EU court decision could cut price of PVRs

For those who didn’t spot it, last week the excellent Broadband TV News site carried a report about a ruling from the European Court of Justice which may have implications for the pricing of PVRs – the hard disk recorders that many people are using for satellite and terrestrial services like Freeview, Freesat and Sky.

Until now, these have been classified as recording apparatus, and so attract a rate of duty of 13.9% when they’re imported into the EU, which of course makes them a little more expensive in the shops.

The ECJ has ruled that they should be reclassified as set top boxes with a communications function, which exempts them from duties (and that, ‘communications function’ element is why, for example, the iCan EasyHD Freeview HD set top box has a modem port on the back; it’s cheap to add, and reduces the import costs).

How prices work

Of course, the fact that the duty may not have to be paid won’t necessarily reduce prices – it could just be absorbed into the profit margin by distributors or retailers, and eventually eaten away by inflation over time, so don’t get too hopeful about a price drop yet.

It’s also worth looking at how things like this affect the pricing. Let’s suppose that a product costs a nice neat £100 to manufacture and ship to the UK.

Import duties of 13.9% take the cost at the point of import to £113.90. If we assume that the distributor of the product takes just 5% margin – out of which they’ll be promoting the product to retailers, perhaps advertising it, and handling repairs, warranty and so forth – the price that they can offer to retailers is £119.60.

According to people I’ve spoken with, some of the large retailers may demand a margin of 30%; sometimes they’ll work backwards from a retail price-point that they have in mind and say “We want to sell this at £179.95” so you have to sell it to us at a price that gives us 30% margin. But for this simple comparison, let’s assume that they just add 30% margin on, taking the final price to £155.47, but that’s before VAT is added, so the final price to the customer is £186.57, for a product that cost £100 at the point of import.

How much difference does the duty change make? If we assume everything else is the same, then the price after VAT is £163.80, or over £20 on £100 of imported product, so not to be sniffed at. And, of course, most PVRs are starting at around the £200 mark, or even higher, so potentially, there could be even larger savings.

Imbalance of power

Incidentally, going back to the point I made about large retailers having a price point in mind, if they did impose that price, then what happens is that the distributor – especially for smaller brands, who won’t have the same power as the large retailers, who can simply decide to drop the product – will be forced to cut their margin. With the figures I’ve given for the example with duty and a retail price of £179.95, that means they’d have to offer large retailers the product for £115.35, equivalent to a margin of 1%.

And after this duty change – which of course most punters won’t hear about – they could continue to sell at that hypothetical price, and if they paid the distributor his full 5% margin, the retailer would have a margin of 42.8%. Or, they could drop the price to £159.95, maintain their margin and the squeeze on the importer, and boast about having cut prices by £20.

This, of course, happens all over the retail world, not just in electronics – just ask a farmer!

3 Replies to “EU court decision could cut price of PVRs”

  1. I think your explanation is slightly wrong. According to Broadband TV News, the court’s decision isn’t based on the presence of a modem, it’s because recording is an additional function to a decoder, not the purpose of the device. ‘Communication’ is a bit of a red herring term here, meaning the decoding of a broadcast signal.

    Also, in BTVN’s coverage, PVRs are defined as being unable to record to or from external removable media like a disc or tape. So the ruling would apply to any HDD-only PVR, but not to HDD/DVD/Blu-ray combis like Panasonic’s. And what does it mean for USB storage?

    1. I was perhaps a little unclear; communication isn’t specifically a red herring – it is certainly (as confirmed to me by the folk at ADB) a method that is used to reduce duties, which is why their Easy HD 2851T box, which isn’t a PVR, includes a modem. That modem’s not used, but it’s worthwhile for them to include it for the reduced duties it then attracts. So, that principle is established already, as a way to reduce duties, and works.

      What has happened here is that the boundaries of definitions have been pushed a little in various directions, as far as I can make see. First, recording has been redefined to mean ‘recording from an external source’ with a side order of ‘and anyway they didn’t buy it just because it could record.’

      That’s perhaps not such a big push – camcorders were for a long time treated differently, and subject to a higher rate of duty, if they were able to record from an external source, which is why the cheaper ones didn’t tend to have Firewire connections.

      This is where, if you have the will to live, you need to go to the source, which is available via Europa, and see what the judgement says in case C289/09.

      Reading through the rather dense prose, certain things are clear.

      1. There are two customs categories involved. 8251 90 00 is the one in which the Sky Plus box found itself, with 13.9% duty. Category 8528 71 13 is for

      set-top boxes which have a communication function: a microprocessor-based device incorporating a modem for gaining access to the internet, and having a function of interactive information exchange

      which is to comply with a global tariff agreement.

      So, the box could, potentially, be in either, but has been in the first category. The rules for classification are set down, and include the note

      Unless the context otherwise requires, composite machines consisting of two or more machines fitted together to form a whole and other machines adapted for the purpose of performing two or more complementary or alternative functions are to be classified as if consisting only of that component or as being that machine which performs the principal function

      Much of the argument detailed in the ruling is essentially down to Sky pointing out that the main job of the box is receiving their service; the hard disk is ancillary, partly because it can’t be used as a recorder in the accepted sense, but also because even when you’re playing something back, you’re reliant upon the Sky broadcasts – it won’t work if it’s not connected to a dish.

      There’s a discussion of which is the real principal function, followed by the conclusion that (the CN is the list of categories):

      It follows from all those considerations that the CN must be interpreted as meaning that set-top boxes with a communication function and a hard disk drive, such as the Sky+ box, are to be classified under subheading 8528 71 13 despite the Explanatory Notes to the CN.

      So, the presence of communications functionality is certainly key to this – and it hasn’t been redefined to mean simple satellite reception. But whether or not ethernet will be considered a modem for the purposes of the regulations isn’t something that was discussed in the ruling, and of course plenty of PVRs don’t have a modem anyway.

      Perhaps the only people who’ll really benefit right away will be Sky (and they’ve been working on this for years).

  2. Interesting article, thank you.

    Nitpicking here, I know, but the devil’s in the detail….

    To make a margin of 30% the retailer must add 43% to the cost price.

    43% is ‘the mark-up’ and 30% is ‘the margin’.

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