European Software Bargains: Who’s Gouging Whom?

Right now the cheapest software deals in all of Europe are just south of where I live, in Marlow, New Hampshire, home of mail order giant MacConnection. European netters writhe with envy every time some New Englander mentions having just picked up PageMaker 4.2 for $400. The cheapest deal in Europe right now is more than twice that. It should be no surprise then that American mail order firms like MacWarehouse find many people ordering software from Helsinki to Milan. Even after value-added taxes exceeding 25 percent and shipping that can be as much as $40, U.S. mail order firms consistently provide cheaper deals than any offered by a European retailer.

This point has not been lost on European netters. Unless you’ve been under a cybernetic rock, you’ve read complaints from the Continent about the evils of American software corporations. U.S. manufacturers have been accused of everything from conspiratorial pricing to naked greed to plain stupid marketing. But there seems a reason to the madness. And that reason may not have much to do with the software manufacturers.

THE PROBLEM

"Prices for the end users are too high and the level
of service is too low."
    -David Steiner; Vechta, Germany

Put simply, it seems non-American software consumers are getting soaked. Over the past six months, a rather large and random sampling of American-made software products sold from about one and a half to two times as much as it did back in the colonies. (The variation in relative cost came not so much from changes in prices, but rather from wildly shifting exchange rates.)

Also, several major American software companies are beginning to garner consistent complaints about a lack of customer support for European patrons. Even worse, when Europeans spring for a call to U.S. customer support, they are often turned away, told that they must go through their recalcitrant European distributor. One TidBITS reader from Vienna said he used his American parents’ address when he registers software to guarantee decent support and cheap upgrade prices.

David Steiner, a researcher in Vechta, Germany recalled a time when he tried to get a question answered from Symantec’s European office (Netherlands). His fax was never answered.

"We report bugs," said Jan Steinman, a Swiss who often tries to help clients find customer support, "and companies disappear off the face of the earth, or at least the face of Europe."

Many registered purchasers of Microsoft Word, Microsoft Excel, Norton Utilities and other name-brand American products still have yet to receive update notices for the latest software incarnations.

"The sad part of this," added Steinman, "is that, due to the weak dollar, U.S. goods should be real bargains these days."

Dr. Alan Hewat, of Grenoble, France, told of an experience where he failed to get any sort of a response from Adobe Europe (both offices, in the Netherlands and Scotland) until he finally sent back his original Illustrator disks with a nasty letter to Adobe’s offices in America.

Adobe, as Mike Glendinning of Britain reported, also proscribes U.S. retailers and mail order firms from selling to foreigners, denying better deals to non-domestics.

Some companies do better than others, however, when it comes to service and prices. Dr. Hewat noted that in a recent French MacWarehouse catalogue, Aldus PageMaker and Adobe Illustrator both cost over $1,000 (this before an 18 percent tax!) while Microsoft Word cost $374 – roughly comparable to the U.S. street price.

When Erkko Autio of the Institute of Industrial Management of the Helsinki University of Technology was asked what was going on, he responded, "Many American companies are suffering from what I call the home market myopia."

He said that since U.S. companies have already determined that their home markets are large enough to sustain them, they "tend to focus on that only and ignore the international dimension." He went on to add that if the U.S. is not careful, its software industry might follow its car industry – into the red.

"To put it simply," summed up Autio, "some American software companies are acting arrogantly toward their European customers."

Europeans are not alone, however. All countries but the U.S. and Canada suffer from the same pricing structures. Frank Horowitz, of Mt. Waverley, Australia listed about 50 items offered in a Sydney-based catalogue. Americans buying from the very same company pay only one half to two thirds as much as Australians.

Judging from the frequent protests seen on the nets, people are beginning to take notice of the opportunities they are being denied. And they are demanding an accounting.

AN ACCOUNTING — Software companies by and large do not charge different prices in European markets – at least for the original, English versions. For the most part, the mark-ups are perpetrated after they’ve been sent over the Atlantic.

Licensing, taxes, various certifications and so on add to the cost, according to University of Connecticut marketing professor and well-known network omnipote Murphy Sewall.

"In short," said Sewall, "it really may be more expensive to make products available in some markets, but perhaps not 70 percent more expensive."

Companies do spend a good amount of money localizing their products. You can’t just use ResEdit to change all the words to a different language. Manuals and other documentation must be translated and printed. Multi-lingual technical service employees must be hired. This, however, fails to explain the entire price difference.

"It costs a lot of money to translate the manuals and other paper documents, but that does not explain why the English versions of the software I buy is as expensive or, sometimes, more expensive than the German one," noted transplanted American David Steiner.

Here’s the low-down. Large companies have the capital outlays to create a national subdivision for a particular market – say Italy. This subdivision can then take advantage of the tax, labor and product regulation benefits given to domestic Italian companies. Smaller software companies, however, must hire a local distributor in order to compete from afar. The distributor, however, asks for rights to a monopoly for the product in the particular market since the market is so tiny to begin with. No monopoly, no deal. This creates a situation in which distributors feel they must charge a high mark-up because of their relatively minuscule market and the market constituents feel they’re getting the rod due to the monopoly – and, in some respects, they are.

