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How Piracy Opens Doors for Windows

Bill Gates may not be entirely dismayed by software thieves. They seed the world market and make Microsoft a standard.

April 09, 2006|Charles Piller | Times Staff Writer

Experts applauded the approach as thoughtful, given past problems with copy protection. But it does little to deter piracy, because thousands of activation keys -- stolen or generated by software programs -- can be found easily on the Web.

Microsoft's legal approach differs sharply with that of the music industry, which sues as if it were in the fight of its life, said John G. Palfrey Jr., director of the Berkman Center for Internet & Society at Harvard Law School.

"They put Napster out of business and sued Grokster to the Supreme Court," he said.

Like Microsoft, the music industry sees network effects from piracy. For little-known artists who have trouble getting airtime, piracy can be crucial to create buzz. But instead of generating revenue growth, pirated music generally replaces a CD purchase. In most countries, music revenue is falling.

In a loudly public campaign, music publishers have pressed more than 15,000 suits against individual pirates worldwide. Microsoft and the Business Software Alliance have rarely sued individuals, instead making claims against dozens of distributors and institutional users of illicit products.

More commonly, according to industry observers, Microsoft has cut pragmatic deals to convert institutional piracy into standard sales. Instead of suing, it asks organizations found to use illicit copies to replace them with licensed, paid versions. Microsoft wares become entrenched without competitive bidding, via piracy, and formal forgiveness cements the commercial relationship.

Microsoft declined to comment on how often it uses this approach.

Piracy also prevents free, open-source alternatives such as Linux from chipping away at Microsoft's monopolies, especially in developing nations.

China, for instance, promotes Red Flag Linux -- a local, open-source competitor to Windows. As Gates concluded in 1998, piracy may be the only way Microsoft can stay in that market, embracing the opportunity to gradually convert pirates to payers. If Microsoft launched a draconian crackdown, UC Berkeley's Varian said, it would provoke the obvious reaction: "People would just switch to open source."

In China, pirated versions of Windows are easy to find on the street for 5 yuan, or about 62 cents. Why doesn't Microsoft put the thieves out of business by giving away or deeply discounting local-language versions of its products? The strategy would offer network benefits while providing better data on users.

Consistent global pricing reduces confusion for multinational buyers, Hartje said.

Experts believe high prices encourage piracy but offer the company offsetting advantages. If Microsoft sold Windows for, say, $10, it would lose money on every copy because of manufacturing, distribution and support costs. At zero cost to Microsoft, piracy enhances network effects by getting Windows out to users who can't or won't pay, without undercutting normal prices.

"Microsoft benefits from piracy, then says, 'If you think prices are high, blame the Chinese, because they are the thieves,' " said Ariel Katz, a law professor at the University of Toronto and an expert on the economics of piracy.

"They like us to feel guilty -- to think that piracy is wrong and immoral. Economically, it's not necessarily true, but it resonates with the public."

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