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Standing Committee on Infrastructure and Communications - 30/07/2012 - Information technology pricing

CARTWRIGHT, Mr Madison, Campaigns Coordinator, CHOICE

LEE, Ms Katrina, Strategic Policy Adviser, CHOICE

LEVEY, Mr Matt, Head of Campaigns, CHOICE

CHAIR: Welcome. Although the committee does not require you to give evidence under oath, I should advise you that the hearings are legal proceedings of the parliament and warrant the same respect as proceedings of the House itself. The giving of false or misleading evidence is a serious matter and may be regarded as a contempt of parliament. The committee has a lengthy submission from you, submission 75, received on 16 July 2012. Would your organisation like to make any additions or amendments to the submission?

Mr Levey : No, we would not.

CHAIR: I invite you to make a brief opening statement before we proceed to questions.

Mr Levey : Thank you to the committee for inviting CHOICE to appear. As you have just said, we did provide a submission to the inquiry. In putting that together, the main thing we did was undertake research across a range of IT hardware and software products. That research identified an approximate 50 per cent price difference between what Australian consumers and US consumers pay for more or less identical products. We looked at music downloads from iTunes, PC games, software, console games and computer hardware. Some of the starkest figures coming out of that were that, compared to US consumers, Australians pay around 52 per cent more on iTunes for the equivalent top 50 songs; we pay 88 per cent more for Nintendo Wii console games—that was a selection of the 20 most recently released games; and there was a difference of about 34 per cent across a selection of 44 popular home and business software titles. We also looked at hardware, and a selection of 12 Dell computers showed a price difference of about 41 per cent between what Australians and consumers in the US would pay. So we think these are significant price differences and we do not think they can be fully explained, let alone justified, by some of those factors that have been identified in other submissions to this inquiry. That is because we think those factors that comprise the gross margins of these goods are simply not that much higher in Australia, even cumulatively, to account for the price differences that we have identified. For example, in relation to labour costs, the Productivity Commission have identified that take-home pay in the US retail sector after the payment of commissions can in fact be higher than in Australia. In relation to retail rents, any price difference is not significant enough to explain the kind of disparities we have found and, more to the point, we have found disparities in products that have no physical shopfront—things like music and software downloads. Similar things can be said for transportation logistics and we also believe, broadly speaking, retail profit margins.

The final factor we looked at was the GST and, as you would know, that is the focus of ongoing campaigning from our retail groups who believe the current low-value threshold exemption for GST and duty should be lowered from the current level of $1,000. We found no evidence to suggest that the GST could explain the price differences that we found. Set against that we found abundant evidence that lowering the current threshold would hurt Australian consumers and the economy more broadly.

We came to the point in our research where we asked if the price disparity is not sitting in the gross margin for these products, where is it? That is why CHOICE believes the most likely cause of the price disparities we found in IT hardware and software products is international price discrimination—that is, the practice of international brand owners, suppliers and manufacturers setting the wholesale cost of their products higher for particular markets such as Australia. We believe this matters for Australians. It matters because the digital economy is obviously immense and is rapidly growing. That economy is increasingly the access point for essential services, along with numerous other benefits to household consumers. This includes everything from government services like e-tax through to banking services, which in our experience in banking campaigning we are obviously finding the banks are increasingly pushing Australian consumers into that environment.

ABS data that we have put forward in our submission shows Australians on low incomes or in regional areas are less likely to have access to a computer and the internet, so we believe this international price discrimination that we have identified contributes to this regional price divide. It creates higher costs. It reduces productivity for business and all that inevitably flows on to household consumers.

To finish up, we have called for some action to reduce this disadvantage faced by Australian consumers. We believe the federal government could play a greater role in educating consumers on the protections and rights they enjoy when shopping online. That is important for a range of reasons but, from the perspective of this inquiry, we think it is one way of increasing access to legitimate parallel imports from foreign markets thereby putting pressure on international businesses to reduce their prices in Australia, and we have seen evidence of that occurring in recent times.

Secondly, we have called on the government to investigate whether certain technological measures that sustain international price discrimination against Australian consumers are anticompetitive and should continue to be allowed. We believe that certain measures of this type are of a kind of privatised tariff or privatised protectionism and they have no place in the globalised market that we are seeing for these goods. They hurt Australian consumers.

