Why Software Piracy Pays

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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

The Big Picture

Again, I use Microsoft and China because it’s an extreme case, and one that’s well documented. But a similar phenomenon is happening in many countries with many companies.

Because of the radical scalability of the software market — the costs are mainly in the development, then you can burn copies ’till the cows come home — software companies can tweak and fiddle with prices and deals in each country.

Ultimately, the price of anything is whatever the market will bear. But with software, the cost of production is very low — in fact, most of the costs of production will occur whether you end up selling a thousand copies or a billion.

Those of us who pay US prices for Windows and Office are subsidizing users in piracy countries whether they get a discount or not. The money we pay goes in part to the salaries of the people who build, package and sell the software.

Whether someone in China or elsewhere is just making a pirate copy or getting a steep discount, we’re still paying for all or part of the cost of their software either way.

In a country like China with a company like Microsoft, the current strategy is probably best for everyone. Microsoft is trying to slowly change the culture in China, and to get Chinese individuals, companies, government organizations and OEMs to get into the habit of paying for software.

As China emerges into a richer nation, we can count on Microsoft to jack up the prices so that, increasingly, they pay more of their fair share.

In the meantime, software piracy definitely pays for countries like China. While those of us in the West are paying full price — and more — for software, they get it either free, or subsidized by you and me.

So when you shell out $200 for your discounted upgrade of Windows 7 Professional (act before July 11), know that you’re actually paying only, say, $190 to $150 to for your software, plus between $10 and $50 as a contribution toward a copy of Windows 7 for someone in China. And the reason you’re doing that is because they have high rates of software piracy.

You’re welcome, China!

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