Piracy Economics

Reader Anonymous Coward the younger sends in a link to an article up at Mises.org on the market functions of piracy. The argument is that turning a blind eye to piracy can be a cheap way for a company to give away samples — one of the most time-proven tactics in marketing. The article also suggests that pirates creating knock-offs might just be offering companies market feedback that they ought to attend to. (Microsoft, are you listening?)

Comments

Piracy is marker of immature market

[Harmonious Botch]

Or the marker of a market that changes very quickly. And I think that currently the OS market is both.

Once a market is mature and stable, each major supplier within that market will have a product for all market segments. ( With cars, almost every manufacturer has a cheap sedan, a mid-size, an SUV, etc. Books come in limited signed editions, then the hardcover, then the quality size paperback, then the pocket paperback. )

There are some markets that are inherently unstable - like fashion - in which illegal knock-offs will always be practical. But in most mature makets the legitimate sellers fill every niche so well that the marginal costs of piracy are not worth it.

MS will get pirated until they have half a dozen or a dozen versions of their product. It would be practical for them to give away the low end version.


PS: This even applies to labor markets. In that case we call the piracy 'slavery', and the low end versions 'volunteers'.

Re:Piracy is marker of immature market

[mcarp]

Except that you dont have to install an OS in yer car to get it running. You dont have to chose between windows/linux/bsd b4 you can drive it off the lot. The OS market was flawed from the beginning. MS could have seen fit to make tons of $$$$ off windows compat apps and given the OS away long ago after making it on the map with their buy off of qdos and subsequent bluff/save to ibm. Dont get me wrong, I dont mind ppl making money, thats how markets work, but lets face it. How many ppl would be irate if they had to chose an OS b4 driving away a new toyota?

I for one am sick of this OS/copyright/ip/uspto/riaa/mpaa war.

Re:Piracy is marker of immature market

[bigstrat2003]

They did start going in this direction with Vista, and no one (as far as I know) likes it. The layman thinks it's too confusing, the geek (well, the Slashdot user, which isn't a very fair cross-section of geeks) just mocks Microsoft. How is taking the idea further going to benefit them?

Re:Piracy is marker of immature market

[jambarama]

Yes an no. Piracy can really only apply to copyable objects. You can can steal a Civic but you can't "pirate" one. Intangible goods that can be pirated haven't been around as long as "tangible goods", like wheat and clay pots. You really can't pirate music until tapes, you really couldn't pirate movies until VHS, and software is somewhat of a recent invention itself.

I would suggest that piracy is associated with newer markets, not because the markets are immature, but because the newest markets are easily commoditized. Sure there was piracy long ago with books (since the printing press), and music (with sheet music), but we've found more efficient distribution methods go hand in hand with piracy. I don't think the music market is immature, music is just easily distributed.

Re:Piracy is marker of immature market

[simm1701]

Microsoft do give away some of their products.

The developer studio and SQL server express editions. Slightly cut down, and I doubt that most people that would buy the full edition would opt for the express edition but its a perfect example the only realistic way to cut piracy, offer a free "good enough" alternative.

In those times when I have to code something on windows (a situation I try to avoid) its now easier for me to get one of the express editions than it is to get a pirate copy. And I can use the express editions in the office.

In this case its mainly self serving by microsoft, they want people using their developement environments, so they gain by offering a free version to those that would probably never buy a full version anyway. But did you really think any company is going to do something for purely altruistic reasons?

Re:Piracy is marker of immature market

[Ravnen]

A network economy is different to an addictive drug. The reason Microsoft might want to allow piracy is because the more people use Windows, or Office, etc., the higher the utility to each user. In contrast, an addictive drug is addictive even if you're the only one taking it.

For a company like Microsoft, there are at least three or four different phases, and the implications of piracy are different in each.

1. Minor producer: if you're a minor producer with low market share, piracy may be good for gaining market share, as long as revenue from paying customers remains high enough to cover costs.

2. Dominant producer: if you're the dominant producer in your market, but perhaps still with only a minority share of the market, piracy is good, because most people pirating will be pirating the dominant product, This will spur a network effect, and any revenue implications are likely to be less important than for smaller producers.

3. (Near) monopoly, without regulation: if you've got a near monopoly, you'll gain the benefits of network effects. The network gains from piracy, and the extent to which it keeps out competitors, are both gains. Without viable alternatives, however, there is the potential for higher revenue from those who are pirating, but would pay if they had to. The network effect and the exclusion of new entrants might be worth more than the lost revenue.

4. (Near) monopoly, with regulation: if regulatory restrictions are imposed on a firm with a near monopoly, that means the gains of network effects and the prevention of new entrants are offset by both the lost revenue and the costs of the restrictions (e.g. no bundling, limitations on pricing strategies, etc.). I this case, the more onerous the restrictions, the less value there is from piracy. It may be worthwhile to give up unpaid market share, in exchange for higher revenue, especially if this leads to a reduction in regulation.