Finally, we have recommended that the low-value threshold exemption remain at its current level in the absence of any evidence that lowering it would be cost-effective. The idea that we can stem the tide in overseas online retail through measures that are costly and in fact penalise Australian consumers is regressive. It would hurt consumers. It would hurt productivity and it would hurt our economy more broadly. Thank you again, and we are more than happy to answer any questions.

CHAIR: On the LVT, you quite rightly say that there has been a rather loud campaign by retailers as one might expect. We just heard some evidence from the publishing industry about its effect on Australian publishing and book selling. One of the recommendations is the geoblocking issue, which we might come to in a second. One of your recommendations asks for a level playing field; the other one says 'Keep in effect a tax exemption.' If I buy a book from the local bookshop, I pay GST and that GST helps to fund hospitals and the operations of government. If I go online to Amazon, which is just a big retailer after all, I do not pay tax. It would not seem to me to be terribly hard. Amazon and many of these big booksellers are big companies. They are used to applying taxation regimes. How was it going to be inefficient to ask Amazon, or the Book Depository for that matter, to apply a taxation regime?

Mr Levey : It is a fair question, and I should emphasise that CHOICE does support the principle of tax neutrality. Our issue is not that we do not support a level playing field; it is that there is absolutely no evidence that reducing the threshold would be cost-effective. This stems from a point the Board of Taxation made in 2009: that, if the cost of collecting the tax is greater than the revenue you raise, it is just a principle of taxation that you do not collect it. I understand the government has a task force at the moment looking at the low-value threshold. If there are ways they can cost-effectively collect that tax—that they can cost-effectively increase the efficiency of parcel processing—then it certainly would not be CHOICE's view to oppose that. Our view at the present time is that, in the absence of significant investments in parcel-processing infrastructure with significant efficiency gains in that process, you are essentially going to spend more collecting the tax than you raise from it, and in doing so penalise a whole bunch of Australian consumers who are accessing online goods—not in terms of price but in terms of the delay in those goods arriving. Certainly a 10 per cent GST in the scheme of a 50 per cent price increase is not the deal breaker for the average Australian consumer shopping online.

CHAIR: You have called on us to stop geoblocking or regional lockouts. How would you propose that we do that? If we did do that, would you expect Australian consumer law to still apply to those products? If I am buying Call of Duty from the local shop, it is obvious that Australian consumer law applies, but if I bought it online from somewhere else then would you still expect Australian consumer law to apply to that?

Mr Levey : I might take the second part of that question first. It is our reading of the Australian consumer law that it applies to anyone doing business in Australia, including an Australian who is purchasing that product from within Australia even if it has been retailed from overseas. Obviously there are difficulties in enforcing the Australian consumer law against overseas-based businesses. It is done from time to time, often in high-profile cases, but in our submission we have identified statements made by some Australian businesses—I possibly would not use the word 'scaremonger'—that imply that there are shades of grey around whether you are covered by the Australian consumer law. We would say you are covered, but it is a matter of enforceability. So we would expect it to apply.

On the first part of your question, we have not put forward a proposal for precisely how, in legislative terms, you would prohibit geoblocking or effective technological measures—they go by a number of names. Our basic view is that there are equivalents for how those sorts of measures can be addressed. More than that, we would say that they are increasingly making no sense. The marketplace for these goods is putting consumers in a position where they are potentially voiding a warranty if, for example, they want to quite legally disable the region blocking in their gaming console. We do not think that is a fair position to put consumers in. It is not illegal to disable it, so why should it void your warranty? We have not put forward a specific proposal around how we would legislatively ask for those things to be addressed.

CHAIR: Are you aware of any other jurisdictions that have done it?

Mr Levey : We are not.

Mrs PRENTICE: With the submission, which was quite thorough, was that purely in response to our inquiry or have you done research in this area before?

Mr Levey : We have done previous research which is referenced in this submission, but the vast majority—certainly in terms of the 50 per cent price difference that we are talking about—is new research that was done for this inquiry. There are some figures in there which, in fact, showed a more significant price difference. That was from previous research that we had done. That was across a range of software products and we also did some similar research for our submission to the Productivity Commission's retail inquiry as well, which showed larger differences. What we attempted to do here was, instead of picking a small number of products with large price differences, to take as broad an approach as we could in terms of choosing a selection of product groups and choosing a reasonable number of products within those groups. That is research that was prepared for this submission.

