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Standing Committee on Infrastructure and Communications - 13/03/2013 - Information technology pricing

BESGROVE, Mr Keith, First Assistant Secretary, Digital Services Division, Department of Broadband, Communications and the Digital Economy

WINDEYER, Mr Richard, First Assistant Secretary, Digital Strategy Division, Department of Broadband, Communications and the Digital Economy

Committee met at 16:07

CHAIR ( Mr Champion ): I declare open this public hearing of the House Standing Committee on Infrastructure and Communications and welcome all the attendees. The committee is inquiring into IT pricing in Australia and is asking: do Australians pay more for IT software and hardware then consumers in overseas markets and if so why? The inquiry has already generated a great deal of interest and we look forward to it promoting more interest with the public. To date there have been 115 submissions plus several additional supplementary submissions, which are all available in the committee's website.

I welcome representatives from the Department of Broadband, Communications and the Digital Economy. 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 merit 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 the parliament. I invite you to make a brief opening statement before we proceed to questions.

Mr Windeyer : As you know, we put in a submission to the inquiry. I don't think there is anything particular that we have to add at this point, so we are happy to move straight to questions from the committee.

Mr NEVILLE: I just wondered what points you wanted to emphasise to us.

Mr Windeyer : In our submission?

Mr NEVILLE: Yes—how do you see your role in this whole scenario of the overpricing of IT equipment and so forth overseas. How do you see your role in that?

Mr Windeyer : We do not have a direct role in the question of pricing of stuff in this area. We do have a general policy interest in how the digital economy is evolving and operating in Australia, and obviously that assumes that people are purchasing and using the sorts of things the inquiry is taking an interest in. So we have an interest in how the broader digital economy is evolving but no particular interest or direct role with respect to the pricing of products or services in the market itself.

Mr NEVILLE: But, if you take this view that you are the advisers for the government and at times speak on behalf of the government regarding digital strategy, and if you find that in Australia we are paying sometimes two or three times the price that other countries are paying, doesn't it reflect on the effectiveness of your section of the department if you do not say something about it?

Mr Besgrove : It has come up on occasion in briefing ministers, and it was indeed our minister, I think, who was one of the key ministers interested in this inquiry taking place, so it is certainly the case that our portfolio has some interest. But my colleague is correct: we have no direct responsibility for the matters which are the subject of the terms of reference. We do not have any particular legislation that we are called upon to administer or anything of that sort, so the interest that we have is, I think, more a general one than a specific one.

Mr NEVILLE: I am just at a loss to know where that leads us. It seems that, all the way through this inquiry, everyone we talk to has some sympathy for what the committee is on about and the terms of reference, yet, when it comes to seeking advice, we have a number of the operators, the providers, in Australia who do not want to talk to us, and we have a lot of government agencies who do not see it as their direct responsibility, so where do we find a starting point in seeing that Australians get IT equipment and the like at a fair and reasonable price? In reading the submissions—which I presume you have—as the minister's departmental advisers and the organisation that carries out the government's wishes, what would your advice be to the committee on improving the situation?

Mr Besgrove : In the early stages of this inquiry, we appeared before the committee on one previous occasion where we gave what was considered to be a sort of background briefing on our understanding of the issues, and between us we have had some exposure to these issues over a number of years in different roles, so we have a degree of knowledge of these issues over the period of years. It has struck us in particular that the emergence of the online economy and the widespread availability of online marketing sites, sales sites, that are easily accessible here and overseas has thrown into quite stark relief an issue which has actually been around for many decades; it is just that it did not have visibility. The emergence of the internet, the use of the Web, has enabled people to become much more acutely aware of the price disparities that the committee has been uncovering, but those disparities have existed for many years.

Mr NEVILLE: Do you think electronic purchasing has just highlighted that?

Mr Besgrove : It is unquestionably the case that online purchasing has raised the visibility of those disparities in a way which I do not believe existed in the past.

Mr Windeyer : Across more than just the IT products too.

Mr Besgrove : Yes. We have not been asked to provide government with specific advice on this issue. It has in our conversations come up a number of times that we believe that the emergence of that online market is in itself publicising the issue, so at least to some extent that publicity seems to be having some impact.

