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Apple, Microsoft, and Adobe also gets grilled about high prices by Australian regulators

According to Morgan Stanley (MS) analyst Scott Devitt, Google Inc. (GOOG) paid about $700M USD to Apple, Inc. (AAPL) in 2012 to solidify its monopoly on mobile search traffic.

I. The Price of Search Hegemony

As computing continues to shift towards a more mobile profile, Google -- a company driven by search-related advertising profits -- has moved aggressively to be the king of mobile.  By offering its Android operating system "free" to partners Google has established a dominant position in unit sales.  And by extending an olive branch to Apple -- the second place player in the market -- Google is ensuring that if a customer uses the default search on their smartphone, they'll probably use Google's mobile landing page.

Google pays an estimated $3.20 USD per iOS device sold to be the default search provider, according to Mr. Devitt's math.  That deal grossly eclipses Google's lucrative deal with the Mozilla Foundation, which Mr. Devitt estimates paid $200M USD.

Google on Apple
Google pays an estimated $3.20 USD per Apple device to be the default search engine.
[Image Source: Android Headlines]

On the desktop front, many users manually navigate to Google.  Additionally, Google's Chrome browser is currently in third place, while Firefox is narrowly ahead in second place in most usage statistics.  Both browsers have Google as the default search engine.  Overall the two browsers account for about a third of internet traffic according to Net Applications, while Microsoft Corp.'s (MSFT) Internet Explorer (IE) hangs on to half of traffic.  The default search page in IE is Bing (or the Bing-powered MSN), Microsoft's own in-house solution.

Mr. Devitt estimates that by 2019, IE will have bled more market share to Chrome and Mozilla, and Google will have greater control of the market.  However, he also believes that control will cost Google $500M USD in traffic acquisition costs (TAC) to Mozilla.

He also estimates by 2019 Google will be paying Apple $2.3B USD in TAC for iOS, as he expects unit sales of iPads, iPhones, and iPod Touches to soar to half a billion devices a year by 2019.

Google made $10.75B USD for fiscal 2012; by contrast Apple made $13B USD in Q4 2012, alone.

Google's dominant position in mobile and desktop search has drawn scrutiny.  Google recently agreed to make certain changes in the U.S. to placate the U.S. Federal Trade Commission (FTC), but Microsoft and others claim the FTC let Google off too easy.  In Europe Google is looking to settle a similar antitrust spat with more extensive promises and fairness guarantees.

II. Australia Targets Apple With Harsh Words, Parliamentary Probe

In related news, Australia's Parliament is looking to grill Apple, Microsoft, Adobe Systems, Inc. (ADBE), and others over claims that they're overpricing products for the Australian market.  

The Australian dollar is generally relatively "strong", which should mean that products there should be more affordable.  But Australians are finding that Apple and others are charging similar rates in dollars to other countries, making the Australian products much more expensive, effectively.

Labor government MP Ed Husic, who helped set up the hearing and whose party currently is the second largest in the national government remarked to Reuters, "In what's probably the first time anywhere in the world, these IT firms are now being summoned by the Australian parliament to explain why they price their products so much higher in Australia compared to the United States."

iPhone Australia
An iPhone on sale at the Sydney, Australia Apple Store; Apple is among the U.S. companies accused of price inflation and tax evasion in the land down under [Image Source: Reuters]

Australia's Labor Party has been dented by the rising cost of living and looks to leverage the hearing to its advantage before the Sept. 14 elections.

A 16 GB iPad (Wi-Fi) commands A$539 ($553.60), almost $55 more than its U.S. cost ($499 USD).  

So far Microsoft and Adobe have submitted written statements, while Apple has ignored the Parliamentary complaints altogether.  Microsoft and Adobe have defended their pricing saying that there's an inherent cost to imports and that Australia has a higher cost of labor than other markets.

MP Husic is not amused, commenting, "The companies have blamed each other for not appearing. One will say 'we're not going to appear if the other is not going to appear'. So we've cut straight to the chase and said we'll just summons you."

This time if the companies don't send executives to the hearing, they could face contempt of parliament charges, fines or even jail terms.  MP Husic takes particularly hard aim at Apple, who he effectively accuses of tax fraud.  He comments, "Ask anyone who has sought answers from them about their Australian operations and you will hear a common theme. They will not talk."

"While they generated A$6 billion in revenue, they apparently racked up from what I understand A$5.5 billion in costs. How?  They do not manufacture here. They have no factories here."

But it looks like Apple will be forced to finally talk and explain both the high pricing and why it only paid $40M USD in taxes in the lucrative market.

(Apple has faced similar complaints of tax evasion in the United Kingdom, another of its top markets.)

Sources: Business Insider, Retuers

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There are still costs.
By othercents on 2/11/2013 3:58:52 PM , Rating: 3
"While they generated A$6 billion in revenue, they apparently racked up from what I understand A$5.5 billion in costs. How? They do not manufacture here. They have no factories here."

Even though numbers seam skewed, Apple will still have costs associated for manufacturing the phone (in other countries)then shipping and selling the phone in Australia.

RE: There are still costs.
By BugblatterIII on 2/11/2013 6:28:28 PM , Rating: 2
Thing is the patent case against Samsung forced Apple to reveal its margins, which are around 50%.

