news Global technology giant Microsoft has declined to provide the Federal Parliament’s IT price hike inquiry with concrete details as to why many of its products cost dramatically more in Australia than in its home country of the US, despite prolonged questioning on the issue from Members of Parliament last week.
The company has long charged Australians more for the same products — often delivered online with no physical boxed copy — than it charges residents and businesses in its home country of the United States. For example, when Microsoft launched its flagship Office 365 service in Australia in June 2011, the company jacked up local prices by up to 76 percent. The company has previously declined to attend the inquiry, but was eventually compelled to attend, alongside fellow reluctant vendors Apple and Adobe.
At the inquiry, Microsoft Australia was greeted with a hostile reception by Labor backbencher Ed Husic, who has been leading the push to hold global technology vendors accountable for their Australian pricing habits. Husic said that he had received an email from one of Microsoft’s partners in Australia, which stated that the price it had to pay for identical Microsoft software as 50 percent higher in Australia in the US, for the same downloaded software — no international versions. “How is it that the Microsoft partners feel that even they are being overcharged on product themselves which they feel they then have to pass on?” Husic asked Microsoft Australia managing director Pip Marlow (pictured, above).
In response, Marlow said Microsoft did not operate under a single global market model, and there were a range of factors which impacted the way it went to market. “They may start with cost structure, customer perceptions, partner choices but most importantly the competition that we have in market,” Marlow said. The full PDF transcript is available here.
“I have been working at the company for 17 years and I would say it is the most competitive time for Microsoft that I have ever experienced. So ultimately our customers have choice and, at the end of the day, if we price our products too high our customers will vote with their wallets and we will see our sales decline. While there is competition in market and the customers have choice, we have to continue to deliver value. We have to innovate. That is why we spend $10 billion a year on R&D to continue to build products to delight our customers.”
With reference to a pricing document, Husic followed up with a second question asking how the company could justify the cost of a certain product which cost US$2,324 in the United States and in Singapore, CAN$3,105 in Canada and AU$4,136 in Australia.
“… do we have a price differential in our markets?” Marlow responded. “The answer to that is, clearly, yes. We do not set a global price for our products … We do not operate on a standard price because we do not believe that every market is the same. We may be selling to an emerging market, for example, where the cost of living, the availability of technology, the ability of customer perception and the competition might be completely different. At the end of the day, we set our prices based on those factors. We do not set them on a global market. We know that, in the end, because we are living with competition, our customers will vote, as I said before, with their wallets. If we make the price too high in that particular market, they have choice and they will look elsewhere. We respond to that.”
These initial exchanges between Husic and Marlow appeared to set a pattern for the rest of the vendor’s appearance at the inquiry. Although Marlow did directly answer questions about Microsoft’s Australian pricing put to the executive by the MPs in the inquiry, at no stage did Marlow go into detail about why a specific product was priced at a specific level compared to the US. Instead, the executive appeared to prefer to discuss the abstracted concepts affecting pricing (such as higher Australian labor, distirbution and licensing costs), instead of the specific details of why a certain product cost more.
In a further example, Nationals MP Paul Neville asked Marlow how Microsoft could justify charging the same price in Singapore for some of its products as the US, but marking them up for Australia. The MP asked: “Singapore is in our part of the world, the Australasian area. You would imagine freight prices would be marginally the same. Singapore, if anything, unless there was a resell component there, would be a smaller market than Australia and yet the products in Singapore are exactly the same price as they are in the United States, but they are 60 or 70 per cent higher in Australia. How do you account for that?”
In response, Marlow said: “We would talk to things like labour costs, rental costs and compliance with local laws. But we are not saying that cost structures are the only part of things impacting our price. We are seeing that the law of supply and demand, customer perception, the value of our price and how we compete in the market are the things that we have to deliver on every day. We have to look at all of those factors and then make sure we are out there selling to a small business or a consumer, who has choices. In fact, we compete with products today that are free. So when the customer makes that choice we have to be able to deliver a product, should they choose us, that meets their value expectation.”
Neville responded that he believed what Marlow was saying was that Microsoft charged what it could get away with in any given market. “We believe we are competing lawfully to win our customers’ business every day. As I mentioned at the start, I have never seen such a competitive landscape in the IT market in my 17 years with Microsoft,” responded Marlow.
