Why Software Piracy Pays

When you shell out $200 for your discounted upgrade of Windows 7 Professional, you're actually helping pay for a copy for someone in China.


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I don't condone software piracy, and I wouldn't recommend it to anyone. But it sure has paid off for China.

Pundits and bloggers bitch and moan about the price of software, including Microsoft flagship products like Windows and Office. And it's true. The stuff is expensive.

Making matters worse is that part of the price we pay is a subsidy or transfer of wealth from countries with low piracy rates to those with high piracy rates.

In other words, you and I pay more for some software as a penalty for obeying the law and honoring user agreements. Other countries pay less as a reward for breaking the law and making illegal copies of software.

Why We Pay for Their Software

This phenomenon is repeated across the industry, and in many countries. But to simplify the issue, let's focus on Microsoft, the leading software company, and China, the world's largest country and one with a very high piracy rate.

Years ago, Microsoft charged the same price for Windows and Office in China as it did everywhere else. This fair, even-handed pricing policy failed miserably, as China's high piracy rates meant that people just bought or made illegal copies. Even the Chinese government and military was pirating Microsoft software.

To combat this problem, Microsoft cracked down hard, using raids and the courts to punish counterfeiters. But that strategy failed, too.

Chinese nationalists rallied around the software pirates, and the whole episode resulted in Microsoft gaining a reputation as an industry bully (hard to imagine, I know).

Then along came Linux. Because Microsoft was viewed as a big, evil foreign company bent on coercing poor Chinese people to pay too much for software to make Bill Gates the richest man in history, pirating Windows and switching to Linux was viewed in some quarters as a kind of patriotic duty, a virtuous act.

About eight years ago, Microsoft reverse-engineered the problem and came up with a new, multi-pronged strategy. First, they would resist the encroachment of Linux into the Chinese market by easing up on counterfeiters.

Sure, Microsoft wasn't getting paid for the vast majority of Windows installations, but at least the company could maintain dominant market share.

By selective leniency on counterfeiters, Microsoft has retained and fortified its dominance in China. Now, most major companies and government agencies use Windows because it's the de facto national standard, thanks to piracy.

Microsoft selectively approaches those companies and agencies and says, Look, you guys are using Windows -- shouldn't you be paying? We'll give you a massive discount.

And this is where the subsidy comes in. Microsoft offers public prices that are lower than people pay elsewhere, but not dramatically lower.

Behind the scenes, Microsoft is wheeling and dealing, selling software at extremely low prices. OEMs, big government contracts -- these organizations are paying a fraction of what comparable organizations in the US pay.

One report says that Microsoft sold or is selling a bundled deal of both Windows Vista and Office for $3 to anyone who can flash a student ID. OEM prices are in the $7 to $10 range for companies selling PCs inside China.

If you assume that Microsoft has specific targets for worldwide Windows and Office revenues and profits, then those targets can only be met if somebody is making up for the losses on steep discounts in high-piracy countries.

And that would be us.

Next Page: Piracy and the Big Picture

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Tags: Linux, Windows, Microsoft, Vista, piracy

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