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  • Enterprise IT, News - Written by on Wednesday, March 27, 2013 14:30 - 19 Comments

    Microsoft stonewalls IT price hike inquiry

    pipmarlow

    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.”

    opinion/analysis
    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

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    19 Comments

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    1. Dave H
      Posted 27/03/2013 at 3:23 pm | Permalink |

      Just make region-locking on any form of a product sold in Australia illegal. So if you want to sell it boxed in Harvey Norman, you can’t then stop Australians buying the US version online for 70% less. Problem solved. They won’t just walk away from the market when there’s clearly still money to be made, and if people are able to trivially save 70% they will, which will drive down the boxed price.

      • Bpat
        Posted 28/03/2013 at 10:38 am | Permalink |

        +1

      • Woolfe
        Posted 28/03/2013 at 2:48 pm | Permalink |

        Its not illegal now. You can buy anything you want from an overseas site. Providing they will sell it to you. Which they obviously won’t if they can avoid it.

        IMO a simple advertising campaign pointing out the difference in other countries vs here would make a significant difference.

        Hell I reckon even the whiff of the possibility of a advertising campaign would do it.

      • Ausgnome
        Posted 28/03/2013 at 4:08 pm | Permalink |

        Governments could just stop mandating it in there departments

    2. jasmcd
      Posted 27/03/2013 at 3:27 pm | Permalink |

      It is these same businesses who effectively dodge tax laws and responsibilities by taking advantage of the openess of the international tax laws and agreements whilst blocking their customers from using similar tactics to source the best priced software.

    3. Stephen G
      Posted 27/03/2013 at 3:37 pm | Permalink |

      I’d recommend LibreOffice (http://www.libreoffice.org/default) over OpenOffice.org now for opening MS office documents. Their Office document support is rapidly improving – I’ve seen more improvement in opening complex office documents in it over the last few months than I’ve seen in years with OpenOffice.

      Between LibreOffice and Google Docs I pretty much never use Microsoft Office anymore. I haven’t upgraded from Office 2003 at home.

      • Dave H
        Posted 27/03/2013 at 3:45 pm | Permalink |

        While I totally agree with you, I think that your comment, just like the spiel from Marlow, misses the point. It’s not whether or not there are free alternatives out there… no one’s disputing that. But why can my friend on the other side of the Pacific buy the exact same thing in the exact same way (with a credit card on a website) for 70% less? What’s the justification? If there isn’t a valid justification, is there anything the government can do to stop us being taken advantage of?

        • Posted 27/03/2013 at 5:00 pm | Permalink |

          I think you answered that in your first post. Make it illegal to use region locking on the product / stores and let the consumer go outside of the country to purchase.

          If enough people did this then Microsoft would know that the cash cow of Aus is no longer isolated…

          If only the inquirey looked at other industries where we pay more than overseas (exluding trade tarrifs obviously)

    4. Stephen H
      Posted 28/03/2013 at 10:36 am | Permalink |

      Forbid region-locking to start with, but also permit grey imports and require the local representative to honour all international warranties and support arrangements for their products.

      If people can import their own copies of software from Russia and get support from the local supplier, the local supplier is going to start demanding that their local pricing change.

      • djos
        Posted 28/03/2013 at 11:03 am | Permalink |

        Agreed, I’d go one step further and ban any locally based companies and their affiliates from signing exclusive regional supply supply contracts – imo they are anti-competitive and only designed to restrict supply therefore pushing up prices!

        Part of this should include forcing companies to honor warranties for OS sourced products – decent companies do this already (eg Apple, Pentax etc).

        • Posted 28/03/2013 at 12:25 pm | Permalink |

          Yep.

          If they wants the upsides of a global market (easier trade, tax minimisation techniques by ‘offshoring’ profits), they should accept the potential downsides (handling warranties on their products sourced internationally etc), which really pale into insignificance anyway when considering the upsides.

    5. Posted 28/03/2013 at 12:22 pm | Permalink |

      I hate to say it, but:
      What. A. Waste. Of. Time.

    6. Tom
      Posted 28/03/2013 at 1:06 pm | Permalink |

      In addition to banning region locking, the other major lever the Government has got is to pro-actively move away from MS products. Choose open source or Google docs. As one of the largest group buying procurer of Microsoft technologies in Australia, their stance will both hurt MS and increase the eco-system of providers able to support open source.

    7. TrevorX
      Posted 28/03/2013 at 2:00 pm | Permalink |

      Very much agreed – but not only should region locking in general be illegal, but any technological measure designed by the manufacturer to control and restrict the use of software and hardware products by the end user (owner) whether it’s for uses beyond the scope of what the manufacturer intended or outside the jurisdiction they prescribed.

      They should also be forced to honour warranties globally – a huge part of the argument against this is the logistics: in order to provide warranty, it’s argued, it is necessary to track the chain of distribution to see who has supplied and handled the products. Because of that, the serial numbers of products are only traceable through regional suppliers – it isn’t possible to track serial numbers globally.