Marlow also appeared to play down Microsoft’s power in the market, as Apple Australia managing director Anthony King had also done earlier in the day’s proceedings.
Labor MP Stephen Jones pointed out to the executive that Microsoft had an overwhelming market share in, for example, the small business market, noting that it would be very surprising to walk into any small business in Australia and find that they did not have Microsoft’s Office suite installed.
Marlow responded: “I am not prepared to represent the 1.2 million small businesses as to what is on their computers. I do know that many small businesses are choosing to use competitive products, including free products that are available in the market.” The Microsoft managing director was also unwilling to confirm that Microsoft enjoyed an “overwhelming” market share in small business in Australia. “I do not have the share details for small business,” the executive said. “I do not know them.
Jones subsequently attacked Microsoft’s approach in the area.
“… when it comes to the small business market, Microsoft operates and has the vast share of the small business market in this country. It is pretty simple: small businesses do not have the time, energy and expertise to go out there and download and access freeware or shop around for all the various IT products. They use similar or related products to the one they use at home, the one they learn at school, so they are more likely than not to be using Microsoft Word and Microsoft Excel. So effectively your ‘charge what the market can bear’ policy, which is leading to a 30 to 70 per cent product differential, is amounting to nothing more than a private tax on small businesses in this country,” he told Marlow.
In response, Marlow said she would not agree. “I would agree that small businesses in this country have choice,” the executive said. “There are a plethora of products they can use. There are other products that they can use today for similar functions, and they have a choice to make. We operate in the market very lawfully. We are out there competing every day on price and on the service of product.”
Pressured on the issue, with reference to the fact that small businesses may find it hard to switch away from Microsoft’s products because of the long history they often had with the software, Marlow said she did not believe small businesses were locked in to using Microsoft software.
“Most of our software programs are built with interoperability in mind, so you can use tools to transfer data and technology,” Marlow said. “I hope if they have been using our product for 10 years they have seen value out it, that it has helped them run their business and that that is why they made the decision to make that acquisition in the first place. We have to keep building on those products, keep making sure we compete and innovate, keep making sure that we deliver the value they want, because they do have those choices in this market.”
In my opinion, Marlow’s testimony before the IT price hike inquiry last week strongly demonstrated the difficulty which Australian Federal Governments find themselves in when it comes to this issue.
The fact of the matter is, as Marlow pointed out on a number of occasions, that Microsoft is not technically breaking the law with respect to its pricing habits in Australia. Usually companies are relatively free to charge what they want for their products in a competitive open market such as Australia, unless they are in a monopolistic position and abuse their market power. In all of the product categories which Microsoft operates in, there is sufficient competition to state that its products aren’t the only option, even if its just open source products such as OpenOffice.org.
Of course, in a practical sense, there is very weak competition in many of the markets which Microsoft operates in; so weak as to be immaterial to the debate. Products like Microsoft Office, Exchange, SharePoint and others are so dominant in the spaces which they operate in that Microsoft well as may have a monopoly in those areas. Customers can choose to use other products, but the Microsoft ecosystem is so interlinked and so foundational that almost nobody chooses alternatives. A good example would be Microsoft Word. Personally, I do all of my writing in Apple’s Pages alternative, but I am still forced to keep a copy of Office on hand, because no other suite does a 100 percent perfect job of opening and editing the Microsoft documents which my partners, customers, sources and readers send me.
If the Federal Government wants to do something about that, it can; the government, after all, sets the entire regulatory environment in Australia for capitalism to take place. Of course, it probably won’t — it could expect massive, well-funded legal challenges from companies like Microsoft and Apple, which are some of the world’s largest companies of any kind.
In this sense Marlow is essentially staring down the Federal Government’s challenge here; declining to attend its parliamentary inquiry in the first place, stonewalling it with meaningless and abstracted high-level statements when the executive is compelling to attend, and falling back on statements regarding the law and the open, capitalist market when required.
It was interesting to see Adobe harmonise the Australian price of its Creative Cloud suite with its US prices; this appeared to indicate at least a modicum of sympathy with Australian customers on the issue. From Marlow’s performance last week, I doubt we’ll see anything of the same from Microsoft. The company is playing hard ball. To deal with it, I suspect will take nothing less than some form of regulatory enforcement action from the ACCC (if any regulations exist which are pertinent to this situation), or new legislation from the Government. I highly doubt we will see either.
Image credit: Microsoft