Microsoft loses millions of dollars every year to software piracy. The bulk of this loss can be attributed to illegal copies of its two bulwark products, MS Office, and XP, taking place mainly in developing nations such as India and China.
Henry Chesbrough, the Executive Director of the Center for Open Innovation at the Haas School of Business at UC Berkeley, recently wrote about why Microsoft should welcome piracy in China. His reasoning focuses on the technology lifecycle and why it’s important to let new technology thrive in the early stages, even if it’s unlicensed.
Just as an aside, the technology lifecycle consists of 4 stages: Creation, Growth, Maturity, and Decline, and these 4 stages are shaped almost like an S-shaped curve. When a new technology is created, it gradually rises in its Creation stage until it reaches the Growth stage, where it hyper-exponentially takes off. The Maturity stage represents the peak of the curve and maximum market saturation after which the technology declines.
Chesbrough claims that given the currency differential between developed and developing countries, Microsoft should only capitalize on IP protection when technology reaches the Maturity stage, otherwise, the newly created middle class in China will simply use open source alternatives. George Ou of ZDNet disagrees with this and calls Chesbrough irresponsible for condoning piracy. As an alternative, he suggests selling Office and Vista for $3 each and ensuring that OEMs localize those particular versions of Vista and Office to be restricted to running in China. As an added incentive, he claims that people in China will want to buy these cheap legal copies because the illegal ones are full of malware.
I agree with George that Chesborough was wrong in condoning piracy but disagree with his business model. I think that a $3 per copy fee in China versus hundreds of dollars per copy in the developed nations will only cause resentment in the developed world and serve to push them away towards open source alternatives.
What do I think the answer to Microsoft’s piracy worries in China is? Facebook.
Simply put, Facebook is the only social networking site out there today that validates the authenticity of a user by requiring him to provide a work or university email address. This minimizes the amount of multiple bogus accounts.
Here are the potential stepsMicrosoft could take towards diminishing piracy in China by leveraging Facebook:
- Let Microsoft Popfly virally grow within Facebook (Popfly is an application consisting of pre-programmed blocks that lets non-techies create applications content for Facebook)
- Since the Facebook community is primarily full of college students, by using Popfly, a Facebook college user could leverage such content for a class project.
- As an example, imagine a class project where a business school student has a marketing research project to find out whether consumers prefer fast-food outlets (where you’re virtually expected to do a take-out) for lunch or “quick-service” outlets (such as Quiznos, where you can spend some “down-time” sitting and eating your food in a relaxed atmosphere)
- The student could conduct a poll amongst Facebook’s 30 million users
- He could then narrow this demographic information right down to the zip code (or whatever it is in China)
- He could then further overlay this information with Quiznos, McDonald’s, and Subway outlets in each of the zipcodes surveyed and apply a “classification scheme” where he sets Quiznos with a “quick-service” tag and McDonald’s and Subway with a “fast-food” tag
- He would now have hard quantitative information to report for his class project
- However, he now has to present his findings in the form of PowerPoint to his prof, and before that, maybe perform some more trending and analysis using Excel
- This is where if he wants to export this data from Facebook to the Office software installed on his laptop, Microsoft would perform a license check to verify that the copy is a legal one
- If it’s illegal, the user would be unable to export this data and is faced with two choices:
- Pay the full cost of a student version of Office or
- Pay the full cost of a regular consumer version of Office but benefit from a “reduced cost advertising model”
- In this model, the Facebook user would be subject to viewing targeted ads based on the interests filled out in his Facebook profile
- A monthly discount would be paid to the user based on the ads viewed, number of ads clicked upon, and services or goods actually bought from the advertiser. As an added incentive, the cost of such a service or good would be a lot cheaper through Facebook than the street price or regular e-commerce price. Furthermore, a certain percentage of these already discounted products would be applied to the monthly discount on the price he paid for Office
- This advertising model would apply for an entire year so it’s to the user’s benefit to conduct all his transactions through Facebook to derive maximum savings on his Office purchase. Of course, if the total value of these discounts, ad clicks, and ad views equals the price of Office, then the monthly discount stops (i.e. the limiting factor is the zero value).
Microsoft would obviously first have to lobby the Chinese government to ensure that Facebook adoption increases in universities across China. The Chinese government, being one that takes great pride in monitoring the activities of its citizens will only be too happy to oblige.
The above mentioned model could easily be replicated in the enterprise, small-business and mid-market sectors as well (using work emails) which is where a lot of the piracy also takes place (I’m assuming of course that multinational enterprise companies conform to legal purchases).