Bill your software low, Steve!

Steve Ballmer, CEO of Microsoft, on his recent trip to India confessed that it is not Linux but piracy that he is most worried about, especially in emerging markets such as India and China. There are indeed reasons for his worry. According to the eighth annual Business Software Alliance (BSA) global software study, China, along with countries such as Vietnam, Indonesia, Russia, Ukraine, and Pakistan top the list in terms of piracy rates. India, is in the 16th spot with 70% piracy rate. Recent advertisements by Microsoft to promote genuine Windows XP installation reflect Steve's sentiments.

Software has the distinctive characteristic of digital goods expensive to produce the first copy (fixed cost) and inexpensive to reproduce and distribute subsequent copies (near zero variable cost). Moreover, sharing the software with others much like other public goods, does not reduce its consumption utility. Researchers have found strong co-relations between the per capita GNP of countries and piracy rates. Lower the GNP, higher is the piracy rate.

However, Steve argues that software is used by organisations and individuals who have enough purchasing power and are relatively affluent. So why can't they pay the original licence fees? It is not exactly the purchasing power of the population but the reservation price the willingness to pay  that determines whether the user is willing to shell out money to buy the original licensed copy or alternatively get the low-cost pirated version. Researchers have also found out that though software piracy is touted as the poor man's only avenue for participating in the new information economy, piracy is rampant even in some of the high-income economies such as Singapore - 48%, Korea - 50% and Hong Kong 56%. The most common form of piracy is that of legally obtaining an evaluation version and subsequently entering a copied license code or applying generic patch that undoes copy protection. Legally obtaining one copy and installing it on more computers, often referred to as softlifting is used by companies to reduce the cost of licensing. Mischanneling of licence meant for one purpose for another is also another form of piracy that is adopted by organisations.

Microsoft, as other software vendors, has been using different technologies for handling piracy. The most common software-based approach for piracy prevention is the use of token such as licence key, a licence file or activation code. However, illegal distribution of licence codes has proven to be very effective in cracking this mechanism. Internet provides a cost-effective channel for illegal duplication and distribution of copyrighted software.

However, the above technical measures of minimising piracy have met with only limited success. Though it is difficult to measure the reservation price for software, a solution could be to peg the software prices to per capita GDP of the country so that prices in low income economies are nearer to the reservation price of potential users. Though it is easier for arbitrage (that of buying goods at low prices in low income economies and smuggling it to countries where the prices are high) to take place in software compared to books, stricter enforcement of copyright laws and the cultural tradition of buying legitimate goods in richer countries will provide the necessary hindrance.

Microsoft announced in September, 2004 that it plans to release Windows XP Starter version in Hindi early next year. Steve unveiled plans for other Indian languages as well. Though the exact pricing scheme is still not yet known, it is expected that it will be cheaper. However, Microsoft and other vendors should consider releasing such no-frills products at substantially reduced prices in emerging markets to strengthen their presence. Microsoft should team up with Nasscom and other professional bodies to educate corporate users about the advantages of purchasing licensed software. If Microsoft wants to keep its hold on emerging markets such as India, it had better do some soul-searching along the above lines. If technical measures are enforced instead of bringing down prices, the users, especially corporate and governments in price sensitive markets such as India and other low income economies, might even be tempted to switch to open source software!