How much more do servers cost in Australia?


blog How much more do hardware servers cost in Australia? Quite a lot more than in the US, according to a report by small business technology media outlet BIT, in yet another case of the Australian technology tax striking fear into local wallets. The publication reports on the cost of some gear from HP (we recommend you click through for the full article), quoting local reseller Complete PC on the ProLiant N40L and mid-range ML350 models:

“The N40L was just $40 dearer here at $390 but the [RRP] for the ML350 was $7075 locally. The equivalent US product was $2085. However, Complete PC said that they would sell the ML350 for about $3100 as the RRP was higher than the market would pay.”

Wow. Gracious of Complete PC to only allocate a 30 percent markup or so, considering the original Australian RRP was more than triple the US price. I guess we can add another product category to the IT price hike inquiry’s growing list.

I can’t say this news is surprising, given the fact that virtually every technology product or service of any level of importance seems to cost a substantial percentage more in Australia than it does overseas (even software delivered via the Internet), but it is always disappointing to see markups in the range of 30 percent for products like this. It makes one wonder what the Australian technology tax would look like on a high-end piece of gear from the likes of Oracle (hello, Exadata), IBM, HP or Dell. Anyone out there got any figures?


  1. I can probably give you a fairly good idea of the causes for the pricing disparity across the whole sector, although nothing I have to say is anything new. Sorry for the length of this comment – I wanted to be thorough to avoid any misunderstanding.

    Let’s sart with the manufacturer – for a given product (under normal market conditions) the more units you manufacture the lower the cost per unit. That’s called economies of scale, a simple and fundamenal economic concept.

    When that manufacturer goes to sell that product, they have a number of goals – they want to sell at the highest possible price the market will bear, they want to sell as many units as possible, to the smallest number of customers to simplify and reduce the costs of shipping, inventory, manufacturing, forecasting and aftersales service and support. In order to strike the best compromise between these competing goals, manufacturers will usually enter into binding legal agreements with key distribution partners (and sometime very large retailers) which provide benefits to these distribution partners such as market exclusivity in their region, while the manufacturer simplifies sales, account management, logistics and support, streamlines everything from manufacturing forecasting through to end user support,and all these efficiencies lead to dramatic cost reductions.

    The other cornerstone in the wholesale pricing model is, of course, the tiered volume pricing structure. Basically, the more units purchased in a single order, the lower the price per unit. For example, a manufacturer may sell product X for $90 in 1,000 unit quantities, but $80 in 10,000 unit quantities, and $65 in 100,000 unit quantites. It makes a lot more per unit in smaller quantities, but the costs of logistics and support are greater for smaller quantities. Larger orders also give the manufacturer greater confidence and stability, enabling them to manufacture more units per order, and purchase assembly components in greater numbers (giving them lower costs per unit), all of which reduces the cost of manufacturing each unit.

    Bear in mind that ‘large’ distribution partners for the Australian region (who may well have a monopolistic ‘exclusive distribution’ agreement) may be buying less than 10% of the volume of major American retailers like Walmart. Superdistributors like Ingram-Micro account for much larger volumes as they distribute to multiple regions and countries, but they introduce their own problems (monopolies by definition have no competition thus they are free to set prices at whatever level they choose).

    So, that’s the first part of the problem – Australian distributors simply can’t compete on unit volume, thus they pay more per item, so even with the same margin, it costs more at retail.

    In specific regions manufacturers and distribution partners are traditionally quite sensitive to retail pricing ramifactions across the market, which is where the ‘MRP’ or ‘RRP’ comes in – small retailers can still make a modest profit (around 3% in the cut-throat consumer IT space) while huge conglomerates that control the whole supply chain to retail end up with inflated margins per unit – everyone’s a winner (or so the philosophy goes). However, if you have a large, powerful retailer who engages in agressive tactics against their competition, they can set their pricing at a modest markup over their (heavily discounted) cost price per unit, which results in a retail price lower than the cost price to their competitors. So now your RRP means nothing and the smaller retailers either keep trying to sell the same item with a higher price (not too hard if you differentiate your ‘brand’ with other things like customer service that the large retailer can’t match), or they try to match the discount price on some items in the hope that it will keep bringing customers through the door, but they’ll be able to sell them other items with more reasonable markup. Such predatory pricing usually results in the collapse of the smaller businesses. If we’re using the Internet to determine the internationally available cost of a product, we may be seeing the extremely cheap pricing of low margin, large volume retailers, which even most US retailers can’t compete against.

    But that still doesn’t explain why the RRP on an item is so much lower in the US than Australia, regardless of real world discounted shelf prices.

    I’ll illustrate the next part of the story by continuing my fictional example. An Australian distributor buys product X for a wholesale, before tax cost of $80, while in the US it retails for $150 (I’m being generous – that’s a pretty huge markup for the US). The wholesaler is already buying this product for 10 to 20% more than large US companies because they are buying for a potential market of 400,000 people in a population of 22 million, compared with a potential market of 5.8 million in a population of 330 million. Now their $80 item has cost them an additional 5% import duty (I have no idea what the previous comment above was about – there is almost always 5% duty on any non-special good imported to Australia. Special goods attract much higher duty) and 10% GST, for a cost of $92. Plus they’ve had to ship the item, but assuming they use 40′ containers that cost may be less than $1 per unit, averaged out. So let’s say we’re at $93.

