In-Depth

Capturing Dollars Lost to Piracy

Think software piracy is just Redmond's problem? A study being released at the Microsoft Worldwide Partner Conference puts a dollar figure on the revenues the channel could collect by helping the software giant defeat the pirates-and that bounty is bigger than you might think.

Every time Microsoft has announced a new victory in the software piracy wars over the last few years, it's touted the legal action as a win for its law-abiding partners. It's always been clear that piracy costs Microsoft a bundle. The toll for the company -- and for other major software publishers -- maps pretty closely to the value of counterfeit and unlicensed software on systems worldwide.

To find that number, analysts estimate the total value of counterfeit software on systems and attempt to account for how much of that wouldn't be bought in the first place. Presto: There's the dollar cost to Microsoft.

For partners, though, it's never been so clear. At a gut level, it makes sense that distributors and retailers lose out on their cut if the software is installed illegally. But for solution providers, VARs and ISVs, the losses are a little harder to articulate.

Later this month, at its Worldwide Partner Conference (WPC) in Houston, Microsoft will release a study it commissioned from market-research company IDC that attempts to put a hard dollar figure on channel losses from piracy.

According to an advance copy provided to Redmond Channel Partner magazine, the study, "The Impact of Software Piracy and License Misuse on the Channel," is the first such research of its kind. "What has never been documented is the effect they have on all the other companies in the software ecosystems -- resellers, VARs, system integrators, service firms, and other ISVs," reads the report by IDC analysts Darren Bibby, John Gantz and Amie White.

The Results
Boiling piracy down to one global number, IDC finds that "for every dollar Microsoft realizes from lower software piracy in 2008, other companies in the software ecosystem will realize, in aggregate, $5.50," according to the report. That figure is in the same range as other typical estimates that for every $1 of Microsoft software sold, the Microsoft ecosystem generates another $7 or $8, according to Michael Beare, Microsoft's director of license compliance.

Regional Benefits of Lower Piracy
Aggregate Microsoft ecosystem benefits (increased revenues plus cost savings) per dollar that Microsoft realizes in lower software piracy:

Worldwide $5.50
North America $4.82
Western Europe $5.66
Asia Pacific $6.84
Latin America $7.98
Central and Eastern Europe/Middle East/Africa $8.17

Source: IDC Partner Piracy Impact Study, 2008

Benefits of Lower Piracy by Partner Type
Benefits by partner category per dollar that Microsoft realizes in lower software piracy:
Product-Oriented Partners $1.62
Services-Oriented Partners $1.56
Value Added Resellers $1.39
Logistics Partners $0.54
Retail Logistics Partners $0.66

Source: IDC Partner Piracy Impact Study, 2008

The big takeaway number is the worldwide ecosystem benefit for each dollar that Microsoft realizes in lower software piracy: $5.50

Source: IDC Partner Piracy Impact Study, 2008

Other high-level findings of the new IDC study include:

  • The global average of $5.50 is a combination of $4.37 in increased revenues and $1.13 in lower costs.
  • The revenue increase can be attributed to faster sales cycles (31 percent) and faster product and service delivery (40 percent).
  • The largest single factor in the cost savings (64 percent) comes from lowering the cost of service.

Methodology
Rather than collect new data for the Microsoft-sponsored study IDC built on existing research. First, the company used data from its study, "The Economic Impact of IT, Software, and the Microsoft Ecosystem on the Global Economy," originally released in October 2007 and updated in May 2008. That data was combined with results from IDC's "The Impact of Lowering Software Piracy on Local Economies," which the research firm and the Washington, D.C.-based Business Software Alliance released in January 2008. IDC also used its previously published research projects for Microsoft on key performance indicators and channel profitability.

IDC then interviewed partner companies in the United States, Europe, South Africa and Brazil in early 2008 to validate the assumptions used in the models that generated the benefit and cost-savings figures.

Although the report mixes a combination of data originally gathered for other purposes, John Gantz, chief research officer and senior vice president at IDC, believes the results are fairly reliable. "It may not be quite as tight as [a] single-input [study]. But the inputs are all pretty tight," he says of the various sources of data. "IT spending by category -- we publish that every quarter, that's as good as IDC gets. The percentage by category that's running Microsoft software, that's pretty tight," Gantz says. As an example of the range, he says, "if I say $1.50, it could be $1.40 or $1.60."

The results of the latest global study on personal-computer software piracy are a bit of a mixed bag.

