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TechWatch: Dealing with Software Piracy

Software piracy is a big issue, not just in China where Microsoft Office has been sold on the streets for $2 a copy. Data suggests it is also a big issue in the U.S.

I often hear two reactions. One is, we need better compliance and enforcement. Unfortunately, the political rhetoric around this issue focuses on the lack of intellectual property protection in other parts of the world, with not as much recognition for the problem in the U.S. But the counter voice advocates that software should not be owned in the first place, and looks for a “free software” solution.

Recently I had coffee with Larry Foster, the CEO of a relatively new company, Software Management Systems, Inc. Foster has a long history in the software business. He was a founding executive with Egghead Software, the company that pioneered the idea way back in 1985 that selling software on the weekend might be good. He and his team have pulled together much of the data I will share that demonstrates piracy is a big problem in the U.S., including the business world.

Data on the Software Piracy Problem

The Global Piracy Study 2002 from the International Research Planning Corporation says that 37% of all installed software is unlicensed and 25% of all business computers house unlicensed programs.

Authorities have instigated enforcement actions against companies of all sizes, with 69% of the companies in the small to medium sized category (Business Software Alliance, 2002). Even when software has been properly purchased, most companies can produce only 40% of their licenses. Companies without proper paperwork have been forced to pay full price for licenses they already possessed, and can be found liable for infringement (Asset Metrix, 2001). Yet fewer than 20% of companies employ internal controls to assure software license compliance (Intuit and IDC, 2003).

Some companies are totally unaware of the problem—when employees download software over the web, for example—though ignorance is no defense when charges are brought. Penalties in the U.S. include fines (the average settlement increased from $88,000 in 2001 to $97,000 in 2003) as well as new license costs. Numerous laws, some new, cover this area both in the U.S. and internationally.

Some companies think they won’t get caught; however, 90% of the compliance investigations start with tips from disgruntled current and former employees (Business Software Alliance, 2004). Unhappy customers and unpaid creditors are other sources of tips for investigators to go into a company looking for unlicensed software. Once an investigation is launched, few companies come away clean. Courts in the U.S. have uniformly upheld charges brought through these investigations, according to Foster.

The watchdog on these software issues is the Business Software Alliance (www.bsa.org), with members drawn from companies in the commercial software business such as IBM, Intel, Microsoft, Hewlett Packard, Apple, and many others. The organization is dedicated to “promoting a safe and legal digital world. BSA is the voice of the world’s commercial software industry before governments and in the international marketplace in sixty countries around the world. BSA educates consumers on software management and copyright protection, cyber security, trade, e-commerce and other Internet-related issues.”

In a statement on their website, Robert Holleyman, BSA President and CEO, says, “Crucial for the future of technology is strong intellectual property protection. Software piracy cost the industry $11 billion last year. The BSA and its members have been successful in promoting education programs and international laws that protect copyrights in the digital age. And we remain committed to ensuring that new intellectual property standards protect creative works while promoting continued technological innovation.”

Why is this Such a Problem?

Few businesses would condone the procurement of their paper, pencils, or other office equipment through stealing. Purchasing agents are seldom recruited for their ability to walk out of a store with supplies under their coats. In spite of the recent notable exceptions in the headlines, I believe most companies try to follow the laws. So why is software piracy such an issue?

I believe there are a number of factors related to the transition period we are in as we move from a primarily physical business world, where capital equipment means tangible goods made of atoms, to an increasingly digital business world, where we have to understand and place value on intangible goods made of ideas often represented in bits.

Much has been written on this subject, including two excellent books: Intellectual Capital by Thomas Stewart and Management Challenges for the 21st Century by Peter Drucker. Nevertheless, there remains strong evidence that their insight has not yet led to substantial change.

Financial statements continue to place value on physical assets and fail to account for intellectual assets. As long as companies are managed “by the books,” it will be difficult to give more value to the electronic assets, including software.