In the late 1980s and early 1990s, Microsoft was in category 2, with a dominant position, but a market share near the middle: it crossed the 50% mark in 1990. During this time, piracy was arguably good for Microsoft. By the middle of the 1990s, however, Microsoft had moved to category 3, and so whilst piracy was no longer as clear a benefit, it was still arguably less bad than good.

With the monopoly ruling against Microsoft in 2000, it moved into 4, although the level of regulation has varied. With the regulatory costs offsetting some of the network gains, piracy arguably became less valuable to Microsoft, and this may in part explain the increase in anti-piracy measures in Microsoft's software since then. Giving up some non-paying customers to competitors, in exchange for converting some non-paying to paying customers, is arguably a good strategy, especially if it reduces the regulatory pressure.

An interesting point is whether people who pirate Windows, and would switch to Linux or something else if they couldn't pirate it, are willing to pay for other software. The expected answer is no, so Microsoft could arguably give up these low-value customers without losing the benefits of being the dominant platform for commercial software development. Producers of commercial software would have little interest in developing for Linux if Linux users wouldn't buy their software anyway, so a higher market share for Linux would have little impact on the network effect there.

From the above, the risk of giving up some market share comes from network effects other than those relating to commercial application development. For example, people who won't pay for software may still pay for products and services bought over the web, etc., in which case they'd be targeted by website developers. They might also still be willing to buy relatively expensive hardware, which could reduce the network effect regarding device driver development.

Re:wtf?

[QuantumG]

Please stop confusing legality with morality.

Microsoft exec says piracy can be good for MS

[christian.einfeldt]

I saw this story first on Engadget:

'Does our collective ear deceive us? If pirates are to plunder, Microsoft now wants them to board the Windows ship first. The news came about at last week's Morgan Stanley Technology conference where MS business group prez Jeff Raikes stated, 'If they're going to pirate somebody, we want it to be us rather than somebody else. We understand that in the long run the fundamental asset is the installed base of people who are using our products.' '

So yes, Microsoft understands that there really is only one difference between FOSS-based IT vendors and Microsoft: CONTROL. You can fork FOSS, but you can't fork Microsoft products. And in the end, it is that single fact that is going to tip the economics in favor of the FOSS community. Microsoft has long given away software that is free-as-in-beer, and that did not earn them our love. We want control. Transparency. Forkability. The right to share. The right to improve. Microsoft gives us no love in these areas.

Microsoft just won't be able to compete against a developer and testing community as large as the FOSS community. We are everywhere. And I dare say we are having more fun than the Microsofties.

Pop music's quality doesn't match it's price

[Jozef Nagy]

I've been a member of the Mises Institute for years. It's good to see Slashdot picking up on their articles.

The author's assertion was that the innovator produces the initial, high quality product. Then the pirates produce low quality knock-offs to fulfill a market segment the initial innovator isn't fulfilling. In the case of the record industry, I'm afraid they're well past the point of innovation and the production of high quality products (at least as far as pop music is concerned). In that case they're selling a low end version of their music, but still deluding themselves into thinking it's a quality product.

Either the quality has to go up or the price has to come down.

Re:wtf?

[iminplaya]

Don't confuse illegal with shady either. The law can be just as shady, like prohibition, for example, or DMCA... or for that matter, copyright...shady law that steals from the public disguised as "incentive".

Distributing Linux

[nacturation]

The article also suggests that pirates creating knock-offs might just be offering companies market feedback that they ought to attend to. (Microsoft, are you listening?) So companies who distribute Linux in violation of the terms of the GPL are offering Linux developers valuable market feedback that they ought to attend to? (Linus, are you listening?)

Re:wtf?

[i_b_don]

ah yes... but just becuase it's illegal doesn't mean you should stop doing it, it just means you should make sure you don't get caught.

(However if it's immoral, that's a reason for you to stop doing it.)

Re:wtf?

[owlnation]

No.

Not sure who modded you insightful but I assume they work for a corporation. You are using the Fox News style of argument. Reduce everything to black and white / good versus bad / legal versus illegal.

Also, please stop using words like "illegal". That's also a simplification and, in many countries in the the World, wholly and utterly incorrect. You may be American (I assume you must be), but it's a big planet, your laws apply to your country alone. Please try to remember that, and remember that you are speaking to a global audience here.

The truth is that this is not a black and white subject, it is a grey one. It is not a rationalization to consider alternative economic strategies with regard to this. In fact, if software companies, the MPAA, and the RIAA, actually started doing more of that kind of thinking, then the need for piracy might be alleviated.

Keeping an open mind and exploring new directions is the only way media producers are going to win in any way that is sustainable.