"Distribution monopolies undoubtedly drive European software prices up, either through waste or greed," noted a recent Info-Mac Digest contributor. "But, even in a perfect world, software in Europe would be more expensive than in the U.S. because the expenses are higher and the markets smaller."

SOFTWARE COMPANIES RESPOND — "I know of no software company that charges a penny more for exported copies of software. In fact, we often lower our prices to overseas distributors," said Terry Morse of Fifth Generation Systems, makers of AutoDoubler and other utilities. "The real problem is that no other nation can compete with the U.S.A.’s efficient and highly-competitive distribution and sales channels."

U.S. manufacturers give European distributors identical deals to those they give the Americans, according to Morse. The higher prices come from foreign markups. "50 percent is the low end of markups overseas. 100 percent is more typical," said Morse.

Another executive from a different utilities developer, who asked that he not be identified, concurred, "The end-user price differential comes from the fact that the foreign distributors mark up the product a lot more than the domestic ones, mainly because they serve much smaller markets."

He noted that "advertising costs roughly twice as much per subscriber in foreign markets," and "there are costs associated with shipping, customs and the administrative expenses of maintaining an international vendor/distributor business relationship."

He also defended the monopolistic nature of software distribution: "Most international software distribution is territory exclusive. If there were two distributors in a territory and one does a good job of building the market, the other would lowball the marketing and support budgets in favor of a cut rate price and get the business generated by the ‘good’ distributor."

Finally, several executives pointed out that retail channels outside the U.S. are simply not as efficient as they are in the U.S. There is limited mail order, practically no superstores and a much less well-developed dealer channel.

Larry Zulch, of Dantz, was reticent to lay all the blame on distributors, however, noting that "the number of distributors going bankrupt is at record levels." Instead, he blames the "fact that the services distributors provide are expensive, particularly when the volumes are low."

Zulch highlighted the differences between domestic and foreign distributors. Here in the U.S., distributors rely on the software company to provide customer support and upgrade programs. "It makes no sense for a German end user to call us: not only are they likely to call at 2:00 AM, but we don’t speak German," Zulch pointed out. "So our distributor provides tech support – in effect, they become Dantz in Germany."

THE SOLUTIONS

"If the American companies do not treat their European
customers well, it is certain that someone else will."
    -Erkko Autio; Helsinki, Finland

When pressed for a solution, Fifth Generations’ Morse said half-jokingly, "Do away with borders so markets will be big enough to support large distributors and dealers. Do away with value-added taxes that escalate the price of software through every step of distribution."

More seriously, several companies are beginning to experiment with new forms of distribution. For instance, one company said it was experimenting with dissemination via loaned CD-ROMs.

"I believe that the end of full service distributors is in sight," said Dantz’s Zulch pondering the future. "It has already happened in the US, and it will happen in other markets as well, starting with Europe."

Already Dantz ends up making less per copy sold overseas than those sold here despite the price differences. They sell products at roughly 50 percent of suggested retail price to companies like Ingram Micro, Merisel, and Kenfil who go on to take on the expenses of foreign marketing.

"US distributors don’t deal with end users at all. For the most part, they rely on us to provide telephone support, run upgrade programs, and generate demand," noted Zulch.

He said we shouldn’t be surprised to find those relatively expensive services no longer offered in foreign markets sometime soon. And, he adds, that might not be such a bad thing.

It’s all a matter of waiting until the foreign markets become more like the American one, said Erkko Autio. "Achieving economies of scale similar as in the U.S. is what the European integration process is all about: to create an integrated market."

One thing European computer users tend to forget occasionally is the fact that most other consumer technologies are also more difficult and expensive to come by on the Continent. The U.S. simultaneously suffers from and enjoys a full-blown consumer economy. Europe is both cursed and blessed with a more producer-driven economy. Just try finding a 24-hour ATM machine in Mannheim, Germany and you’ll see what I mean. Outside the U.S. Air Force base located there, it’s practically impossible – as it is in most German towns.

When I asked an electrical engineer in Viernheim, Germany if he missed having a Radio Shack down the road where he could pick up most anything he needs, he replied rather simply, "But I can just order something and go to Frankfurt to pick it up in a few days. Why would I need that?" He simply did not perceive he needed the convenience. And because he didn’t perceive he needed it, he probably doesn’t. But other electrical engineers who do perceive they need that local Radio Shack shouldn’t be surprised that Tandy decides not to plant a store in their European town because it doesn’t see a seething demand.

The mainstream European culture does not yet perceive it needs immediate service 24 hours a day at cut-rate prices. Things then become particularly dissonant when Europeans gaze over the pond at Americans who get their software Fed-Ex’d to them 12 hours after they call a toll-free number and shell out only one half to two thirds the money. It’s a great incentive to join the consumerism culture.

Unfortunately, barring a cultural revolution, it does not look as though many Europeans will be boycotting their fishmongers and tobacconists in deference to supermarkets and 7-11s. It’s simple market sense. Software and hardware distributors simply won’t feel safe trying to exploit the same market that can’t even make EuroDisney profitable. Discount-minded computer consumers in Europe must either wait for compatriots to join them to create a large enough market or somehow figure a way to finagle software and hardware from America.