Australia: IT pricing and the 'Australia Tax'

SUMMARY

A recent parliamentary committee report on IT pricing found that Australians generally pay more for IT products such as software, games, music, movies and e-books than customers in many overseas markets. However, a lack of engagement by the industry appears to have limited the rigour of the committee's analysis and its understanding of the issues underlying pricing differentials. Some of the recommendations in the report appear likely to have a range of unintended effects, both within and beyond the IT industry, and will need thorough evaluation.

INQUIRY AND KEY FINDINGS

On 29 July 2013, the House of Representatives Standing Committee on Infrastructure and Communications (Committee) released a widely-anticipated report on the pricing of IT products in Australia entitled "At what cost? IT pricing and the Australia tax".

The Committee was tasked with investigating the extent of price differences between IT products sold in Australia and those sold in the US, UK and Asia-Pacific markets, why those differences occur and what, if anything, might be done to address any disadvantage to Australian consumers and businesses.

As expected, the Committee found that Australians often pay considerably more for IT products such as software (including downloaded and cloud-based software), computer games, music, movies, and e-books than their offshore counterparts.

The Committee also noted that the evidence suggested that price differences have a negative impact on Australian's lives (for example, higher prices may be particularly keenly felt by consumers with low incomes, students and persons living with a disability).

Importantly, the Committee found that price differences could not be wholly justified by "cost of doing business" factors such as market size, wages, consumer protection regimes, exchange rates and localisation costs. Rather, the Committee found that price differences often arose from the international price discrimination practices of multinational IT suppliers and a willingness by those suppliers to charge "what the (Australian) market will bear".

SUMMARY OF RECOMMENDATIONS

The Committee's inquiry was prompted by longstanding consumer and business concerns about IT product price differentials. The Committee was broadly sympathetic to those concerns.

It is also worth noting that the Committee was clearly frustrated with the approach taken by IT companies to the Committee's enquiries. The Chair of the Committee, Mr Nick Champion MP, criticised the industry for "stonewalling" the inquiry and for being reluctant to engage with the inquiry to defend their pricing models. After various IT businesses declined an invitation to appear before the inquiry, the Committee took the unusual step of summonsing representatives of Apple, Adobe and Microsoft to appear before it. The Committee's frustration at the perceived lack of engagement was clear from its report and may go some way to explaining the tone and breadth of the Committee's recommendations.

A number of the recommendations are likely to be uncontroversial. For example, the recommendation that the Australian Bureau of Statistics begin to monitor and report expenditure on IT products seems sensible, particularly in light of the fact that the Committee's inquiry was hampered by a lack of comprehensive data. The recommendation that the Australian Government consider public procurement policies to make IT products more accessible to the disabled also seems sensible.

Other recommendations, however, are likely to be of some concern to business. The Committee recommends significant legislative reforms that, if implemented, would have far-reaching (and potentially unintended or undesirable) consequences for IT industry participants and other businesses that rely on intellectual property (IP) rights. In particular, the Committee recommended that:

• restrictions on parallel importation arising from the Copyright Act 1968 (Cth) (the Copyright Act) and the Trade Marks Act 1995 (Cth) (Trade Marks Act) should be lifted;
• the Copyright Act be amended to "clarify and secure consumers' rights to circumvent technological protection measures that control geographic market segmentation" and, if necessary, the Australian Government consider a ban on so-called 'geo-blocking' (i.e. techniques to verify an IT consumer's location for the purpose of enforcing price discrimination);
• the Australian Government consider the creation of a "right of resale" in relation to digitally distributed content; and
• section 51(3) of the Competition and Consumer Act 2010 (Cth) (CCA), which exempts certain conditions of IP licenses and assignments from some parts of Australia's competition law, be repealed.

RESTRICTIONS ON PARALLEL IMPORTS

The Committee recommended that all remaining restrictions on parallel importation in the Copyright Act and Trade Marks Act be removed. This change would apply to all products (such as books and clothing), not just IT products. The recommendation followed an observation that inquiry participants considered that the shift to digitally delivered content has altered the balance between the interests of right holders and those of consumers. The Committee suggested that the change would address the challenge of finding a balance in the copyright regime.

