License misuse is also piracy, says Microsoft

After years of hammering the message that software piracy can send users to the slammer, Microsoft Corp is shifting gears to encourage greater partner buy-in in its battle against counterfeiters.

The Redmond, Wash.-based software maker has expanded its definition of piracy to include instances of license misuse.

But it is also highlighting the millions of dollars in lost up-sell opportunities afflicting the entire software “ecosystem” — including software vendor partners, value added resellers, hardware and software integrators and  systems installers — when piracy is allowed to prosper.

Bolstering Microsoft’s new perspective on piracy is a study by analyst firm IDC Canada that concludes for every dollar Microsoft realizes from lower software piracy, other businesses in the worldwide software ecosystem realize an aggregate of $5.50.

“Piracy is not just a Microsoft problem. It’s also our competitors’ problem and on a worldwide scale it’s a partner problem that has cost the entire software industry $48 billion,” according to Keith Beeman, general manager, worldwide anti-piracy at the small and medium-sized business solutions and partner group at Microsoft.

During the Toronto release of the IDC study titled: The Impact of Software Piracy and License Misuse on the Channel, Beeman recounted his encounter with a Microsoft partner seller in Durban, South Africa.

“The seller said he often encountered customers with counterfeit software. He initially tried working with such customers, but stopped after realizing he wasn’t making as much revenue with this group of customers as he was with clients using legitimate software.”

This was the thrust of the study authored by IDC analysts Darren Bibby, John Gantz and Amie White. It basically determined the scope of the Microsoft partner environment, estimated the effects of piracy to this group and its categories, and then analyzed the benefits to each segment of the ecosystem if piracy were lowered.

In the past, Microsoft’s anti-piracy campaigns tended to be heavy on publicizing cases of piracy and legal action brought against alleged perpetrators.

Despite this, piracy continued to grow, and the publicity has often backfired on large software makers, who sometimes came out looking like ogres – multi-million dollar businesses muscling in on the activities of teenage hackers, and septuagenarian computer users.

Bibby of IDC said educating partners about the greater business benefits they stand to gain if they take a more active role in anti-piracy efforts may be a more effective strategy.

“If you approach the partners with information that they could gain $5.50 for every $1 that Microsoft earns, that would be a greater incentive for the partners to take on more responsibility.”

Beeman, however, did not say the former strategy has failed Microsoft. “No, we are not abandoning one strategy for another. This is just another method of approaching the same problem.”

Although Microsoft considers instances of license misuse part of piracy, Beeman said the company is wary about labeling as “pirates” under-licensed users of Microsoft software.

“The term has a lot of negative connotations, and in most instances these users are unaware they are violating license agreements.”

Bibby said the worldwide savings of $5.50 comes from two sources: $4.37 from increased revenues; and $1.13 in lower costs.

For North America the savings total to $4.82 ($1.01 for cost savings and $3.81 for new revenues).

The largest portions of potential revenue increase come from faster sales cycles (a gain of 31 per cent), and faster product and services delivery (an increase of 40 per cent). The largest portion of cost savings comes from lowering the cost of services (64 per cent).

Bibby said piracy hits Microsoft and its partners in two ways:

  • Directly: through lost sales due to competition from cheaper copies
  • Indirectly: from lost opportunity to sell other products and services and from longer sales and service cycles

When a customer knowingly uses pirated software, Bibby said, there is less of an incentive to go to a service provider when something goes wrong. “That’s lost business opportunity for the partner.”

When counterfeit software users do come to a service provider, the partner often encounters various difficulties in servicing the client’s system.

“Repairs generally take longer because the software does not function properly in the first place, and then there is lost potential for up-sell because counterfeit software is not guaranteed to work with other Microsoft components.”

The study, however, noted that software piracy and license misuse offer an opportunity for partners.

A lot of license misuse is inadvertent, the study says. Lots of firms in the software ecosystem have developed lines of business helping customers “tune-up” their software licenses and install more sophisticated software and asset management programs.

The value of PC software that was pirated in 2007 is close to $50 billion worldwide, and the value of all software pirated in 2008 could be as high as $100 billion – larger that the entire software market of Europe.

“Drop the piracy rates a few percentage points and billions would move to the industry’s bottom line,” Bibby said.

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