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Piracy Economics

Posted by kdawson on from the lawsuits-make-a-poor-marketing-strategy dept.

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?)

29 of 347 comments (clear)

  1. Piracy is marker of immature market by Harmonious+Botch · · Score: 5, Insightful

    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'.

    1. Re:Piracy is marker of immature market by zappepcs · · Score: 3, Interesting

      "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.
      "

      hmmmm I was under the impression that they *ALREADY* have a dozen versions of their product on the market, none of which are being given away... unless you want to run it for an education institute on cheap (OLPC type) hardware, for which you can pay a meager $3 or so.

      The practicality of giving away the low end version won't make sense to MS as they would still have to support updates, security patches etc. I doubt they want to be known around the world as the makers of the least secure OS on the market. While they may have that reputation now, it would be solidified if they were to give away products and not support them.... oh wait, sorry, that model seems to be working if you support the product.

      Now, just to figure out the steps to getting MS to do this...

      1. design OS
      2. support OS
      3. give it away for free
      4. pay lawmakers to make this legal (not sure about this step or how it might work)
      5. ????
      6. Profit !!!!

      --
      Support NYCountryLawyer RIAA vs People
    2. Re:Piracy is marker of immature market by Khaed · · Score: 5, Interesting

      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.

      They have quite a few versions of Vista.

      MS will always be pirated. If they give away the low end, people will pirate the high end because that's what they want. Paint is given away for free with every Windows computer, Gimp is free, yet Photoshop is probably one of the most pirated programs in existence, after Windows and possibly Office.

      While the car and book analogies make sense, Microsoft isn't actually hurt by people pirating Windows. Windows has always been pirated and they're a billion dollar company. One of the reasons for this is that you can pirate all you want at home, but if you're a business caught pirating, you are going to get screwed. In an uncomfortable place. (and not like in a station wagon)

      Short of giving all versions of Windows away, MS will be pirated. They might as well make the best of it and work it to their advantage.

    3. Re:Piracy is marker of immature market by jambarama · · Score: 3, Insightful

      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.

    4. Re:Piracy is marker of immature market by init100 · · Score: 3, Funny

      Piracy can really only apply to copyable objects. You can can steal a Civic but you can't "pirate" one.

      You have obviously never heard of counterfeiting.

    5. Re:Piracy is marker of immature market by simm1701 · · Score: 4, Insightful

      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?

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    6. Re:Piracy is marker of immature market by Ravnen · · Score: 4, Insightful
      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.

  2. As I recall... by AKAImBatman · · Score: 5, Interesting

    ...wasn't there some sort of memo that was leaked from Microsoft that basically said the only reason why Windows 3.1 became popular was because it was the most pirated software ever?

    As it so happens, I used to sell a product which required a simple registration key to upgrade to the full version. (The free version never shut off, but it had fewer features.) After noticing a few Google searches for " crackz", I thought about seeding a few reg numbers to promote the product. Alas, I never got around to it, but it would have been a cool marketing trick.

    That being said, I don't agree with piracy in general. Only that it can fullfill certain market needs. If it gets too out of hand, though, it can become a serious problem to the producer. (e.g. Napster) Of course, you don't get in that position unless you're failing to meet your customer's needs in the first place. (e.g. lack of legal MP3s)

    --
    Javascript + Nintendo DSi = DSiCade
    1. Re:As I recall... by jambarama · · Score: 5, Insightful

      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.

    2. Re:As I recall... by Tuoqui · · Score: 3, Interesting

      Thats because the software simply isnt worth $600+. It is more than the market is willing to bear under normal circumstances.

      Do you think Photoshop would be one of the most pirated software in existence if they sold it for $60-80 instead of $600? Probably not, and they'd likely make more than 10x the $$$ off of sales than they do now.

      --
      09F911029D74E35BD84156C5635688C0
      +2 Troll is Slashdot's way of saying groupthink is confused
    3. Re:As I recall... by Brickwall · · Score: 3, Interesting
      Thats why MS won in the end. Now, most people associate a PC and Windows. MS was just better managed, held a reasonable amount of respect within the general populace, and was able to sustain life into near monopoly.

      I have to disagree. MS won because of their relationship with IBM. I worked in IT during the 80's, and IBM's market share was huge. So when employees started requesting PC's, IT managers bought IBM PC's which came bundled with DOS. IBM helped considerably by creating FUD that using "clones" would destroy the network, and that connecting them to the mainframe would cause compatibility problems. MS won their market share by piggy-backing on IBM's market power.

      After that, it was simply the "network effect" - it was easier to share information, programs, etc., if everyone in the organization was using the same software. So even the the Mac was considerably more advanced - Christ, I am the only one who remembers the problems with getting past the 640k barrier, or "TSR" programs instead of true multi-tasking? - no IT manager would OK one for use outside of areas where its graphics abilities were needed.

      Of course, if by "better managed", you mean used illegal anti-competitive methods, then I do agree with you.

      --
      What was once true, is no longer so
    4. Re:As I recall... by cliffski · · Score: 3, Insightful

      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.

      --
      DRM-free indie games for the PC and Mac: Positech Games
  3. Re:wtf? by QuantumG · · Score: 4, Insightful

    Please stop confusing legality with morality.

