iTunes Ripping Off UK Customers?
Back in the latter part of 2004, The Office of Fair Trading (OFT) referred Apple’s iTunes service to the European Commission on grounds that it was over-charging UK customers. This followed a complaint from Which?, a charity that aims to raise awareness of consumer rights, who pointed out that UK’s iTunes customers pay almost 20% more than its neighbours, France and Germany.
Now, according to icWales, Apple will finally be facing a heavy fine for “overcharging.”
“The European Commission (EC) alleges that agreements between Apple and major record companies violate EC Treaty rules banning ‘restrictive business practices.’ The commission has sent a ‘statement of objections’ about online music sales to Apple and the record companies involved.”
Ignoring the recent price increase for DRM-free music, DRM’d 128kbps music available on iTunes through the UK store costs 79p, while the Americans pay 50p and Europeans pay 67p ($0.99 & €0.99).
Because Apple verifies customers’ countries via their card details they can only purchase songs from their country store; according to the EC, “consumers are thus restricted in their choice of where to buy music, and consequently what music is available, and at what price.”
Apple and the record companies involved, said to be Universal, Warner, EMI, and Sony BMG, now have two months to defend themselves or face a fine of up to 10% of their worldwide annual turnover. To give you an idea of how much that is, Apple’s turnover for 2006 was $19.32bn, which means that they could face a fine of up to nearly $2bn, something I’m sure they could live without.
As present Apple’s only response to the complaint and possible lawsuit is that they “always wanted to operate a single, pan-European iTunes store accessible by anyone from any member state, but we were advised by the music labels and publishers that there were certain legal limits to the rights they could grant us.
“We don’t believe Apple did anything to violate EU law. We will continue to work with the EU to resolve this matter.”
Really iTunes or just a case of “Rip-off Britain?”
As many people know, Apple makes very little profit on individual songs sold through iTunes, so there’s a good chance Apple is going to lose out in two ways if they are forced to reduce their prices and cough up the hefty $2bn fine. But is it their fault?
In the UK at the moment, the cheapest album purchase in ASDA (Walmart) costs £10, while the cost in America is around $10. Translated, the Americans actually pay just over £5 an album, which means UK consumers have to fork out an extra £5 for the same set of songs.
While I’m sure the record labels are partly to blame, the real criminal here is the UK government and its 17.5% V.A.T. (Value Added Tax) that forces the record labels into increasing their prices just so they can make a reasonable profit.
So who do you think is to blame here? Are the record labels being greedy? Are they being forced into raising their prices because of the UK government? Or is it Apple who is overcharging UK consumers?
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Good god… It’s the UK’s tax laws. There gonna sue themselves or at least through the lawsuit see the error of their tax laws. Remember how many labels sell to iTunes that RESIDE in the UK? VAT, VAT, VAT…
I disagree with the last statement - the 17.5% VAT only accounts for the price being 17.5% higher - an album costing £5 ($10) in the states should only cost £5.87 with a 17.5% VAT markup, not the £10 that it does. Also, most other states in the EU have VAT of around the same amount - 19.6% in France and 19% in Germany, yet the cost of Albums is still less than that in the UK.
Apple & the labels will lose on this. If I remember right, something similar happened with auto dealerships and the upshot was a UK resident can go to any EU dealer and buy a RHD car. This was attractive to UK residents because the UK dealers consistently charged higher prices than the rest of the EU. Somebody else might know more about this.
The main reason I consider the itunes store to be over-priced is that DRM-ridden albums cost £9.99, when instead I can buy a DRM-free physical CD for £8.95 (or often less) from places like play.com and cdwow.co.uk.
I suspect that Apple had no choice in many ways. The record companies simply sold their songs for a higher rate, and tha twould be how Apple justifies the difference.
It may be harder if only half the record companies wanted to charge more, and the others were willing to charge the same throughout the EU. If this is what happened, Apple may have chosen to set a single common price in the UK. I imagine that would leave them in hot water.
With regards to the Europe iTunes issue.
Apple is not at fault here, it is the record companies. There is already precedent over this in Europe. A while ago the European car manufacturers and in particular VW were preventing dealers selling to customers IN EUROPE but not in the dealers own country. This is a clear breach of European Free Trade laws and VW (not the dealer) eventually were heavily fined. If we use this example and compare it to the iTunes case, then the record companies play the part of VW and Apple is the dealer.
