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

[Khaed]

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.

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.

As I recall...

[AKAImBatman]

...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)

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?

[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:Distributing Linux

[QuantumG]

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.

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.

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.

easy distribution get you market shares

[Atreide]

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.