As to whether there are specific things that the committee may wish to propose, we do not have a list of suggestions. While it may not be satisfactory from the committee's perspective, I am unable to give you a list of suggestions that we may have developed over time, because we have not.

Mr NEVILLE: Do you see this situation as being an impediment to the development of Australia's digital economy?

Mr Besgrove : In some measure, I cannot see that it would not be having some deleterious impact if you have to pay higher prices for inputs into production processes. That must place you at some disadvantage. As to how significant that is, we have not done the analysis, so we cannot provide advice as to whether it is of limited impact or significant impact. I do not believe that is something we have looked at?

Mr Windeyer : No, I do not think so. To pick up on the point that my colleague was raising, I think what we are seeing is that there may be, as Keith suggests, some impact which we have not done the analysis on, but equally we are also, I suppose, watching new business models for selling goods and services emerging online, some of which are enabling people to purchase from a much wider range of suppliers than they might previously have been able to purchase from. Arguably, people are getting access to some products, not necessarily in the IT space, from suppliers at prices and from countries that they would not have previously, so I suspect there is a bit of an effect in both directions.

Mr NEVILLE: I suppose what stimulated the minister to give us these terms of reference was the downstream effect this might have on Australia. Just to use an example: it is the objective of the current government that all children should have laptop computers or, in some cases now, tablets, and this has been extended to many primary schools as well as secondary schools. The point must come where, if we are paying twice the price, say, for the software, we are starting to put Australian kids—or, if not the kids, their parents—at a disadvantage if we do not do something about rectifying price differentials. Are we just going to be sanguine about that and say, 'Well, that's stiff cheese for Australia,' or are we going to do something about it? I think I am looking to you as the advisers of the government on where you think we should be going.

Mr Besgrove : It is certainly the case that publicising the issue must have some impact. It is certainly our presumption that, as the online economy becomes a more critical element of the economy as a whole, people will certainly be looking for alternative sources for supply. As my colleague indicated, we are aware of the emergence of companies in Australia that are finding ways to get around some of the issues that you have identified. While that may not be a perfect solution, it is nevertheless the case that the market is responding to this issue and responding in the form of different supply mechanisms. I think our expectation is that, as the use of the online economy expands—and it is expanding quite quickly—and as people routinely use online services, it is likely that sources of supply will diversify, and it is our expectation that, at least to some extent, the market will respond to those issues. If government chooses to do some further things, that is something that we have not been asked to analyse and we have not been asked to advise on. So I apologise, but I cannot give you a list because we do not have one.

Mr NEVILLE: I think that is probably enough from me for the time being.

CHAIR: We have received some evidence about the lack of statistical information in this area. Given you said that the more information there is the more markets respond, do you think there is a role for government in the collection of statistical data and the publication of it?

Mr Besgrove : There may well be. There may well be some opportunities for further analysis. One of the things which we do not have much understanding of is the extent to which this is an issue unique to Australia as opposed to an issue common to many smaller economies. The brutal reality is that Australia, depending on who is measuring it, is between one and three per cent of the world market for IT hardware and software. So you have the bargaining power of three per cent. There are other sophisticated markets that are similarly small. They are all different to each other, so I am not sure how far you could take this, but we would certainly be interested in the experiences of other small advanced economies.

Mr HUSIC: There are three components to the department—broadband, communications and the digital economy. For the digital economy section, is there a discrete staffed section?

Mr Besgrove : Yes, there is a group. We are the two division heads of the two divisions in that group.

Mr HUSIC: What are those two divisions made up of?

Mr Besgrove : In both cases there are a quite diverse range of responsibilities. I can go through the list of mine, if you like.

Mr HUSIC: Just in broad terms, what are the two? You have two groups—what are they broadly responsible for within the digital economy section of the department?

Mr Besgrove : We are both involved in things such as the preparation of the government's digital economy white paper. On my side, I am responsible for issues to do with cloud computing, telecommunications consumer issues, regional issues and Indigenous communications policy. I also look after the spectrum policy, internet policy, our involvement with the ITU and trials of the NBN in health care and education. Richard has a similarly diverse range of responsibilities.

