With the Australian dollar continuing to soar against the US currency analysts are tipping a gradual rollout of ICT price cuts.
But big vendors are keeping tight lipped on whether they will make the move.
Since the lowest troughs of the economic downturn when the Australian dollar fell to around $US0.60, the currency has made a steady rebound and now trades at just under $US0.90.
IDC’s ICT spending analyst Jean Marc Annonier said that while the rise in the Australian dollar should logically result in lower IT prices, other factors, such as how much stock vendors had lying about in local distributor warehouses would dictate when price cuts were passed on.
“Nobody knows how much stock vendors have so it is really a wait and see game. Vendors’ partners in the channel need to get rid of their old stock before they can start lowering prices, so my advice to IT manager is that yes, prices will come down,” he said.
The analyst noted prices could already be seen to be coming down with both Cisco and Sun having already made significant cuts this year after raising their prices last year because of the dollar's fall.
“Because it is a very highly competitive game, and the margins are not high, vendors need volume, so the prices [of other vendors] will come down,” Annonier said. “Stock is like immobilised capital, so typically vendors will have three months’ supply of stock at the maximum so we will see prices coming down in the next three to six months, so my advice would be ‘wait and see’.”
Annonier also advised IT managers to find out from their vendors how local sales teams had their sales targets set.
“If vendors have sales targets measured in Australian dollars as opposed to US dollars then they have much more freedom in how they do their pricing,” he said. “If they are measured in US dollars then they will tend to keep their prices high, where if it is Australian dollars, then prices will tend to come down more quickly.”
Forrester analyst Tim Sheedy said that if any prices were to fall as a result of a strong Aussie dollar it would be hardware rather than software vendors which would move first.
“Hardware is a low margin game and if one [vendor] moves then they all tend to move and it is a very price sensitive game as if one vendor is 10 per cent higher than another then customers will switch vendors,” he said.
However, in order to give local operations surety over price, exchange rates were typically fixed for a quarter or year so an immediate pricing change in response to an increased Aussie dollar would be unusual, Sheedy said.
Additionally, local operations would likely use an improved exchange rate to bolster revenues which had been sapped by the global financial crisis.
“Even if there were real exchange rate benefits passed on to local operations in Q4, I suspect many of them will choose to do some profit taking as they have probably had three pretty average quarters before that,” he said. “Better exchange rates given by corporate HQ will help their revenues through the year… as there has been a clear slow down in IT spend during the year.”
Price cuts could flow through early next year via new products issued at lower price points rather than discounts on existing products. Already vendors such as Apple and HP could be seen doing this. Assuming stability in the exchange rate, price cuts on software are likely to flow through in Q1 and Q2 next year, Sheedy said.
“Where price cuts on software will be felt is on the maintenance prices… which is typically 15 to 22 per cent of the cost of the purchase,” he said. “Already there is a huge amount of flexibility in the prices of upfront licence costs, but what is typically not negotiable is the ongoing maintenance so that’s where you will see the price cuts.”
However, he added with the use of firmer negotiation tactics IT managers could access lower cost IT now instead of waiting three to six months for official price cuts.
“That may involve talking to your vendor about cloud computing as part of your purchasing strategy for hardware which will get your hardware vendor pretty scared,” he said. “There is leverage in other places aside from exchange rates – such as alternate purchasing models – that will allow you to get lower prices.”
Despite the rise in the Aussie Dell, VMware, HP, Cisco, IBM and EMC are all keeping tight lipped on whether they will move to reduce prices.
An HP spokesperson told Computerworld that like all organisations it made pricing changes based on fluctuations in costs, market conditions and exchange rates but was unable to provide specific details on current or future pricing strategy.
Similarly, a Cisco spokesperson said it adjusted its pricing over time to reflect a number of factors, including currency changes, and that it remained “transparent and proactive in communicating any changes to the market and our partners".
A spokesperson for IBM was more expansive, saying that despite having an extensive portfolio comprising of thousands of solutions across its software, hardware and services lines of business, it regularly reviewed its pricing to ensure its was “appropriate for market conditions”.
Therefore, prices of some solutions may go up while prices for others may go down in response to changing economic conditions and cost structures, the spokesperson said.
“IBM's long-standing practice is to avoid frequent price changes due to currency fluctuations, which naturally are unpredictable,” the spokesperson said. “This practice provides pricing predictability in local currency, which is desirable for our customers.
“IBM continues to monitor a number of currencies around the world and may take additional general price actions up or down in response to long term currency movements.”
Similar responses were received from Sun, Dell, EMC, VMware and Microsoft.