Mrs PRENTICE: Did you attempt to talk to people like record labels or performers to understand the price structure and who was restricting the—

Mr Levey : No, the conclusions we have reached are on the basis of identifying the price differences, looking at those factors that have been proposed by others to explain them and, I think, forming a view that those factors, as we say, that comprise the gross margin cannot translate into a 50 per cent price difference.

Mrs PRENTICE: In fact, I think you come to the conclusion that international price discrimination is the most likely cause. So is that just the regional? What is the component of that price discrimination?

Mr Levey : That is essentially changes in the wholesale price of the product. We are suggesting that—

Mrs PRENTICE: Is that just profiteering?

Mr Levey : I do not think we deny that there are factors which are specific to doing business in Australia—I am sure there are, just as there are factors specific to doing business everywhere—but on the basis of what has been put forward, whether it is rent, marketing, labour costs or GST, we do not think that the proportionate higher costs of doing business in Australia in any of those areas can amount to a 50 per cent or greater price difference. Therefore, the only place we can look to is the wholesale cost of that product, which would be set by the manufacturer, the international copyright holder of that product.

Mr HUSIC: This morning your analysis was described as just doing pricing in isolation. If I understand correctly—I just did a quick take—there are about 212 different prices in your submission. Is that about your understanding of it?

Mr Levey : It sounds reasonable. They do go for quite a few pages, but I have not tallied the final number.

Mr HUSIC: So there are over 200 prices. Were there other goods for which you had tracked the prices between countries that you did not necessarily include in what you put in the submission?

Mr Levey : No.

Mr Cartwright : No, everything we got together ended up in the final submission.

Mr HUSIC: Were the over 200 prices that you listed in your submission all done relatively recently, or have you done historical tracking on pricing as well?

Mr Cartwright : The prices that appeared that we did for this submission and that we had not done for the previous submission, to the PC inquiry, or from 2008 were taken over roughly a month, from late May to about late June. So they are fairly recent, and we took the average exchange rate from that period of time as a basis.

Mrs PRENTICE: Was that parity?

Mr Cartwright : Yes, it was approximately parity.

Mr HUSIC: For those 200 prices you have given an average of, I think, about 56 per cent or thereabouts. Then I think you take out, for example, some gaming products, and the price comes lower. But what has been the biggest difference that you have seen in pricing?

Mr Levey : Certainly the product category would have been the Nintendo games, at 88 per cent. In terms of a single product, I think there is a Microsoft software development product that we identified as, I guess, more of a niche or boutique product. To illustrate the price difference, we suggested that you could employ someone, pay their wages to fly to the US and back twice and buy the product once when they are there, and you would still come out slightly ahead. So that was certainly the starkest individual price difference that we identified. I think that what we tried to do in all our analysis was not to cherry-pick those sorts of isolated examples to comprise our average and our median but rather to cast across a broader range of products. So for that reason you will see that in a small number of instances it is actually cheaper to buy a product in Australian than from the US.

Mr HUSIC: Have you had any discussions with the major vendors? I am particularly interested in the geoblocking and the prevention of consumers from being able to buy from overseas sites. In effect, most retailers here would source wholesale from overseas and shop around for the best deal from their perspective, but consumers are prevented from doing the same sort of thing. Have any of the vendors explained to you why they do that? Have you had any discussions with the vendors on this issue?

Mr Levey : No. I imagine CHOICE would have in the past, and this is a position that we have put forward a number of times, particularly in relation to entertainment products like DVDs and Blu-ray. But in the course of this submission we have not spoken to any vendors.

Mr HUSIC: The issue of warranties came up a lot today. Earlier it was suggested that the differentials in warranties were one of the big reasons why prices are the way they are here—amongst a suite of different issues which are usually trotted out as the reasons for these differences, but there was a focus on warranties. Has CHOICE done any work in comparing warranty regulations in overseas jurisdictions with the Australian system, which has now been harmonised, and what exists elsewhere?

Mr Levey : In the course of this submission we had a preliminary look at the US because that was obviously the most relevant jurisdiction for us, given that all our price comparisons, bar a small selection of UK ones, are in the US market. We do not have data out of that, but we fail to see evidence of how offering a warranty in the Australian market under Australian consumer law could be that much more expensive than offering the requirement under US legislation. I am not sure whether my colleagues have anything to add to that.