      That is, of course, a nonsense argument – every manufacturer would have inventory and logistics systems to determine the manufacturing plant and chain of distribution right up to their regional suppliers (it is then up to the suppliers to keep track of what is sold to whom). Manufacturers simply don’t want to give suppliers access to that information (or be responsible for any costs involved in delivery or access to such data).

      But the reality is that providing a portal for distributors and suppliers to get access to a centralised and comprehensive tracking and support environment would be relatively trivial to both deploy and maintain. It’s just that unless it’s legislated they have no compelling reason to do it.

      There is also a side benefit to such a scheme – elimination of counterfeit or stolen goods. If it is simple for any supplier to look up the serial number of any product and see its chain of distribution they will instantly be able to see if the serial number is unique and legitimate and if the chain of distribution adds up (ie it hasn’t been marked as stolen, or wasn’t sold in Estonia a year ago but turned up new in a retail store in Australia).

      Finally, a big +1 to Govt bulk purchasing from international markets to send a clear message to Microsoft Australia to bring pricing in line internationally or face obsolescence (although you do risk Microsoft playing chicken on this issue – imagine if they closed shop locally and refused to support Australians. They can afford to do it more than Australia can afford a world without Microsoft at this point).

    8. Paul Thompson
      Posted 29/03/2013 at 2:10 pm | Permalink |

      I have a totally different approach. Commission the CSIRO to developing viable alternatives to the main microsoft software. If they can come up with something that Australia can use, then it is a bonus – otherwise they may be able to come up with enough patents to screw with microsoft for the next decade.

    9. KB
      Posted 29/03/2013 at 4:20 pm | Permalink |

      In my view, Gillard should make the following changes to the law to combat this

      ****

      1. All companies operating in Australia must ensure foreign resellers are not disallowed to provide their products to Australia. Penalty – Max $10,000,000
      a) Shipping/mail order restrictions are included in this.
      b) Downloaded orders are included in this.

      2.(a) As per AUSFTA (2005), Australian consumers must be able to purchase software sold on the US market at rates substancially similar prices, taking into account
      i) any extraneous costs in domestic production.
      Penalty -Max $10,000,000
      b) The software company
      i) must not levy any premium on said software, should software be imported through mail or post
      ii) must not levy any additional premium on the software should it be provided in a downloadable form from a server external to the purchaser
      Penalty – Max $10,000,000
      c) support and warranties valid in the US market are valid and enforceable against the company in the domestic market. Penalty – Max $10,000,000

      ****

      The effect of the above provisions-
      1. There would be an epic court battle to determine ‘substantially similar’, which consumer groups would need to join to ensure a fair contest, but as a result would probably allow levies of 10-30%, which if you think about how much the cost of business is in this country would be far more reasonable compared to the 75%
      2. Software would become unavailable over the internet because they wouldn’t want to supply it so cheaply to Australians. This would drive more piracy, and push them to lower their prices on boxed software. IMHO, boxed software is superior anyway. Eventually they would cave and provide internet versions again as Microsoft are pushing this as their model.
      3. Some resellers (ALA Amazon) would still hide behind policies like “we don’t sell software overseas blah blah” but it would stop the big companies from PREVENTING some of the smaller companies from selling the packages and force the software author to support it.
      4. Fines are high because of the amount the big players charge on software

      • Giri Fox
        Posted 02/04/2013 at 12:07 pm | Permalink |

        The ideas you put are right.

        Many overseas retailers are prohibited by their suppliers (like Microsoft or Adobe) from selling into an export market (ie. from USA to Australia).

    10. Jason
      Posted 03/04/2013 at 4:55 pm | Permalink |

      The rule of equilibrium is a fundamental concept in the study of economics. That is, there is a price point that a) The supplier can charge and b) that the consumer is willing to pay. Provided that point is above the supplier’s cost, everybody wins.

      Suppliers will charge what the market can bear. It happens in *every* industry, and isn’t limited to tech/software.

      Maybe it’s time to take a look at the supply chain. Every man and his dog wants a cut. Microsoft take their margin. Your distributor (Synnex, Ingram Micro, etc) take their 10-15% cut. Your retailer takes their cut. All this before it gets to you. This is even the case for digital downloads and license purchases, still procured through the same channels despite the fact that no physical product is changing hands.

      Another good example is cars. A Ford Falcon in Australia will cost you upwards of $30,000+. The equivalent Ford Fusion in the US starts from $21,000. Different input costs play a part but it comes down to what the market will bear.

      Microsoft, Adobe, etc aren’t doing anything illegal here. Yes – it sucks for the Australian consumer but it certainly isn’t illegal.

      • mash
        Posted 04/04/2013 at 2:28 pm | Permalink |

        Bingo. People fail to realise the reason these products cost more here is that people are actually paying that amount. Simple Simple economics.




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