Mr Windeyer : They cover programs in relation to digital literacy for both households and small businesses and general advice on the evolution of Australia's digital economy. As Keith said, we are both involved in the preparation of the government's digital economy white paper. In my patch I have also got online safety and online security issues as well as some responsibility for issues to do with convergence, although that is something that obviously spreads across all the elements of the department.

Mr HUSIC: I am not asking you to comment on the white paper per se, but I would imagine that as part of that process you would have some degree of mapping capability, if I could put it that way, to be able to scope out the size of the digital economy in Australia and its various components that generate economic wealth and jobs within what you would class as the digital economy.

Mr Besgrove : We predominantly rely on external studies the department has—

Mr HUSIC: Specifically commissioned or that have already been published?

Mr Besgrove : A mixture, but predominantly studies done by others. The department has quite limited research capabilities.

Mr HUSIC: The issue of price discrimination would have an impact on the growth of the digital economy or its ability in pace, scale and size. Would you concede that?

Mr Besgrove : I think I indicated before that we would have to acknowledge that it must have some impact, but we are not in a position to comment on the relative size and importance of that.

Mr HUSIC: If it is able to be demonstrated that there is an impact, are you able to recommend to the government what might be able to be done?

Mr Besgrove : It is certainly the case that once this committee reports to the government we and other agencies will then be called upon to advise the government on how to respond to those recommendations. So, yes, we will certainly find ourselves in that situation a little bit further down the track.

Mr HUSIC: I have had in the last week an Australian Microsoft partner email me confidentially saying that they do in fact see that SMEs pay 50 per cent more in Australia for identical Microsoft software. This is just for downloaded software. While your submission deals with other external factors like, for example, labour, warranties and the like, they are just talking about the downloaded software. The partner said: 'To my business, and of course it has to be passed onto SME customers, this represents an additional cost of approximately $33,000 a month with growth of approximately half a million dollars over the next 12 months. Not only does this have a negative effect on the economy; it also stops my business and businesses like mine in Australia from competing on fair terms with offshore competitors.' These are the type of things that are getting raised with us. You do not necessarily get a sense of that from your submission. Has there been any thought given by the department, given this inquiry has been going on for a number of months, to the types of legislative reform you think might be embarked upon to try to deal with this?

Mr Besgrove : I think it is fair to say that we are waiting to see what emerges from the committee. We are aware that it has attracted a great deal of interest and we have certainly followed at least some of the submissions and some of the attention in the media that this committee has sparked. But we have not actually done any specific planning of responses.

Mr HUSIC: There have been other submissions. This is from a confidential submission, so I have to be careful about not giving away too much. But there has been a lot of focus within this committee on the practice of geoblocking. In actual fact we have had games developers contact us saying that console manufacturers make use of region protection to prevent users from importing software and obviously inhibiting the ability of competition to drive down prices. Obviously we need to test both sides of the story. It is clear that there are competitive advantages in tackling geoblocking. If we were to recommend ending geoblocking and this practice of region protection, what do you see as the upside and downside of that type of move?

Mr Besgrove : I think this is more Richard's area than mine, but one that immediately occurs to me is that when governments focus on a specific technology issue one of the things they need to think through is if you respond to this technology does that simply mean that they will find an alternative and is that easy to find? In a former life I was involved in developing the antispam legislation in Australia. That has had some beneficial impacts but nowhere near as much as we had hoped it would. It is not always easy to see how much impact you can have by taking specific legislative action.

Mr HUSIC: You are focusing there on a technological response rather than an overall practice to prevent people from being able from their geographic location—

Mr Besgrove : Yes.

Mr HUSIC: It is not precisely but almost like parallel importing to be able to get a more competitive price for, in this case, software. So it is more about the practice rather than looking at the technological measure.