So in this case I do not believe Apple have anything to worry about but the record companies do.
Note: Two and half of the four big record companies are European and should know better.
With regards to pricing and VAT.
The UK iTunes price will be dependent on the wholesale price Apple got from the record companies. I don’t think anyone believes it is not the case that the record companies charge Apple a higher wholesale price for the UK, i.e. the record companies are ripping UK customers off. This theory is supported by the fact that irrespective of VAT, CDs also cost more in the UK than the rest of Europe (or the US).
Note: UK VAT is 17.5% which is not the highest nor the lowest in Europe. US sales tax seems to average about 8%. Therefore all other things being equal, UK prices should be about 9.5% higher than US prices, this is obviously not the case.
While it does not apply in this iTunes case, I can illustrate an example as to why often UK prices are much higher than US prices.
In the US a manufacturer, might sell directly to a reseller, who then sells on to the customer. The reseller might as an example get a 25% margin (the exact figure does not matter).
The same US manufacturer would also be selling internationally, but this time they sell to a distributor (importer), who then has to sell to a reseller, who then sells to the customer.
Now, logically, the importer (distributor) is going to have much higher costs than a US reseller, the importer is going to have to pay international shipping, customs duty, and still give a margin to the reseller, they also often take on the local marketing, support and warranty burden as well, so you would logically expect the manufacturer to recognise this and give a bigger margin to them. The sad reality is that many/most US manufacturers give that importer the same exact margin as a US reseller. Now the importer needs to make SOME money and its costs are much higher so what happens is as follows.
US manufacturer -> US reseller 75% of US retail (25% margin) -> US customer 100% of US retail
US manufacturer -> Intl Distributor 75% of US retail (25% margin) -> UK reseller 100% of US retail (25% margin) -> UK customer 125% of US retail
and then after that you get charged VAT at more than double the typical US equivalent.
So to summarise a UK distributor is charged the same as a US reseller even though their costs are much higher and they are doing more work, they than ADD a margin (e.g. 25%) on top of their cost and charge that to the UK reseller, the UK reseller then adds their margin (another 25%) on top of THAT, and charges the customer that (plus VAT).
Now one could argue that the costs of supplying the product to a UK customer are higher (they are), but one could also argue that the US manufacturers are also being very unfair as well (since potentially their costs are actually a bit less since they are typically doing less support for international customers).
Now this does not cover all eventualities. There are indeed cases where manufacturers are ripping UK customers off over and above this distributor problem. For example, look at books. Books are zero VAT and duty rated in the UK but actually do get charged sales tax in the US. Nether the less, the US edition of a book bought from Amazon UK, is almost always cheaper than the UK edition of the same book also bought on Amazon UK. Since the shipping costs to Amazon are going to be less for the UK edition, and there is NO tax at all, the only conclusion is that UK publishers are ripping UK customers off. This applies to many other products as well (e.g. CDs, DVDs, etc. etc. etc.).
There are also manufacturers who make/assemble products in Europe (e.g. Ireland) and don’t make any in the US, and yet still the US price will be cheaper.
*sonysonysonysonysony*
Of course it’s Apple’s fault. They try to hide behind record labels in the case of iTunes. So how do they explain why their computer products are so much more expensive than in the US?
Also wrt to DRM free records, according to EMI, it is Apple that insisted on charging more for these tracks not EMI.
Also wrt to DRM free records, according to EMI, it is Apple that insisted on charging more for these tracks not EMI.
I wonder why that is. We all know Apple only breaks even with the iTS - i.e. it sells the music at cost - so it would make sense if that price increase is actually needed to cover the 100% increase in bandwidth costs for these new tracks.
Actually I may have to disagree with what I just said. I think apple’s current bandwidth costs per track are considerably less than the price difference. In fact I strongly doubt that apple keeps most of that extra few pence. EMI may be telling the truth in that it might have been Apple’s idea, but I would think largely as an incentive or deal-clincher for EMI.
It must also have strategic importance. Perhaps positioning DRM-free as ‘better’ than DRM-encumbered will have a positive effect, actually.
Apple had to price these 256kbps DRM-free tunes $0.30 more expensive than normal, DRM’d 128kbps editions to differentiate them and not cannibalize the >90% existing content.
