Pirate's bounty

Pirate's bounty

Buddy, wanna buy a copy of the Microsoft Office XP at a steep discount? The box has a cool hologram, if you're wondering whether it's genuine. I can also sell you the latest accounting or computer-aided design programs."

Despite aggressive efforts by U.S. trade groups and their allies across the globe, that kind of chatter continues to characterize street kiosks and legitimate shopping malls throughout Asia, Eastern Europe and Latin America. Despite recent progress, an estimated 39 percent of the software used by companies worldwide is unauthorized by manufacturers - and thus qualifies as "pirated." Even in North America, the region with the lowest piracy rates, 24 percent of all software used by businesses is unauthorized, according to the Eighth Annual BSA Global Software Survey (2003).

"Piracy rates are gradually declining, but that's not a great cause of celebration," said Bob Kruger, vice president of enforcement for the Business Software Alliance. "Rates remain very high. Two out of every five software programs are pirated (worldwide), and that's a tremendous drain on revenue."

Unscrupulous counterfeiters are hardly the only culprits. High piracy rates reflect the fact that, even in the U.S. and Canada, a significant number of businesses still view piracy as a victimless crime, and an easy way to lower their technology spending. "If they need another computer, most businesses don't steal one off a truck," Kruger said. "Companies have to approach software the same way: You have to budget for it, and you have to acquire it illegally."

Common acts of piracy include downloading unlicensed software from Web sites that offer it free; copying licensed software and distributing it to unlicensed users in the workplace; or even purchasing counterfeit software packages - which sometimes come in packaging that looks like the real thing, but isn't.

Some progress has been made. The BSA software survey shows a 10 percent drop worldwide from the overall rate in 1994, when global piracy was calculated at 49 percent. Moreover, between 1994 and 2002, several countries significantly cut their piracy rates. Israel's piracy rate dropped from 78 percent to 37 percent; the United Arab Emirates' rate dropped from 86 percent to 36 percent; Ireland's improved from 74 percent to 42 percent; and Spain's dropped from 77 percent to 47 percent. (Kruger admits that the methodology for calculating rates may be flawed, but says it is consistent.)

Nevertheless, in many rapidly expanding markets, piracy of business software continues at epidemic levels. Notable examples include Vietnam (95 percent), China (92 percent), Russia (89 percent) and India (70 percent). Moreover, as the total volume - and potential value - of business software expands, dollar volumes lost to piracy continue to grow, even as rates decline, said Eric L. Smith, president of the International Intellectual Property Alliance. Not surprisingly, China is now the largest market measured by dollar-volume losses - an estimated $2.4 billion in 2002 alone, or 18 percent of the global total, according to the BSA study.

Nowadays, the Chinese even export a significant portion of their counterfeit software programs to markets in nearby Southeast Asia, and even to the U.S. A recent arrest in Los Angeles targeted a syndicate that had shipped some $100 million worth of counterfeit software, in an operation of surprising sophistication. The shipments were labeled as "blank CDs" - and got past U.S. Customs and Border Protection because "they didn't see there was any content on the CD - or because the CD was burned in the U.S.," explained Smith, whose organization is a consortium of the six major trade associations in industries that rely on copyright protection. The holograms that supposedly guaranteed the authenticity of the software were shipped separately, and were "almost undetectable" from authentic holograms, he added.

For the counterfeiters, piracy is immensely lucrative, Smith told a congressional hearing on "China and the WTO: Compliance and Monitoring," in February. Smith added that a pirate "can buy or produce 1,500 pirated copies of Microsoft Office . . . and resell them for a profit of 900 percent." That's a higher margin than cocaine dealers reportedly make on their own transactions, Smith testified.

To stem the tide, U.S. industry has taken a two-pronged approach. The IIPA is making a concerted effort to convince local policymakers in China, India and elsewhere that enforcing anti-piracy laws will provide a major boost for their local economies, not just for U.S. software firms. U.S. policymakers, with help from the IIPA, are pressuring foreign governments to strengthen enforcement of existing World Trade Organization obligations regarding intellectual property, or face the consequence of reduced trade with the U.S. "We tell them, 'It hurts your trade relations with the U.S. government. The U.S. government will put you on a list and go after you under Special 301," Smith said.

The U.S. Trade Representative's Office conducts annual "Special 301" review exercises that involve a comprehensive examination of major trading partners' commitment to, and effectiveness of, intellectual property protection. Based on this analysis, the USTR categorizes some trading partners as "Priority Foreign Countries" (the most flagrant violators). Alternatively, they can assign them to either the "Priority Watch List" or "Watch List" (for those requiring particular and close attention). The USTR can then disqualify a foreign country for the U.S. Generalized System of Preferences program and bring disputes to the WTO for settlement. "It can hurt foreign direct investment in your country, especially high-tech investment," Smith said.