Mr Windeyer : There are obviously many considerations that would have to be worked through with something like that. One observation I would make is that it would have to be clear whether the practice is a bad thing and necessarily a problem in every instance. I would also observe that it is a practice that applies to a whole lot of things beyond just the products and services that are relevant to this inquiry. In a sense, it is a practice which is attempted by some retailers trying to sell clothing to people. It is also a practice that then some consumers have got around and even some logistics companies have found ways of helping people get around or circumvent. I think there would also be questions about how one could make that effective if some of the suppliers that we are dealing with are entirely offshore based. I suspect there are whole lot of practical considerations that would need to be worked through to understand, frankly, whether it was something that could be given effect to with any success. One of the observations we make in respect of a lot of things in the digital economy and the online space is that the power or the ability to regulate effectively in Australia assumes that the border is something that is easy to get a handle on, and that is difficult with stuff that is occurring online.

Mr HUSIC: Not if they get your IP address it's not. If they are able to locate where you are and then direct you to a local website that has inflated prices then clearly this issue of borders does not matter.

Mr Windeyer : That is the point, and that is the difficulty with how to make legislation effective in an environment where the border seems to be very hard to—

CHAIR: The main people who use geoblocking are big multinational companies that have Australian subsidiaries. Surely we have every right in the world to make laws in respect of them.

Mr STEPHEN JONES: Withhold other benefits.

CHAIR: Yes, that's right. I understand your point: if there's some pirate radio or something like that—to use the Goodies analogy—you can't do much about them, but they are not the main game, anyway, are they?

Mr Windeyer : I understand what you are saying, but I was simply making the point that you will find that it can be a surprising number of sites that attempt to direct you to an Australian badged site to sell to Australian consumers. I don't know whether they are all necessarily companies that would have a presence in Australia—and that goes for everything from an online fashion retailer operating out of the UK to possibly the big multinational IT firms which, yes, probably do have a presence in Australia. I think there is a variety of flavours that would need to be taken into account. The other observation I was going to make is that regional differences have existed in some of these spaces for a long time, in the case of the release of films et cetera. It is territory that businesses have decided to use for, presumably, their own commercial reasons for a long time. It is not something, therefore, that we have looked to come up with solutions to.

Mr NEVILLE: Let me come at this from another angle. Let's say that the committee was to recommend that Australia ban geoblocking of any equipment sold in this country—I know that is the extreme anti case. Are there downsides to that in other fields if equipment sold in this country could not be geoblocked.

Mr Windeyer : Just to understand you: to pick an example, software or a computer—

Mr STEPHEN JONES: Microsoft Office.

Mr Windeyer : A software sort of service?

Mr NEVILLE: Yes.

CHAIR: Or a game.

Mr NEVILLE: Or a game. A piece of equipment that will not accept other than Australian-sold software and rejects software from the UK, the US, Asia and so on. If the Australian government were to ban equipment of that sort—in other words, you could sell equipment in this country but you could not have a geoblock on it.

Mr Windeyer : Sorry to be annoying: do you mean a games console, for example, could not be pre-programmed or preset to only accept material within a certain region.

Mr NEVILLE: Pre-programmed to exclude their own material from another country.

CHAIR: Outlaw, what are they called, an effective technological measure?

Mr HUSIC: It depends on what you using—technological protection measures.

CHAIR: There are a number of terms, yes.

Mr HUSIC: TPMs or ETMs.

Mr NEVILLE: Anything for that matter—for education or other things like that. I don't know the extent to which geoblocking is being carried on, but if we were to have a general policy that geoblocking was not acceptable on electronic equipment in this country, would that be enforceable, do you think?

Mr Windeyer : It is not one that I have thought to—

CHAIR: Do you want to take it on notice?

Mr STEPHEN JONES: [Inaudible] it is perhaps problematic, Paul. It is software, generally, that we are looking at.

Mr NEVILLE: I know. I suppose there are ways they could get around it.

Mr Windeyer : There are probably two flavours of geoblocking. There is the online blocking of access to sites based on IP address and redirection to a different one, and then there is the regional coding of equipment to 'only place'—for example, a DVD that is bought in the Australian Asia-Pacific jurisdiction as opposed to in Europe or what have you—

Mr STEPHEN JONES: Which is less and less effective. That is the big end of things.

Mr Windeyer : Yes. I think there are probably two flavours to it, but I have not given that any particular thought. I think that is one we would have to take on notice rather than being able to offer you any sensible comments at this point as to whether that would be enforceable or not.