My friend Ozymandias... that is not justification. That is not rationalization. That is reality.

Re:wtf?

[syousef]

Please stop confusing legality with morality.

NO! Please don't stop confusing legality with morality. That's not the answer. The answer is to bring the law back in line with what the populace believes is moral. The fact that legality and morality are so far divorced today is a sign of a corrupt sick society. If the large companies played fair with pricing and proof of copyright infringement, and if the penalties for piracy weren't inflated so much (an ineffective deterent!) the argument that you should be allowed to get a copy of the fruits of someone else's labour without contributing something back would be much harder to rationalize. ...and for pity sake stop calling it piracy. I don't like rape or murder, both of which are crimes, but I don't go around calling rapists murders or vice versa!!!

copyrights are an illegitimate law

[argoff]

When a law is unjust, people not only have a right to defy it, but a duty. Copyrights are unjust. They attack our culture, require the destruction of our privacy to be enforced, attack the free flow of information on the internet, and cause fragmentation to societies knowledge base of literature. The cost and effort to secure and enforce them is growing exponentially as society enters the information age.

The reason why anti-copyright behavior works so well in the free market is simply because copyrights are anti freedom and anti free market. http://davidlita.googlepages.com/copyrights/

Rationalizations? WTF! How about Copyrights are not "rights", theft and stealing is not copying, copyrights are monopolies and not "protection", and intellectual property is not "property". Hell, piracy isn't even piracy.

Re:wtf?

[QuantumG]

No. That's how you end up with oppressive religious regimes.

If we're going to call for legal reform (and we should be, I agree) then let's call for a dedication to liberty. Live and let live. If you wanna do something that I consider immoral, and you're not hurting anyone, then I should have no say over what you do. Unlike the world we currently live in where the law has a say over what you do with your body, your mind and your copying devices.

Re:wtf?

[jambarama]

I think we're studying piracy to see if it is worth cracking down on. There are certainly costs to preventing piracy and catching pirates. How much attention do they deserve? If piracy is a wash or a net gain, we shouldn't care. If piracy is a dangerous destabilizing economic force, than we should fight it harder. That is why it is worth studying.

Just because we already have policy on something doesn't mean we shouldn't constantly re-evaluate that policy to see if it makes sense.

Microsoft already sells a Pirated Edition

[BillGatesLoveChild]

These are the "Educational Editions" of Office, XP and now Vista. You are supposed to show a valid student Id when you make the purchase, but shops are hectic, busy places and luckily most households have a couple of students lying around anyway. Conveniently some of these allow the software to be installed on multiple machines. So when Joe frowns that some Microsoft software is too expensive, he has a way around it. Microsoft get their money. Not as much as they would have liked, but they get it anyway.

Microsoft _have_ to know this goes on: If they wanted to they could make their educational program so draconian no one would use it, but households shrugging and installing Ubuntu on their machine is Microsoft's worst nightmare.

Re:As I recall...

[jambarama]

One particularly significant benefit (to the companies being ripped-off) to piracy is lock-in. As you said, Microsoft might not be where it is now, if it were not for piracy. I think the same goes for programs like Photoshop. Teenagers won't/can't pay $600 for Photoshop. Adobe doesn't lose anything by teen pirates who can't afford Photoshop--but they do gain another crop of kids proficient with their software. If any of these kids use Photoshop professionally, they buy a real license.

I think this is the biggest stumbling block to free software. No one wants to use the GIMP because they can get Photoshop. If fewer could get Photoshop, fewer professionals would have Photoshop experience, and more would be willing to contribute to GIMP. Why use Ubuntu when you can get Windows?

But you are right, if any program can be pirated without any repercussions, it WILL hurt both the company and the product's future. It is too costly to stamp out ALL piracy--costly to the produce, the enforcer, and the legitimate customers who will get some spill over--so determining the right amount is tantamount to success.

Re:wtf?

[Carewolf]

No. For christ sake get this: IT IS NOT ILLEGAL.

If you create unlicensed copies you owe the copyright holder proper compensation, but you have committed no crime. There are currently laws under way in the EU and US that will change this, but status right now is that copyright infringement is not a crime, and not illegal!

The obvious flaw

[erik_norgaard]

is that giving away samples with limited lifetime will introduce your product while maintain the potential customer because the trial product will eventually have to be replaced. But digital copies do not have such limited lifetime. And since any number of copies can be made, you loose not only the client that got a trial copy, but potentially the entire customer base. And those who offer complete trial versions soon find them to be cracked.

The solution seems to be to offer limited versions that will show the client how great the product is, and how much greater it would be if they buy the official release. Say music in 96kbps mp3, it's ok on your iPod in the subway, but put it on your stereo and it sounds awful. Or the word processor with reduced dictionary, limited fonts and doesn't support large fonts - say above 18pt, or doesn't contain the print facility.