Under the existing legislative regime, there are certain anomalies in the application of IP laws (particularly trade mark law) which mean that parallel imported products are inconsistently treated under Australian law depending on the particular circumstances applying to the first sale of the goods in question (including the conditions placed on sale of the goods and the identity of the person who applied the marks to the goods). It would be sensible to deal with these inconsistencies.

There are also certain exceptions under copyright law in relation to parallel importation (such as books, which can only be parallel imported under certain conditions) which have been the subject of considerable controversy in the past.

However, it is not clear that these anomalies and inconsistencies have particular effect in relation to digitally distributed content, or how revising the laws in relation to parallel importation would address any perceived imbalance in the copyright regime.

A more comprehensive inquiry (including a review of the relevant legislation and a public consultation process) would be appropriate to ensure there is a coherent policy rationale for any changes to the existing regime and to ensure that implications beyond the IT industry are taken into account.

Recognising that geo-blocking is one way in which IT suppliers can discriminate between geographies, the Committee was concerned to ensure that Australian consumers and businesses are able to circumvent geo-blocking technologies without fear of civil liability or criminal prosecution. Accordingly, the Committee recommended that the Copyright Act be amended to make clear that circumvention is not a breach of the law. Clearly, the Committee expects this change to go some way to defeating the international price discrimination practices of IT suppliers. However, the Committee has also asked that, if this relatively minor change is not effective, the Australian Government go further and consider an outright ban on geo-blocking. The Committee made this recommendation notwithstanding that it heard evidence to suggest that such a ban may be counterproductive for Australian consumers and businesses in that it had the potential to reduce the incentive for offshore IT companies to supply into Australia in the first place.

RIGHTS OF RESALE

The Committee was clearly concerned about the restriction of purchased content to proprietary systems – that is, the restriction on consumer's rights to move purchased content to competing devices (such as by moving books purchased on a Kindle to competing devices). The Committee noted evidence from academics that mobility of digital content is necessary to increase competition.

In response to this concern, the Committee recommended that the Government consider a right of resale in relation to digitally distributed content.

The form and limitations on any such right would need to be carefully considered, given the nature of digital content such as movies and music. Because digital content can be copied an infinite number of times for effectively zero cost (and, unlike with tangible goods, a 'resupplier' retains the original content), an unrestricted right of resale could potentially break the business models of digital content creators.

THE INTELLECTUAL PROPERTY EXCEPTION IN THE CCA

Australia's competition law – the CCA – strictly prohibits 'cartel' agreements, such as price fixing and market sharing agreements, between competitors or potential competitors. The CCA also contains a general prohibition on agreements that have the purpose, effect or likely effect of substantially lessening competition in a market.

Section 51(3) of the CCA provides a limited exception to these prohibitions in relation to conditions in IP licences (e.g. in relation to patents, trade marks and copyrights); the exception applies, for instance, where a licensee is restricted from exploiting the licensed IP in a particular territory. This exception has not been considered in detail by a court and its scope remains the subject of debate, despite extensive academic and governmental consideration (for example, the exception was considered by the National Competition Council in 1999 and the Australian Law Reform Commission in 2000).

In its report, the Committee airs general concerns expressed by the ACCC and academics that this exception may facilitate anti-competitive conduct and hamper the ACCC's ability to investigate that conduct. Accordingly, the Committee recommends that the exception be repealed. However, the Committee's report does not articulate a clear policy rationale for repealing the exception. There is no discussion in the Committee's report of evidence that the exception facilitates the international price discrimination practices of global IT suppliers or anyone else – the CCA does not contain any specific prohibition on price discrimination and geographic restraints in IP licenses will often fall within other exceptions in the CCA (such as in relation to vertical exclusive dealing). The Committee also does not appear to have considered how the repeal might affect other innovative industries, such as the pharmaceutical industry where IP licenses containing a range of legitimate restraints are common.

WHAT IS LIKELY TO HAPPEN NEXT?

It is unclear whether the Committee's recommendations will ever be reflected in legislative reform.

Any reform based on the report will hopefully be the subject of further scrutiny and industry consultation and it is likely, given the impending election, that any amendments to legislation are some way off.

However, given the potential implications for IT prices and costs, digital business models and incentives to invest in innovation, businesses at all levels of the IT supply chain are likely to have much at stake in the outcome.

The report and submissions can be found here.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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