CHAIR: Mr Fletcher has some questions.

Mr FLETCHER: I will just go back over a couple of things you said before to make sure that I am understanding them correctly. I think it was you who said this, Mr Besgrove—and you will correct me if I am wrong—that price discrimination has always been present—

Mr Besgrove : I am not sure if I used the word 'always' but it has been longstanding in my experience. Certainly in my work experience I have been aware of price differentials in the IT hardware and software areas for at least 20 to 25 years.

Mr FLETCHER: But it goes much more broadly, doesn't it, across a whole range of categories of goods and services?

Mr Besgrove : Yes. But I do not have the same length of experience—

Mr FLETCHER: I can understand that. And it is along a couple of dimensions, isn't it correct to say? For example, there are prices for the same product that are different in one country from another or, alternatively, the same product is sold at different prices to different classes of customers in the same territory, such as airline tickets.

Mr Besgrove : Yes.

Mr FLETCHER: So it is a fair statement that price discrimination is not unique to software.

Mr Besgrove : That is certainly the case. In the background briefing that we gave this committee some months ago, we made the point that there seems to be a very strong element of what markets will bear as being a contributing factor in all of this.

Mr FLETCHER: It is also correct, isn't it, that software often comes in different versions—for example, a home version and a power users version—and those will have different prices and often quite dramatically different prices?

Mr Besgrove : Yes.

Mr FLETCHER: I do not know whether you have a view on this but, as I understand it, often the way that is coded is with exactly the same code but the home version will have an extra line that says, 'The following functionality is disabled.'

Mr Besgrove : I cannot answer that one. I do not know the answer to that one.

Mr FLETCHER: I wonder if you could go away and have a look at that point. Hal Varian, who is the chief economist at Google, wrote a book about 10 years ago on this topic, and I think he made that argument. I wonder whether you could just confirm that to the committee. I am interested in the general policy of the government regarding price discrimination. Does the department regard itself as being under policy guidance from the government to root out price discrimination in the IT and communications space?

Mr Besgrove : Within the IT space it is not something that is specifically part of our portfolio responsibilities. There are price constraint elements within the Telecommunications Act, which you would be very familiar with.

Mr FLETCHER: I suppose I am asking whether there is a more general principle, to your knowledge, in which the present government has expressed a generalised objection to price discrimination.

Mr Besgrove : I am not personally aware of it, but it may well be the case.

Mr FLETCHER: I guess I am really asking whether the department has received any direction or guidance from the minister in particular as to a generalised objection to price discrimination.

Mr Windeyer : I am not aware of any such thing. I think if there were a generalised position around discrimination as a matter of practice then it is probably something Treasury would have the lead on rather than something we would be particularly familiar with.

Mr FLETCHER: I am interested in the question of legislation purporting to ban particular business practices, particularly business practices that are followed internationally. Is a consideration for a small jurisdiction like Australia the enforceability of legislation that purports to effect the practices that are followed around the world?

Mr Besgrove : I think enforceability is always something that we have to keep in mind in framing advice to government, because the costs and complexity of enforceability need to be weighed against the outcome that you are seeking to achieve. So we would unquestionably take that into account.

To answer one of the earlier questions, which I failed to respond to, one of the downsides to some measures that the committee might recommend is that, in some cases, they might cause some overseas firms to reconsider whether they supply to the Australian market. I am thinking here of communications devices for the disabled, for example, where the market here is extremely small and the prices here are much higher than overseas. We provided some examples to the committee—

Mr HUSIC: Do you think Microsoft would do that?

Mr Besgrove : No, no. I was not thinking of Microsoft at all. I was thinking much more—

Mr HUSIC: I am just asking.

Mr Besgrove : I have no way of knowing whether that is a remotely realistic possibility. I was thinking more in terms of suppliers of specialised equipment, where we know from some of the research that we have done that the price differentials are very large.

Mr FLETCHER: This is on the presumption that any legislation that a government introduced in this area would need to be neutral across companies; you could not target one particular company, for example?

Mr Besgrove : No.