The extra 100% bandwidth is hogwash since Apple OWNS the data centers and merely peers with Akamai as local WAN reflectors. I am sure there will be slight increase in total bandwidth but now, since majority of offerings are with the lower bitrate qualities, the price increase is called product differentiation in the biz.
Apple already shuttles over 750MB per video/movie files routinely so an extra 128kbps audio encoding will not stress the system that much more. It will be full HD (1080p) that will at a certain compression rate.
As for this articles assumptions that iTunes is ripping off UK customers, it goes along with the territory.
If we were all paying the same exact price for everything we consume, then where is competition? Where would global trade be if this was the case. I can buy anything in China for the same price as I could bear in the US or the EU. This article’s premise or ignorant question is debatable indeed.
Another case, why doesn’t Royal Dutch Shell price their petrol (gas in states) wherever they do business (and they are virtually at every nook of the known world) exactly the same price? Then the same Britons would not be complaining that they are getting overcharged and made the pot-of-gold in the free trade world.
I don’t exactly know how the flow of goods are done in the UK. There has to be more than the previous posters have laid out. National taxes (VATs) only play a 19.5% markup so it doesn’t explain the big differences with the rest of the EU. Ben, perhaps you can explore this for us.
Good points, Robotech. Welcome back, by the way.
Ben, perhaps you can explore this for us.
Bit tired just now, actually.
All I can say is, in India, Duracell AA batteries cost like 50 pence-equivalents for several. Over here I’d think you’d pay about 3 or 4 times that for the same several. Things cost different amounts in different countries. If an economist could step in here and explain why that really is I’d be fascinated.
Had to unplug for a wee bit to attend to more wallet-endowing ventures, if you get my drift…
But count on the Robo to come back and share his loads of acquired intelligence from his adventures.
Neeways, local prices are set by the local market. Duracell prices in the UK should and almost be different anywhere else including nearby France (just 30 some odd miles via Le tunnel sous la Manche or the Chunnel.
The UK must have prevailing higher prices compared with the US or mainland European countries to have this difference in prices. Often, the prices in the UK seems to be higher.
Books for instance (as someone already mentioned) are not priced equally. The US retail price is almost always cheaper than Canadian or UK retail.
Yes those are suggested retail prices stamped on the back of the books yet it clearly shows that UK prices are going to be much higher.
Is this a secret just discovered? Or are Britons laying the whips on Apple for pricing iTunes tracks higher than anywhere else? Hmmmm…
iTunes content offerings are still a product with a certain perceived value. That perceived value is set locally by the local consumers and not by consumers in the US or mainland EU countries. Their local prices are theirs to control by their supply/demand inter-relationships.
Any market economist in this thread to explain it further?
I see lots of similarites between Microsoft and Apple as far as business model is concerned…
Why do apple and duracell price differently depending on market?
Every buyer in the world has a different amount they would pay for a product - Bill Gates would pay $1m for a dell PC if there was no other choice and he wanted to code, an Indian CS student might never be able to pay more than $200 as that’s all he’s got.
Similarly every seller in the world has a price he’d sell for - maybe a little bit more than what it costs them to get the stuff in the first place.
Somewhere between these two prices the deal is made. The seller wants to maximise his profit - cut his price til he sells as much as possible, without cutting it so far he cuts his profits. The buyer wants to push down the price, but not so far enough that he puts the seller out of business.
In India people are less able to pay, and it costs less to make, distribute and sell things. This is why prices are lower there (e.g. batteries)
iTunes pricing is set by apple because there is no real competition - so the deal is made at the seller’s price, rather than the buyer’s price.
Not sure why this means European prices are lower, but here’s a hypothesis - Rich Britons are very rich, and they can afford to pay a lot for iTunes. Non-rich Britons don’t buy music off iTunes, so dropping the price will just cut profits.
Second theory - the prices need to be set by Apple to last for some time. The pound is volatile against the Euro, so Apple needs to protect itself against the fx rate by buying options. This costs money and adds to the price. The pound is a high interest rate currency, so in the future it is expected to fall. Hence the move is against apple - if it sets the price at 1 euro = 75p now, in two years time it will only be getting .95 Euro = 75p.
It’s difficult to raise the price of products, so it’s better to set the price high now than have to hike it in a few months time. The other reason that prices seemed high when your posts were written is that the pound has rocketed up in value recently making 79p seem like a lot of money. Now the pound has fallen again the Euro rates (75p today) don’t seem so expensive.