Even a modest further reduction in piracy rates would have enormous positive consequences for the global economy, the IIPA said. "In virtually every case, our study shows that if you reduce the rate of business software piracy down to 25 percent (the rate in the U.S.), it will have a positive impact on tax revenue, employment and the GDP," Smith said.

According to the BSA study, the global IT sector will likely grow by 34 percent between 2001 and 2006. If the global rate of piracy dropped by only 10 percent during that period, IT revenue would grow by an additional 15 points. In other words, it would grow by 49 percent, not 34 percent, as currently projected. The study also projects that an overall 10-point drop in global piracy would lead to a fivefold increase in China's IT sector over four years, and a doubling of Russia's IT sector. Worldwide, such a drop would generate 1.5 million jobs, add $64 billion in tax revenue, and supply $400 billion in additional economic growth. "We tell them, 'Even if you don't produce software by yourself, you will gain. Even if you only write applications in your own language to operate with American applications, you will benefit,' " Smith said in an interview.

It's no accident that piracy rates in more advanced countries such as South Korea, Taiwan and Singapore have already dropped significantly. Those countries are transforming themselves into knowledge-based economies that depend on intellectual property rights to prosper, so there is increasing awareness of the economic benefits of protecting intellectual property, Kruger said.

Smith adds, "Twenty years ago, we heard this objection: 'We will have to pay more for imports (if we act against piracy), and that's bad.' That argument was based on a static economic model. Now these countries look at a dynamic economic model. Then it was hard to convince local law enforcement that piracy was an economic crime. People would say, 'Who does piracy hurt? Microsoft?' "

Nevertheless, it remains a tough task convincing law enforcement in China, Russia, India and many other countries to enforce their own anti-piracy statutes. China is the biggest culprit - and greatest challenge, Smith said. Despite China's accession to the WTO in 2001, the country is dragging its feet on enforcement, he said. In theory, Chinese law now protects foreign copyrights. Yet Chinese government ministries remain perhaps the worst offenders, making multiple copies of pirated business software for distribution to their own large staffs, he said. The IIPA's 2004 report on China adds, "The (global) software industry has struggled for years" to persuade the Chinese government "to devote sufficient resources of raiding-auditing enterprises that use unauthorized software."

Chinese civil courts have taken on only four such cases, and the results have been frustrating for software firms. One case involving Autodesk and Adobe was decided in favor of the copyright owners, but the damages ultimately awarded to those firms -$60,000 to Autodesk, $36,000 to Adobe - were far lower than the actual damages of more than $250,000, according to an IIPA report. Moreover, IIPA members are aware of less than 10 criminal prosecutions directly for commercial piracy in the last few years in China, Smith told Congress.

The good news for copyright holders is that Asian governments have shown an ability to enforce copyright law, when they have the will. For example, South Korea's textbook industry has grown rapidly - and become much more profitable - following the enactment of Korean copyright laws in 1987, and their gradual enforcement during the 1990s. Textbook piracy rates in that country dropped from 90 percent in the 1980s to only 20 percent today, Smith noted. "Now Korean publishers sing the praises of copyright, because they make more money." Moreover, "for the first time, Korean publishers are publishing Korean authors," now that local works are also protected.

Even the Chinese have made some progress in copyright protection, although in an unlikely area. Three years ago, piracy of academic journals was "out of control" in China, Smith said. Then, one day, the president of the British Publishers Association wrote a letter to the Chinese vice minister pleading with him to do something. The Chinese senior official issued a decree banning piracy of journals. More surprising still, local officials enforced that decree - and China has become a highly profitable market for U.S. and other non-Chinese academic journals.

Although this turn of events shows that the Chinese can clamp down if they want to, Smith shakes his head. "It's a bit of mystery why the Chinese picked journal piracy to go after, and not something that would offer them more revenue" as an economic benefit. "Unfortunately, the Chinese don't do that with software."

For all that, compared with other frequently pirated products - including recorded music and DVDs - business software enjoys one significant advantage. "Software is a complicated product, and it has to work," Smith said. "We explain to people that pirated software can come with viruses that prevent it from working. That's an automatic deterrent for many people." When a pirated song or DVD turns out to be flawed, it is a waste of a few dollars. When a pirated software product infects a corporate network with viruses, it could become a disaster.