It's the same profit-shifting Apple, Google, Starbucks etc. have been doing for years. Rather than bleating about it governments need to make it illegal.

RE: There are still costs.
By Samus on 2/12/2013 1:51:14 PM , Rating: 2
Yep. Legal costs add up too. Steve Jobs famously said it himself that he would spend every cent of Apple's 100 billion USD to 'right this wrong' in his thermonuclear declaration.

It looks like the billions are adding up. Fighting legal battles abroad is substantially more expensive compared to the United States.

RE: There are still costs.
By nikon133 on 2/11/2013 10:14:49 PM , Rating: 3
I don't think Australia is much further to China than US.

It might be something with volumes shipped to specific market, and local taxes. Last time I checked, almost everything technical (including cars) was cheaper in US than in most other parts of the world. Lucky them.

RE: There are still costs.
By spaced_ on 2/12/2013 3:01:23 AM , Rating: 2
I don't think the inquiry is focusing on hardware price gouging. Microsoft and Adobe sell very little in that space.

So, how much extra does a song on iTunes cost to manufacture and ship to Australia?

If the answer is over twice as much as the US then I'm sure Apple have nothing to worry about ;)

By semiconshawn on 2/11/2013 5:11:28 PM , Rating: 3
Australia to Apple...Why do you charge $50-$100 more for a phone or tablet here than in the U.S.?

Apple....Because idiots still line up to buy them.

RE: Why?
By Reclaimer77 on 2/11/2013 5:17:49 PM , Rating: 3
Australia to Apple...Why do you charge $50-$100 more for a phone or tablet here than in the U.S.?

Because people are stupid enough to pay the extra. That's rule #1 for business: Never charge less than a customer is willing to spend.

RE: Why?
By Selmak on 2/11/2013 5:40:04 PM , Rating: 3
Adobe is one of the worst at charging more in Australia, CS6 in the US $699USD the same product in Australia A$1,168.current exchange rates 1.00 AUD =1.02538 USD.

The iPad is a poor comparison
By Zok on 2/11/2013 6:44:46 PM , Rating: 5
Australian prices include a 10% VAT, while the US prices do not include sales tax. If you take that into account the "raw" non-taxed iPad price, after currency conversion, between the two countries, the difference is effectively zero.

I'm sure there are better comparisons out there to illustrate the point.

By sprockkets on 2/11/2013 7:37:24 PM , Rating: 2
An iphone5 costs $650. The same in the UK costs $690 w/o VAT. After VAT, it is $828.

Not sure about other places but just an example. In the days of att exclusitivity, people used to pay around $1000 for an iphone outside the US.

RE: The iPad is a poor comparison
By spaced_ on 2/12/2013 2:58:18 AM , Rating: 2
Yeah it doesn't appear on the surface much price gouging is going on with devices. It would be difficult to get away with given the amount of competition in that market segment.

The crosshairs appear to be pointed at software sales from these companies, e.g. iTunes, Photoshop and well, virtually anything from Microsoft.

For example, on iTunes, apparently the exact same songs are costing $2 in Australia, in the US, less than $1.

Some of the Microsoft price gouging is pretty hilarious. Apparently the inquiry has examples of software that is cheaper to buy if you fly to L.A. buy it online in the US then fly back, than it is to just buy online in Australia.

Please explain.

Not to mention other items
By Brigga on 2/11/2013 7:47:18 PM , Rating: 3
A game costs around $60 in the US, in Australia for a new launch title, try $100 or more on a console. I know Australia is a small market compared to the US, but come on the overcharging for products is getting a little thin!

RE: Not to mention other items
By spaced_ on 2/12/2013 3:03:51 AM , Rating: 2
Yeah I hope that they broaden the inquiry. It seems the entire games industry is price gouging.

Honestly, digital distribution sales shouldn't incur more than 10% GST. The *exact same thing* often costs e.g. $50 in US and $80 in AUS.

Statistics Source?
By ResStellarum on 2/11/2013 7:38:27 PM , Rating: 1
Overall the two browsers account for about a third of internet traffic according to Net Applications, while Microsoft Corp.'s (MSFT) Internet Explorer (IE) hangs on to half of traffic.

Hang on there a moment. Net Applications is known to be heavily biased because of its data manipulation techniques and small sample size. On the other hand, statcounter, which is much broader, and doesn't manipulate its data set, tells us that Google's Chrome overtook IE last year, and continues to cement its lead.

RE: Statistics Source?
By spaced_ on 2/12/2013 3:23:14 AM , Rating: 1
They seem to have a fairly large sample size. But their stats do seem rather heavily skewed in favour of IE compared to what every other market share system. I call shenanigans.

I may be slightly biased, given I wish IE to be DESTROYED! I and all of the world's web developers have called thermonuclear war on IE as it makes our working lives a nightmare.

These prices are actually ok.
By althaz on 2/11/2013 8:05:26 PM , Rating: 2
In Australia we get reamed pretty hard on prices, but these phones and tablets are some of the only products where this is not the case.

Australia was the cheapest place in the world a little while ago to buy iPods and iPads (not sure about iPhones).

You have to remember there is a 10% GST added to the price of every product, in the example given above this is the entirety of the price difference.

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