    Now we get to the elephant in the room. Where in some countries where competition is fierce, life is hard, and where there is no minimum wage but if there were it would be a few cents per hour, businesses apply a markup that the market can bear and that they can survive with given a strong competitive environment. Australian people and Australian businesses don’t operate like that. Because major distributors in Australia are often the ONLY authorised distributor (or one of few) they set their margins very high. We’re not talking 5 or 10%, more in the range of 20 to 40%. The next step may be to retailers, but more often the ‘distribution partner’ or importer is only the conduit into the country. They then sell to wholesalers (who may then sell to ‘resellers’), who then sell to retailers. Every step in this process prior to retail adds 20 to 40% (on average) without adding any additional value. Retail margins vary wildly, depending on the product. Consumer hard disk drives, for example, are extremely price sensitive, so are often ‘loss leaders’, sold literally at a small loss just to get customers in the door. If the retailer is happy to charge higher prices than the discount competition, their markups are still often 3% or less.

    As an aside, this is where parallel imports come in – a small player will go to another region with cheaper prices and buy products in bulk for far less than they’d pay to the ‘authorised’ Australian distributor, stick everything in a container and bring it over for direct sale at the retail level. These products don’t have normal channel warranty, so you have to take them back to the store of purchase for warranty claims, which may take them months to resolve (as they process warranty like they import – in bulk, so your product will sit around until they have a whole container of warranty products to return). The upside for consumers is access to products well below the price other retailers can sell them for, while the parallel importer has vastly greater margins than they would have buying through a local distributor, while consumers pile through their stores in droves to get access to the cheap, ‘below cost’ items.

    The further you get away from the budget consumer space, though, margins are much more palatable (for the retailer, at least). Retail markups to RRP on mid range computer hardware usually sit between 10 and 20%. Premium computer gear may have markups of up to 40%.

    Then you get to ‘professional’, business and enterprise IT. Products for the small to mid business space may actually have quite low margins, in the 10-20% area. But it can depend a lot on the product category – printers and photocopiers, for example, often have 30 to 40% margin built in (the photocopier channel is very tightly controlled by vendors, so while there’s competition between major brands, there is zero competition between different businesses selling the same brands in the same region. And we all know what monopolies do to the price of goods…).

    Enterprise and government sectors are (of course) where the real money is. One major brand at the centre of this new enquiry, for example, used to have markups of over 100% for some of their enterprise licensing suites in 100 EUL bundles. The markups on everything from HDDs to servers, racks to switching equipment, cable to software licenses in the enterprise space is breathtaking. This is why getting on the shortlist as an authorised supplier to Govt is a license to print money – without adding any real value and while only having to compete with two or three other competitors (with whom you’re probably quite friendly) all you have to do is fill orders from non-discerning govt purchasing offices with budgets far in excess of their annual requirements (who are actually desperate to spend as much as they can on as little as possible every year, just prior to the next round of funding, because if they don’t spend their whole budget, it will get cut for the following year). As this particular article shows, markups on off-the-shelf servers are truly colossal and manufacturer ‘recommended’ pricing can be several times the actual cost price of the item (yes, 2 or 300% is routine). I recommend getting yourself access to the aforementioned super distributor’s reseller portal to get some good data on the subject.

    To be perfectly honest, I think this is where you’ll find the cause of the price disparity between products in Australia and in other markets such as the US – Australians are greedy and they have a culture of entitlement. They feel it is their right to be a millionare, and every sale should propel them noticably closer to that goal. It doesn’t matter that they’re selling a product that took the engineering expertise of thousands of people over many years to produce, they feel that it is their right to make at least 50% – after all, the Govt gets 10% for doing absolutely nothing, right? Add together a lot of people in a supply chain with this mentality and the cost of good blows out pretty fast.

    So let’s go back to our fictional model, product X – we started off with a cost price from the manufacurer of $80, which turned out to be $93 landed in Australia. That importer adds 40% markup, plus shipping (say $10). So now we’re at $140.20 by the time it’s at any large retailer (smaller retail stores will probably have an additional middle-distributor involved). This is your big departmment stores like Myers and Harvey Norman, or large specialists like JB-Hifi. Stores like this will have somewhere between 20 and 40% final retail markup, taking the realistic retail price of product X to between $168.20 to $196.30. Now a 25% markup doesn’t look great, but when you compare it to the real world street price, the disparity suddenly becomes enormous – a US retailer purchasing product X in 10,000 unit quantites at the same price as our distributor may be selling directly into the market at cost + 20%. That’s $96, less than half the shelf price of the same item in Australia, and still allowing for a reasonable margin for the discount retailer.

    So how is this relevant for electronically distributed software that doesn’t pass through a physical distribution chain? Relationships. There is no major software vendor that sells products electronically that doesn’t also sell physical media and licensing through channel partners (ie the standard distribution chain). If there are physical copies of a product available in a region, the manufacturer will never deliberately and knowingly undercut the RRP on that product, even though none of the costs of distribution are involved. In fact, the manufacturer probably loves this arrangement, because any direct-to-retail sales they have via their electronic portal have astronomically huge margins.