    --
    How we know is more important than what we know.
  4. Microsoft exec says piracy can be good for MS by christian.einfeldt · · Score: 4, Insightful
    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.
  5. Pop music's quality doesn't match it's price by Jozef+Nagy · · Score: 5, Insightful

    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.

  6. Re:wtf? by iminplaya · · Score: 5, Insightful

    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".

    --
    What?
  7. Distributing Linux by nacturation · · Score: 5, Insightful

    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?)
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    1. Re:Distributing Linux by QuantumG · · Score: 4, Informative

      It worked for DirectX support in WINE.

      Was a time when WINE was distributed under a BSD-like license. A few developers decided they didn't like Open Source anymore, so they split off and formed this company, Transgaming, taking the code base with them and slapped a slightly more restrictive license on it (restrictive enough that you couldn't call it Open Source anymore).

      Their idea was that people pay a subscription which gives them voting rights. Whatever they voted on, the developers would work on. The big thing the users wanted was DirectX support for popular games. So that's what they worked on. Then the problem was copy protection systems.. so they started bundling some proprietary components with the software which made the copy protection work under Linux.

      Meanwhile, over in the WINE camp, they decided to switch their license to GPL because the Transgaming people (and the cross-over Office people) weren't giving their changes back. In fact, the next time someone asks you why the GPL is more popular than the BSD license, tell them about WINE. Anyway, all that work that Transgaming and the others did really inspired a lot of people to join the WINE project. It provided proof that WINE could do what people had been saying for years that it could do.

      As yet, WINE is still not at the 1.0 stage.. It's still not easy for users to get an obscure "vertical market" piece of software working under WINE.

      I know this isn't exactly what you were thinking.. but it does show that the ability to take Open Source in directions that the original authors are reluctant or otherwise slow to go really is a great strength.

      --
      How we know is more important than what we know.
  8. Re:wtf? by i_b_don · · Score: 3, Insightful

    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.)

    --
    all language nazi's will burne in heil!
  9. Re:wtf? by owlnation · · Score: 4, Insightful

    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.

  10. Re:wtf? by syousef · · Score: 3, Insightful

    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!!!

    --
    These posts express my own personal views, not those of my employer
  11. copyrights are an illegitimate law by argoff · · Score: 4, Insightful

    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.

  12. Re:wtf? by QuantumG · · Score: 3, Funny

    You are welcome to drop by anytime.. just bring your physical object copying device from the future with you ok? Speaking of which, can I have a copy of that?

    --
    How we know is more important than what we know.
  13. Re:wtf? by QuantumG · · Score: 3, Insightful

    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.

    --
    How we know is more important than what we know.
  14. Re:wtf? by jambarama · · Score: 3, Insightful

    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.

  15. easy distribution get you market shares by Atreide · · Score: 4, Interesting

    I remember the time of Windows 95.

    When you installed that operating system
                there was no activation.

    There was also no
                serial number verification
                            since you could just enter
                                        an empty number and the system would install.

    That was still not corrected with Windows 98.

    When it is so easy to install
                an operating system,
                            it helps to get of market shares.

    --
    The world belongs to those who get up early. - I'm far from being the king of Earth then :-(
  16. What about piracy psycology though? by niceone · · Score: 3, Interesting

    Thing that worries me about piracy is that people get used to it. Maybe MS can get market share through piracy. Maybe the RIAA can get viral marketing through piracy...

    ...but I know a guy who makes a living by creating drum and other sounds that people use to make electronic music. It's not a big operation, just him and one other guy. When you order a DVD he burns one by hand and mails it to you. Anyway, someone just uploaded ALL their products to Bittorrent, and he can see all these people posting about how cool they are and how they can't wait to download them. Needless to say he's pretty despondent.

    And before people start with the 'information wants to be free' and 'find a new business model' - why should he? This is what he's good at, people want his stuff, why shouldn't they pay him for it? I mean, I have written free software... while earning a fat salary working on other stuff at a hitech corp. It's not so easy in other areas though.

    </RANT>
    --
    ccalam - acoustic versions of new songs.
  17. Re:copyrights by bky1701 · · Score: 3, Interesting

    You seem to totally miss the simple fact that art has existed far longer than copyright. Care to explain that?

    Sure we may not have 100 mil movies... but do we NEED 100 mil movies? Do we need all this FX-saturated tripe? Sure, sometimes something good comes around... but almost always in addition to, not because of, that 100 mil FX.

    And as an "artist" (though this term I think is used far too liberally) I can say that nothing can be made without copying or at least seeming similar to something else. Copyright and patents in the end will stifle art and invention. What if the use of dwarves and elves similar to those in LOTR was strictly controlled? It would have been unlikely to promote any new creations, but it would have caused the stillbirth of whole genres of books, movies and games. What if the mouse was patented and they company refused to license it? This is where our idea-control focused society is quickly spiraling to.

    Have you ever created anything? If you truly think what you say is true, I am guessing you haven't.

    --
    Great Intellect...
  18. Re:wtf? by JasterBobaMereel · · Score: 3, Insightful

    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!

    --
    Puteulanus fenestra mortis