Executive management of non-technology companies, while increasing in its understanding of technology issues, still tends to look at IT in general, and software in particular, as a cost. Particularly in this competitive era, costs are there to be cut. But creative people need tools to do their work and will sometimes go to extraordinary lengths to get them.

The ultimate of intellectual capital in any company, its people, is usually the first area that management will look to cut when costs get too high. And even without layoffs, people are still paid by the hour (or week, month, or year) rather than by the ideas they produce. It’s easy to see why, since an hour is so much more easily measured. But it is another indication that more tangible and easily measured things are more highly valued.

Another indication that we value atoms above bits is the way we value software. I asked a group of graduate students recently why companies would object to paying $600 for a piece of software that would make a person significantly more productive. After all, by the time we pay salary, benefits, office space, and other costs associated with the employee, the business may be spending $100,000 or more on this employee. What is $600 by comparison if it can make the employee more productive?

One student said, “It only costs pennies to produce that CD, and the vendor charges $600 for it. That’s a ripoff!” Beyond the obvious—that cutting a CD is a small part of the cost of producing the software—is another idea tied to a world of atoms. When I buy a car, I can see and feel the tangible product I am buying and accept the cost. I can’t do this in the world of bits. We are slow to making a transition to paying for value rather than paying for cost. Yes, we do it in medicine and law, but we haven’t made the transition in manufactured goods, particularly software. This also means that people seem to feel it’s OK to download or copy software without a license. It is the same mentality that has led to the downloading of music over the Internet.

Another student said, “I can’t afford $600 in my software budget.” Companies have become good at putting costs into buckets, instead of looking at the total cost to get a job done. Instead, someone manages the software budget, and it’s a cost to be driven down. It is true that when you add up all of the software purchases in a company you get a very large number. But you get a large number for all of the paper clips, paper, pens, etc. as well. They are just more tangible.

From these observations we could conclude that software isn’t appropriately valued; it’s intangible so its value is not obvious, and it is not well understood by the executives making decisions. There is a lack of attention to managing software assets, even in the best of companies.

Is “Free Software” the Answer?

Complicating the picture is the subculture within the software world that believes software should not be proprietary, but should be freely shared and distributed. You can read much more about this movement by using “gnu” or “free software foundation” in your favorite search engine. Incidentally, they mean “free” in the sense of available code, widely shared ideas, and nothing proprietary, since there are still prices associated with distributing the software.

This group would not likely join the lawsuits on the side of piracy issues, but get involved legally when someone would try to pick up their “free code” and then place restrictions on their own modifications to it. This point is at the heart of the controversy between SCO and the Linux community today and has raised a question in the minds of many users who might move to “free software” as an alternative to the concern over high prices associated with proprietary code.

Conclusions

It is hard to imagine a modern business operating without software. The typewriter and the adding machine, business foundations of twenty-five years ago, are gone, replaced by computers with software for spread sheets, word processing, payroll, and the like. Yet businesses all over the world still struggle with valuing and managing software. This is both an ethics issue and a business issue.

Usually when we talk about ethics at IBTE we want to be sure that businesses think beyond compliance with the law to ethics that drives a healthy, productive culture. But compliance in this case is a very tough issue by itself. It is not surprising that some ethics officers have told me they are up to their ears in compliance issues and don’t have time to think about the bigger ethics issues.

Businesses face a tough choice today. They can try to avoid the licensing issues, and perhaps some cost issues, by making the move to “free software.” Many companies, municipalities, even countries are making the move in this direction (see the column by Seamus Phan, p. 16). The other alternative is to get serious about license compliance. Properly thinking about the value of such software will help. Tools from the Business Software Alliance, or services from a company like Software Management Systems, will be helpful, as compliance is not easy.

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Al Erisman is executive editor of Ethix, which he co-founded in 1998.
He spent 32 years at The Boeing Company, the last 11 as director of technology.
He was selected as a senior technical fellow of The Boeing Company in 1990,
and received his Ph.D. in applied mathematics from Iowa State University.

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