    When it comes to digitally distributed products with no physical retail-store analogue, the importers, suppliers and distributors have a voice at the negotiation table with the manufacturer. They will argue that related products must match the pricing model for the rest of the industry. So, for example, you have Microsoft selling Windows 7 Anytime Upgrade licenses (which are just an ‘unlock’ license key to enable more features; there is no actual software delivery involved) for AUD$199, while in the US the same thing can be bought for less than USD$100. Interestingly, physical boxes containing these upgrade licenses are available in stores in the US in addition to direct purchase from Microsoft, but they can only be obtained digitally, directly from Microsoft, in Australia.

    So why isn’t everyone simply purchasing these products directly from the US, if they’re so much cheaper? The high-technology sector has a number of ways to ‘combat’ this behaviour. First, they limit support to the sales region. That means if you bought a laptop in the US, you would have to send it back to the US for warranty and support. In some cases, the fact that you’re a resident of another region may be enough for them to reject your support request altogether. Asus are a manufacturer that remains a noteable exception to this practice, supplying all products with an effectively unlimited international warranty, so any Asus product can be returned to any local authorised Asus repair centre for warranty support.

    Some premium and enterprise products also come with ‘on-site’ support provisions, so if you have a support issue a technician will attend your location to repair or replace the faulty product at no charge. This argueably high value service is worthless if you’re outside the prescribed support region.

    Then there is operation of the product – some products simply won’t work once they detect they are outside the prescribed region. DVDs and Blu-Ray films are an obvious example, but there are plenty of other devices and software that cripple themselves in a similar fashion. The smarter the device the smarter it can be about controlling your use of it, too.

    This is why all the key vendors in the spotlight over this issue are both nonplussed at the issue overall and surprised at the attention they’re suddenly receiving – to them, this is business as usual, none of this is new, none of it is unknown and none of it is in any way illegal. This is the natural market of capitalism at work – companies and individuals who have a vested interest in maximising profits, by definition. To combat it you’d have to flatten and broaden the supply channel and create a paradigm shift in the fundamentally greedy, entitled and exploitative nature of Australian businesses and individuals. Good luck with that.

    There is a silver lining to this, in a limited sense. It provides opportunities for innovation for people and businesses willing to think (and work) outside the box. The best example of this that I’m aware of is Kogan – they have essentially replaced not only the distribution channel to retail, but also the vendor – the only part they don’t ‘own’ is physical manufacturing, and almost no vendor ‘manufacturers’ manufacture in-house in 2012, anyway. Kogan uses the same factories that produce products for vendors from Samsung to Sony, but their products only have a single stop between the manufacturing plant and the consumer (and with their innovative ordering system, even that stop is almost completely redundant for many of their orders now, too). They have a single (quite reasonable) markup, so they are highly profitable while undercutting nearly identical products from other brands by 50 to 70%. What Australia needs are more innovative companies like this, but unfortunately that means a lot of existing, less efficient businesses will fail, with a knock-on effect of high unemployment (not just distributors going out of business, but all the brick-and-mortar retailers, too).

    What this shows us is our current retail business environment is unsustainable, but most Australians from store owners to distributors to politicians aren’t prepared to even consider this yet, let alone accept it.

  2. A reader sent this in from the Dell website:

    Server for Dell – Blade Poweredge M610 configured with
    2 x Intel® Xeon® Processor X5670 2.93GHz, 12MB cache, 6.4 GT/s QPI, Turbo, HT, 6C
    No OS
    192GB Memory (12x16GB) 1333MHz Dual Ranked LV RDIMMs for 2 Processors
    2x 300GB 10K RPM,6Gbps SAS 2.5 ” Hot Plug Hard Drive
    (Online prices, using Configurator):
    Australia – $17822.20
    US – $9537

    Bare bones – same as above with one processor and 8GB RAM:
    Australia – $4665,
    US – $3069

    Bit of a shocker.

  3. This is nothing new…. its why there are companies out there that will bring in hardware from other regions and resell and support it directly or have the option of going to the Australian division for support.

    I have used them in the past for midrange HP Servers (no not the ‘toys’ running windows, the ‘heavy iron’ PA-RISC servers)

    HP Australia wanted $80,000 for a server…… we ended up paying $20,000 for the server AND $12,000/year for HP Australia to support the hardware…… We had a good christmas party that year ;)

  4. From Trevor’s comment “because major distributors in Australia are often the ONLY authorised distributor (or one of few) they set their margins very high.” says it all. That is the main reason. Many products in Australia are more expensive than overseas due to lack of competition. Many virtual monopolies and oligopolies across Australian markets. Blame the governments for allowing that to happen.

    Manufacturers putting in place exclusive distribution arrangements is supposed to make the distributor focus more on selling the manufactuers product. However, it only works if the manufacturer has little competition.
    If a competitor prices lower they will walk away with the business. Look how Samsung has eaten Sony’s lunch.

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