Mr FLETCHER: Okay.

Mr HUSIC: You made reference to the price constraint provisions within the Telecommunications Act. Are you able to outline further the operation of those?

Mr Besgrove : It is not my direct responsibility. We could take that on notice for you.

Mr HUSIC: Can you? The prime ministers of Australia and New Zealand recently announced that action would be taken to deal with what are the considerable roaming costs that apply between the two nations. If you are not able to answer this question now, could you take it on notice: how is it intended to give effect to that policy desire, observing that there is a significant price impost and that the two governments can act jointly to address this? Can you outline that now or would you need to take that on notice?

Mr Windeyer : I can probably outline that now for you. I think the key point you have touched on with international mobile roaming as a service is that to have an impact on the price requires coordinated action at both ends of the service, I suppose. The approach that the government has announced it will take is to introduce legislative amendments—and New Zealand would make similar legislative amendments—to the existing telecommunications regulatory framework to allow coordinated action to be taken to regulate prices in the roaming market but on a sort of bilateral basis.

One way of looking at it is that, for many years, many developed countries—Australia being among them—have been working on introducing competition into telecommunications markets. They have as a consequence got slight variance in legislation to provide access to services under reasonable terms and conditions, and to date that has been domestically focused. This is a particular issue that is now getting some attention which cannot be done in just one jurisdiction alone; it needs to be done in a coordinated fashion. But they would be coordinated efforts to respond to the pricing practices of the suppliers in your particular market. So action taken in Australia under the proposed legislative framework would not mean there was action taken with respect to New Zealand suppliers; it would be with respect to Australian suppliers.

Mr HUSIC: Do you think it is the case, as is the view that has been expressed, that the levels of those costs create a great burden to general consumers, regardless of whether they are residential, retail or business?

Mr Windeyer : There certainly seems to be a feeling amongst consumers that those costs are inexplicably high, but people complain about the prices of lots of things. It does not necessarily mean that in each case there is an argument for intervention.

I think that from the government's perspective the issue is that there seems to be little scope for a competitive response, given the nature of the market. In effect, you as a consumer cannot go and purchase a mobile phone with any degree of control or choice over the price you will pay for roaming. So it is more the fact that, like many telecommunications wholesale markets, of which there are a number, there is not much scope for competition and, as a consequence, there seems to be a case for bringing those within the realm of the telecommunications access regime, which has existed to deal with those relatively uncompetitive markets, which show no prospect at the moment of becoming more competitive.

Mr Besgrove : The other comment I will add is that roaming is an issue that has been raised by many governments around the world. The European Union has taken quite concerted action in this space. So, if you like, there is a groundswell of opinion amongst many governments that the issue of roaming charges between countries could and should be addressed.

Mr HUSIC: Okay. Again, we may have different views on this, but would you accept that there is also a growing view within the Australian market that these price differences are not justifiable and that there is a degree of disquiet about them?

Mr Besgrove : I think I acknowledged that earlier in my testimony.

Mr HUSIC: Just picking up on your point, Mr Windeyer: you are right that people will complain about price differences, but—and if I misconstrue or misrepresent your words I am more than happy to be corrected—you said that there needs to be a basis on which to act, effectively. In very broad terms, if you look at the Choice submission, it suggests a 50 to 60 per cent difference on price. Censuses have estimated that small businesses, small to medium enterprises, are about to invest—over the course of, I think, the calendar year—about $11,000 on IT equipment and software. Across the two million SMEs that exist in this country, if you were to do the simple arithmetic, that represents a very big impost in terms of cost. Doesn't that added impact of cost within the digital economy affect the ability of our economy to compete relative to overseas markets, and don't you think that would be a basis on which to start further consideration about what can be done and what advice can be given to government on tackling this?

Mr Windeyer : I understand—

CHAIR: A division has now been called in the House of Representatives, so we will adjourn the meeting Thanks for your appearance at the hearing today. We may ask you to answer some questions on notice in writing.

Resolved (on motion by Mr Stephen Jones):

That this committee authorises publication of the transcript of the evidence given before it at public hearing this day.

Committee adjourned at 16:48