December 06, 2004
Pirated Software
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Jack Horgan - Contributing Editor

by Jack Horgan - Contributing Editor
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Note that 6 out of 27 firms are in the CAD industry.

BSA in cooperation with IDC, a leading global market research and forecasting firm in IT, conducted a study of software piracy around the globe. IDC used its proprietary statistics for software and hardware shipments, conducted more than 5,600 interviews in 15 countries to gain a better understanding of the amount of software running on computers and used IDC analysts to review local market. The methodology starts with the number of hardware units. The estimated amount of software actually installed is determined by country surveys. From software vendors one obtains their software revenue and average system value yielding the number of software units legally sold. The difference is the
amount pirated. According to this study the piracy rate on a global basis is 36% with a dollar amount of nearly $29 billion. Geographic breakdowns are given in the tables below.

Table Top and Bottom Five Countries with regard to software Piracy Rate

Table Top Five Countries in Terms of $ Loss Due to Software Piracy

Figure 1 Dollars Lost due to Software Piracy and Piracy Rate

Note that the Asia Pacific rate is lower than one might expect but this is due to inclusion of Japan and Australia that bring down the average. Since the high-growth regions have higher piracy rates, one can expect the dollar loss to rise. The dollar amount is greater in developed countries because more software is used and prices are higher.

Some quarrel with the dollar loss figure. They doubt that everyone who has an illegal copy of a software product would have purchased a legal copy even if a free copy was not available. Further, they argue that some who have illegal copies eventually purchased legal versions.

Copyright Law

US law says that anyone who purchases a copy of software has the right to load that copy onto a single computer and to make another copy "for archival purposes only" or, in limited circumstances, for "purposes only of maintenance or repair." It is illegal to use that software on more than one computer or to make or distribute copies of that software for any other purpose unless specific permission has been obtained from the software publisher.

The Copyright Act allows a copyright owner to recover monetary damages for infringement as defined by the actual damages plus any additional profits of the infringer or statutory damages up to $150,000 for each copyrighted work. The copyright owner may also be awarded costs and attorney's fees, may permanently enjoin the perpetrator from further infringement and enforce destruction or disposition of the infringing works and devices employed to create and or use the
illegal copies. Further, the government may prosecute copyright infringers and provides for criminal penalties, including fines of up to $250,000 and/or jail terms of up to five years.

The No Electronic Theft (NET) Act is legislation enacted by the US Congress in 1997 to facilitate prosecution of copyright violation on the Internet. The NET Act makes it a federal crime to reproduce, distribute, or share copies of electronic copyrighted works such as songs, movies, games, or software programs, even if the person copying or distributing the material acts without commercial purpose and/or receives no private financial gain. This law was passed as a result of the LaMacchia case. David LaMacchia was an MIT student who set up an electronic bulletin board named Cynosure where people could upload popular software applications and computer games. He transferred
these files to a second encrypted address where they could be downloaded by other users. He was indicted for wire fraud. The case was eventually dismissed because he did not receive any financial gain from this operation.

In 1998, Congress passed the Digital Millennium Copyright Act (DMCA) prohibiting the circumvention of technological measures that effectively control access to a copyrighted work and the making of or trafficking in a device that circumvents such technological measures. Punishments for the first offense include imprisonment of up to five years and a fine of up to $500,000.

Intellectual property protection law and enforcement practices differ greatly from country to country. The lack of protection and lax enforcement are reason often given to be concerned about offshore outsourcing. Internationally, the standards for copyright protection of software are set forth in the Berne Convention for the Protection of Literary and Artistic Works and the
WIPO Copyright Treaty. Both agreements are administered by WIPO (the World Intellectual Property Organization) and the TRIPs Agreement, which falls under the auspices of the WTO (World Trade organization).

The motivation of those who engage in software piracy as a business is the same as those in other illegal activities, namely money. It can be a very profitable business. The thinking of end users who participate in software piracy is more difficult to understand. People who would never think to walk out of a store with a CD or software without paying seem to have no compunction to copying software illegally. While average individuals may not be aware of the substantial penalties for piracy, it is hard to believe that people are totally oblivious to their wrong doing. This is particularly true when they not only use but also actively distribute their ill gotten goods to others.

While one might download pirated songs and movies weekly or even daily, I suspect that individuals pirate software far less frequently. On the other hand, a seat of AutoCAD sells for around $3,000 while a music CD or video DVD sells for under $20.

Some people seem ignorant of basic accounting. They confuse the raw material and manufacturing costs of a product with its total cost. In the case of downloading software, movies or music from the Internet they see no cost at all. Hence, no harm, no foul as they say in basketball. There are of course R&D, Marketing, Sales and G&A costs incurred to run the company that produces the original material.

In 2001 SIIA and KPMG conducted a survey of 1,000 consumers and 1,000 business users exploring the attitudes of Internet users toward copyrighted material, here materials included paid subscriptions to on-line content. Content can be copied or passwords to the subscription can be shared. The study showed that roughly 30% of both consumers and business users downloaded pirated software. Few of the respondents-less than 10 percent of Consumers and less than 16 percent of Business users-indicate that they have redistributed software that they downloaded. Of those who have redistributed software, most have done so multiple times-60 percent between two and four times. The study found
that “In general, most people have at least a moderate belief in the sanctity of copyright laws as they apply to Internet content and software. Overwhelmingly, they indicate that they would not knowingly violate copyright laws. However, there is a shared belief, dominant in some segments, that everyone who uses the Internet eventually violates copyright laws.” This can leads to the justification that “Everyone is doing it”. Some feel that since printed material like a magazine or book can be loaned or given to another, why not electronic content. Of course, only one person has the printed material at any one time. Some people, the study refers to
them as “Anarchists”, see
copying or sharing software or copyrighted information from the Internet as perfectly reasonable and think that the law should reflect this view. The study shows that a significant percentage of those surveyed are confused about what is legal and what is not. The study also showed a disconnect between expressed attitudes and behaviors. This suggests that educational efforts including by companies and universities whose employees and student use their computer systems would be helpful in discouraging software piracy. Universities have been complaining that their broadband and storage capacity has been usurped by the downloading of music, videos and

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-- Jack Horgan, Contributing Editor.


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