions with the ATO. We track all of the revenue that we derive here. We track and report all of the costs associated with doing business, which brings us to the net profit number. We have a very good relationship with the ATO, and I am sure our tax guys absolutely love it whenever they have to spend time with the folks down the road!
Mr STEPHEN JONES: (Inaudible) not your relationship with the ATO—I am sure that is very warm and fuzzy, as is mine! Does Apple have a policy of market pricing for allocating costs between its country entities?
Mr King : I am certainly not familiar with any practice like that. I would say that we do not. We are very clear in our income statements, where we have revenue, products costs, operating expenses—and they are really the three lines. The product cost manifests itself in that physical piece of hardware that you have in front of you today. The operating expenses are clearly tagged to employees, to buildings and general costs of doing business. Our tax affairs in Australia are very straightforward—
Mr STEPHEN JONES: Can I interrupt. I don't want to stop you from answering the question exactly the way you want to answer it but, when I ask you about whether your allocation of costs between countries are done on a market basis, what I mean is: is there a transparent pass-through of costs from one part of the Apple entity to another on a market basis? You answered no. That surprised me; that seems to contradict the suggestion you were making in earlier evidence. I use that language quite deliberately. I am familiar with large manufacturers in my own electorate who, when they sell steel slab to another part within their entity, in another country, they do it on the basis of a market price—that is, one part of the business neither subsidises nor loads up the price they pay to another part of the business. That is what I mean by 'market pricing'. I am giving you the opportunity to perhaps correct, or be very clear about, the response you have given me to that answer.
Mr King : Mr Jones, if there are any specific questions around our product costs that you would like me to take on notice then I am happy to take those questions on notice.
Mr STEPHEN JONES: It was a high-level question: is there a policy within your company that says, 'We allocate costs on a market basis'?
Mr King : I am not aware of a policy along those lines.
Mr STEPHEN JONES: Thank you.
Mr HUSIC: Going back to when we were talking about the channel, I am going to ask a question that I think I know the answer to already—but it is worth a shot! What are the retail margins on a product like an iPad?
Mr King : That information is commercial-in-confidence.
Mr HUSIC: Come in spinner! Okay, let me put a statement to you for a response. People cannot haggle down a price, because Apple sets the recommended retail price higher. What is your position on that?
Mr King : My experience is that I see great competition with customers buying our products in the Australian market. For example, if a customer brings an ad into one of our retail stores, showing the price is cheaper down the road somewhere else, our Apple retail stores have a price-matching policy. But I see a great degree of competition in the Australian marketplace, and that spans across all of our products. And I have seen that for the 10 years that I have been in the job.
Mr HUSIC: Okay. Final two questions—one goes back to something Mr Neville mentioned, and that is about music. One thing that struck me is that these record labels are global. You are obviously a global company. It was suggested that we need to go back to the record labels, but these negotiations are taking place at a higher level. I come back to the point: if globalisation works—which it does, and has great benefits in opening up markets to business—it should also operate in the same way for consumers. Why is it that global record labels, a global player like Apple, cannot deal with establishing a better price on music?
Mr King : Our experience is that a lot of the decision-making within the labels is not global—hence why I am asking you to speak to these guys, to understand why there may be cost differences in their products here versus other markets around the world.
Mr HUSIC: Have you had conversations with your colleagues in Cupertino about the discontent that exists here with price discrimination and how it is affecting your relationship in the Australian market?
Mr King : We are acutely aware of customer feedback in general. We pride ourselves in excelling in the area of customer experience. So we are acutely aware of headlines that might be reported in the newspaper, or a letter we may receive from a customer who is concerned that a song price on iTunes in Australia may be more than in the US. I have a very frank and candid dialogue with my counterparts in the US to make sure that they understand this. Indeed, at a global level, within our iTunes teams, we do pass the observation to the global head office of a music label that we are hearing comments in Australia that frankly make us uncomfortable. But I do believe that a lot of the labels operate more on a territory-by-territory level rather than as one unified global entity.
Mr HUSIC: Thank you.
CHAIR: Thank you, Mr King. We welcome your evidence here today. I am sure I speak for all the committee members when I say don't be shy in the future, when you get a request to come before the committee, because your evidence has been very illuminating for our deliberations. If you have any additional information you think would assist the committee, please provide it to the secretariat. Thank you for being here today.
Mr King : Thank you, Chairman.