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News 18 March 2003 (CRN Australia)

Microsoft minds the gap

By Fleur Doidge

Australian system builders are still suffering a large pricing delta between them and multinational competitors despite regular promises from Redmond to reduce the gap.

Cornel Ung, MD at large OEM Optima, said he had taken his concerns to the Asia-Pacific arm of Microsoft previously but got little response.

“They keep saying they’re going to narrow the gap between the local players and the multinationals, but it hasn’t happened yet,” Ung said.

Although Optima’s contracts with Microsoft were confidential, he confirmed that operating system software, particularly Windows for businesses, represented 10 to 15 per cent of the total cost and most of the “quite big” pricing gap.

He said Microsoft would have to cut its prices eventually because overall product costs were coming down.

William Wang, operation manager at Adelong Computers, said the actual price difference between what Dell paid and what a small Australian company, such as Adelong, paid was “enormous”.

“On OEM products, such as Windows, the pricing to Dell is about $30 or $40 or $50. Whereas we pay about $100 per box,” he said.

That estimate was “minimal”, Wang said.

Customers who did not want to buy from large vendors such as Dell were forced to pay higher prices for similar machines. Yet local system builders could offer better pre- and post-sale support than overseas-based major vendors, he said.

He doubted Microsoft could do much about the situation because it could not control the way Dell products were distributed through the channel.

“If 10,000 or so small system builders joined together, maybe we could negotiate a similar deal,” Wang said.

“But it is difficult to have a special deal with Microsoft because they control the market and they control the prices,” he said.

Maree Lowe, director at box builder ASI Solutions, said the long-term pricing gap was preventing local OEM growth. “I remember having this discussion eight years ago. On volume contracts, every dollar adds additional expense or can lose us a deal,” she said.

Smaller local OEMs were forced to compete on services and hardware quality instead, Lowe said.

Some US-based Intel system builders have estimated Dell pays $US 40 less than they do for Microsoft Office and $US 20 less for Windows. Yet for Microsoft to make prices flatter by even a small percentage could result in a multimillion-dollar drop in licensing revenue.

Kerstin Baxter, national channels manager at Microsoft in Australia, said Microsoft did whatever it could to address pricing differentials internationally and benefits from any proposals adopted would flow to Australian channel partners. “With Windows pricing, the differential now is actually flatter than it has ever been in 15 years,” she said.

CPUs cost more than the operating system and affected the total price although she would not reveal any actual prices. “Most of those contracts are confidential,” she said.

Baxter said Microsoft was “interested” in supporting Australian system builders by using level pricing if possible.

“Like most organisations, we have a volume/price strategy ... [But] we have an international pricing strategy to make sure that our local [system] builders can be competitive,” she said.

Microsoft in the US had taken on board criticism from system builders there, and was reviewing proposals to address those concerns. She said Microsoft Australia would be informed when a decision was made.

“We don’t like to talk about it too early on,” she said.

Australian system builders were getting around 50 per cent of all the desktop operating system business in this country, she said, and systems in place ensured concerns of Australian system builders were heard in Redmond. “The world isn’t ruled by multinationals,” Baxter said.

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