Mr Cartwright : No, that is pretty much it.

Mr Levey : We understand it is a cost of doing business and we understand there may be some jurisdictions out there which do not have particularly sophisticated consumer legislation. But we do not believe the difference between the Australian and US markets would justify that. If the committee were interested, we would be happy to go away and have a look at that and provide some supplementary information.

Mr HUSIC: You have looked at over 200 products. Generally speaking, what would the warranty differences be on those products, particularly the business products that you have listed?

Mr Cartwright : A lot of the larger companies, particularly Apple and Dell, do have international warranties. If you buy, for example, a Dell computer in America and you move to Australia and you bring that computer with you, you can go on to their website, change your registration and the warranty comes with you. Apple has international warranty as well, so some of them of their own accord do have harmonised warranties across national borders.

Mr HUSIC: So they do this on their own, quite free of what is required in the international space? Warranties are so much more tied to countries themselves or the states that exist within those countries. Is that correct?

Mr Levey : They do that as international warranties. I guess another point we would make is that when you look at some parallel importers like Kogan, the TV parallel importer, who, as far as we understand it, has an extremely strong refund/return policy you will see that, even though the goods that it is selling are parallel imported so you would assume not covered by that manufacturer's domestic warranty requirements, it obviously shows it is quite possible to operate here profitably, sell a lot of products and still offer significant price savings compared to what, if you like, the official supply chains would provide.

Mr HUSIC: It is the view of CHOICE—and, again, I use those words advisedly—that it does not believe the warranty conditions here in Australia could be used as a reason to explain the major differences in price for products that are purchased here compared to those purchased overseas?

Mr Levey : Absolutely, that is the view of CHOICE. You would be talking about warranty being a component of 15, 20, 25 per cent of a price difference and that is completely unrealistic from our point of view.

CHAIR: With respect to the comparisons of the hardware prices—I am looking at tables 8 and 9—do you know what the position is for a US consumer ordering online from Apple or Dell? Do they have to pay state sales tax?

Mr Levey : As far as I am aware, it varies from state to state.

Mr Cartwright : In America, if you have a physical presence in a state you are liable to pay sales tax in that state. If you do not have a physical presence, you do not. So an organisation like Apple, which would have flagship stores in every state, would be paying sales tax. But these prices do not include the sales tax because that is usually added on afterwards, as is the custom in America. I assume it would be the same for Dell. I would assume they have a physical presence in most states.

CHAIR: So the US state sales tax is typically between five and 10 per cent?

Mr Cartwright : Some researchers said that it was approximately, on average, 9.6 per cent. It changes from local jurisdictions, so it is really hard to get reliable information on that.

Mr FLETCHER: When I was living in New York a few years ago it was 8.25 per cent, which is an incredibly difficult number to calculate, particularly when you are trying to work out the tip on a restaurant bill. But my question for present purposes is: do the US numbers include state sales tax or are they pre-sales tax?

Mr Cartwright : They are pre sales tax.

Mr FLETCHER: And then the final price that a US resident will pay will depend upon which state they are in and sales tax they have to pay?

Mr Cartwright : Yes.

Mr FLETCHER: For example, if we take some of the products where there is a relatively small difference, the MacBook Air, it is possible that the final price to a resident of a high-taxing US state could be the same as or higher than the Australian price.

Mr Levey : Our view of Apple hardware products is that it was more or less at parity once you accounted for the GST.

Mrs PRENTICE: One of the biggest discrepancies we all noticed is the iTunes. Do you think the possibility for that is lack of competition? For example, in America with movies there is more than one source. Is it more that we need better competition to bring the prices down?

Mr Levey : It is possible, although you could also say that some of the price differentials in iTunes are consistent with what CD buyers, cassette buyers and vinyl buyers have seen in the Australian market for a long time. So yes, you could argue that the dominance of iTunes in the Australian market, as in any market that has a player of that size, is a factor, but we would also suggest that prices for recorded music have been artificially high in Australia for a long time.

Mrs PRENTICE: Is the price differential on CDs a regional problem, a licensing problem or a copyright issue? Who is getting the extra money?