Crackers won't add missing data to a trial version of a song, and they won't add missing functionalities to a program.

Re:As I recall...

[cliffski]

"If any of these kids use Photoshop professionally, they buy a real license"

I'd like to think that's true, but a very large number of people who make very good money using software like this (or 3D Studio MAX) never buy a legit copy, even when they can afford to.

Re:What about piracy psycology though?

[EzInKy]

Even if he could think up some business model where he did something tangential and gave away the sounds, isn't that a waste? Shouldn't he be spending his time doing what he's best at? Shouldn't people be paying for the bit of what he does that they want (the sounds!)? It just seems so inefficient.


I never said he shouldn't be paid for making sounds. I get paid for the work I do, he should get paid too if his services are valuable. The problem he is having is getting paid over and over again for work that he did yesterday and I'm suggesting that he develop a business model that allows him to be compensated for his work upfront. He can hope all he wants that more stringent laws will make people quit stop sharing, but they won't. You would have to undo thousands of years of human evolution to do that.

Re:wtf?

[JasterBobaMereel]

The oldest Copyable products are books, I have a card that allows me to use these without charge and then return them with out paying a penny, I can use book without ever intending to buy it and without paying the copyright holder anything .. So obviously the publishing industry is on the point of collapse and no-one is selling books anymore and we should close these "Public Library" places down!

Re:What about piracy psycology though?

[delinear]

At the end of the day, surely it doesn't matter how many people download the sounds, since the guy's business model is selling the sounds to people who want to use them in their tracks. Copyright still protects him in that instance - since anyone who does use the sound in a track which they gain any kind of commercial success from will be liable for breech of his copyright unless they pay up.

Instead of trying to restrict access to the sounds he produces (which will always fail in this new digital age, anyone paying attention over the last ten years will see that) he could do far better offering the sounds free for non-commercial usage. That way people come to him to download them, not some dodgy torrent site, and it's easier for him to explain his pricing model for anyone who does want to use his work. By forcing the sharers to go underground, he makes it harder for people who find his works to figure out how to get in touch with him and pay for them.

Anyone who is serious about using his sounds in their own works will want to pay, anyone who isn't serious isn't really a lost sale, since they wouldn't have bought the sounds no matter how strongly enforced copyright was. Your friend needs to learn to use sharing to his advantage instead of fighting back the tide - being small makes him more adaptable, an advantage the RIAA dinosaurs don't have. Decrying file sharing won't make it stop, instead it's time to grasp new opportunities.

Re:copyrights

[mOdQuArK!]

You've got a pretty obvious bias when you throw out a "prove it" demand like that, with a weak anecdotal argument ("I didn't write a book because I couldn't figure out how to make money doing it") against the respondee.

As far as rebutting your anecdote is concerned, I make a decent living writing software. I'm not getting paid because of copyright (since I'm selling my services as a developer, not the software itself), and the company isn't getting value from my service because of copyright (they get the value from actually using the software I created for them). Just because _you_ can't see a way to make money without copyright doesn't mean that such a way doesn't actually exist - it just means that _you_ don't have a good enough imagination.

Let me flip your question on its head (essentially restating your respondee's post): I've heard and read ad nauseum that copyrights encourage creativity, yet not once has anyone proven it to me. No matter how many times I've asked or searched, I've never read or been referred to any peer-reviewed study supporting the idea that copyright encourages creativity.

It seems highly counterintuitive that a mechanism like copyright (which at its most fundamental is a mechanism that discourages the free expression of ideas) is going to encourage societal creativity, but it gets repeated like a mantra by proponents of copyright, without any kind of logical or evidentiary support. A lot of copyright proponents even mistakenly think that IP has something to do with free-market capitalism.

Before you go around enforcing a bunch of laws that override personal property rights, you'd better make darn sure you're going to get a societal payback that makes that violation worthwhile - but so far, IP proponents keep failing to provide that proof.

Re:wtf?

[Husgaard]

[...] but copyright itself is not bad.

I guess that depends on how much you like the idea of a free market.

It is a fact that copyrights are monopolies in the market. Monopolies are incompatible with a free market. If you try to combine these two, piracy is an inevitable result.

Re:As I recall...

[cliffski]

maybe they are better businessmen than you think. Its all very well saying "you sell more with a lower price" but thats schoolboy economics. its not that simple. Some products sell MORE at a higher price, as some people want the best, and associate high price with the best. perceived value is greater than actual value in purchasing decisions. Also, given the costs of support, 2 customers at $50 are worse than 1 at $100. Also, halving the price rarely doubles the sales, depending on the product.

At every single price point, a product is a bargian for some and overpriced for others, and in every single price point, there are people at both ends saying "why dont thsoe idiot businessmen realise that..."
Theres a reason these people have huge successfull software businesses, they arent as stupid as people assume they are.