Mr Levey : We have not included an analysis of CDs in this admission, so I would be loath to speak about it too much off the top of my head. I think our view is that it would be the international copyright holder. Perhaps reflecting on one of the previous submissions today, we would certainly be looking at that component—that is, the record company—as a possible source of the price discrepancy, rather than the local licensing fee.

Mrs PRENTICE: Following this inquiry, will you be doing that? Will you take this a step further and look into that?

Mr Levey : Yes. This is certainly an issue we intend to pursue. We are very keen to see prices across the board become fairer for Australian consumers. So I think we are fairly open-minded about any additional work we might do.

Mrs PRENTICE: Chair, if we can ask for copies of any further outcomes, that would be great.

CHAIR: Of course, yes. On the evidence you just gave about prices being higher in the past regardless of cassettes or CDs, is it the case that what the internet is really doing is, in effect, changing the structure of the whole industry, that geographical pricing is becoming more transparent and the ability to access other markets is easier for individual consumers?

Mr Levey : Absolutely. I think some of the artificial walls that get created around regional markets are looking increasingly anachronistic. Our concern would be similar to other areas such as people who are perhaps using the internet to make voice calls. You get segments of the population who are quite fast adopters of these things and are quite savvy and know their way around the online market place. A lot of Australians—as we have identified, low-income and regional Australians—are not necessarily equipped to navigate that environment because of price, access and even confidence levels. Quite recently we saw figures showing that online fraud has increased significantly in the last 12 months or so. We do not think that is because of something inherently dangerous about going online, but a lot of Australians are probably in that space for the first time and shopping in an unfamiliar way. I guess what we would say is that, while there will inevitably be some pressure on international price discrimination through sheer force of democracy, through people using that environment, not everyone will be equally equipped to take advantage of it. There is a risk that the people who can least afford to pay the high prices will continue paying them.

CHAIR: I notice a rather large price differential in games. That is obviously a very big industry now, bigger than movies. Do you see any justification for that or is there justification in terms of product innovation?

Mr Levey : I think no is the short answer. We find it very hard to see what component of that product's gross margin is dependent on it being an Australian product. I think the starkest example is the steampowered website that we had a look at, which effectively sends you to another part of the website, depending on what IP address you have. As an Australian customer, you cop a significant price increase because you happen to be logging on to that website from Australia. We fail to see how a process which is giving you the same bit of data from the same server and charging you 50 per cent or more for it than a US consumer is in any way justified.

CHAIR: Many of these games now require you to be on the net to even play them, don't they? Civilisation V is like that.

Mr Levey : They do, yes, and that affects piracy. You need to be constantly logged on.

CHAIR: That is presumably to enforce such regimes in part.

Mr Levey : In part. I think it is primarily an anti-piracy measure rather than just a price discrimination measure, but it would obviously be part of the same arrangement to some extent, yes.

Mr HUSIC: There used to be provisions in the Trade Practices Act that governed at their heart the issue we are discussing, which is price discrimination. Those were pulled out of the Trade Practices Act and obviously the act has now changed and has morphed into the ACL. What ability has C HOICE got to comment on the way in which those price discrimination clauses operated under the former Trade Practices Act and, if they were to be revisited, is C HOICE in a position to take into account the operation of those clauses and put forward a view about what might work in the future? We are tasked under the terms of reference to look at solutions. I am particularly interested in looking at the changes to competition law. What do you think could be done in this space?

Mr Levey : It is not something that we have looked at in that amount of detail. One thing we have looked at is technological protection measures, which is, as I said previously, something that is used in region coding of DVDs—those sorts of things. There are distinctions between those things which are used to prevent things being copied from a privacy point of view, obviously, and a password. We think that the fact that there are exemptions and, if you like, uses of these sorts of things, including in the Copyright Act, shows that there are ways to legislate for and against them, but it is not something that we have done work on. It would certainly be something that we would be prepared to have a look at but I cannot offer you much more than that at this point in time.

CHAIR: That might be something we could discuss further at some later point. Thank you for giving evidence today. The secretariat will be in contact with you and will provide you with a transcript of the proceedings. You can request any errors in transcription to be remediated. You can provide the additional information that we have requested of you to the secretariat. Unless you have anything further, we will suspend proceedings.

Proceedings suspended from 12:33 to 14:01