First, the good news in the fifth annual global PC software piracy study, which was released in mid-May by the Business Software Alliance and is based on research by IDC: Piracy rates fell in 67 of the 108 countries studied and rose in only eight countries.

Next, the bad news: The study indicates that the worldwide piracy rate rose three percentage points to 38 percent.

John Gantz, chief research officer at IDC, explains the apparent contradiction: "Globally, piracy is dropping pretty considerably. It's dropping in China, Russia, Brazil. But more units are being shipped into those emerging markets, so that drags the overall piracy rate up."

In Russia, for example, the piracy rate dropped seven points in the past year and has dropped 14 points over five years. But as the number of new PCs shipped in Russia explodes, the country's astronomical piracy rate, which is still at 73 percent, pulls global piracy rates higher. For the record, the country with the highest piracy rate, according to the study, is Armenia at 93 percent. The lowest national rate is the United States at 20 percent.

To illustrate the problem's scope, Gantz notes that there are more than 1 billion PCs worldwide and nearly half are believed to have pirated or unlicensed software installed.

Gantz credits what successes there have been to several factors. "A lot of it is hard work on the part of the vendors inking deals with the second-tier OEMs. Legalization programs -- basically an amnesty for older pirated software" also play a big role, he says. Anti-piracy controls built into newer Microsoft software is making a difference as well, Gantz says.

--S.B.

Piracy Puts the Brakes on Deals
In previous research on partner profitability, IDC has found that the keys are business velocity (bookings per salesperson, project revenues and deals per month), service fulfillment (capacity utilization and daily billing rate) and deal execution (average deal size, months to make a sale and months to implement a project).

Finding pirated software in the client base throws a monkey wrench into each of those indicators. "Interruption to the sales process by the discovery of pirated software -- which can take time to legitimize -- slows business velocity. The discovery of piracy can halt solution deployment-which then lowers average capacity utilization and billing rate," the analysts wrote in the study. In interviews, they said, "some partners told us they have to walk away from projects when they discover pirated software -- which obviously affects deal-completion stats and the average time to make a sale."

When predicting that reducing piracy would boost channel revenues, IDC attributed those financial increases to several factors: a faster delivery cycle (40 percent), faster sales cycle (31 percent), cross-selling or up-selling (20 percent) and market expansion (9 percent). For estimates that lower piracy rates would provide cost savings to the channel, IDC found cost of goods sold for services would fall 64 percent, development and testing costs would drop 18 percent, sales and marketing costs would fall 12 percent, training costs would go down 4 percent and research and development costs would decline by 2 percent.

"From a software asset management standpoint, we feel that there's actually an upside to the story here. We feel that there's actually something that the partners can do to address this as well."
Michael Beare, Director of License Compliance, Microsoft

The benefits vary widely by partner types for each dollar of reduced software piracy. Product-oriented partners, such as ISVs, communications solutions vendors and hardware vendors, are the biggest winners at $1.62 per dollar saved for Microsoft. They're followed by services-oriented partners at $1.56 and VARs at $1.39, according to the study. Logistics partners (distributors) come in at $0.54 and retail logistics partners would see $0.66, according to the study.

To explain the disparity between services firms and logistics partners, the report's authors state: "Labor-intensive service firms who have their delivery cycles elongated by the discovery of pirated software at customer sites will feel more pain than retailers with little service content in their product lines."

The opportunity for ecosystem revenues is greatest in the region incorporating Central and Eastern Europe, the Middle East and Africa, where, according to the study, revenues and cost savings combine for $8.17 per dollar of reduced piracy. Latin America is a close second at $7.98, with Asia Pacific third at $6.84. In Western Europe and North America, where much of the pirated software, is actually unlicensed software that is inadvertently out of compliance, opportunities are $5.66 and $4.82, respectively.

Acid Rain
Gantz, who is also co-author of Pirates of the Digital Millennium: How the Intellectual Property Wars Damage Our Personal Freedoms, Our Jobs, and the World Economy (Prentice Hall, 2005), hopes the study will make partners more aware that they have something at stake when it comes to software piracy.

"I feel like there's acid rain out there, and they live with it," Gantz says. "If they're aware of it, they can at least do something about it."

Microsoft's Beare also believes that the study will help Microsoft persuade governments to strengthen intellectual property (IP) protections in their countries to stimulate economic growth by fostering IT ecosystems. The study reinforces a message Microsoft's been working with IDC and the BSA to document and disseminate to governments for some time -- that establishing a framework of strong IP protections expands local economies. "In some regions of the world, it's very hard to be a lawful channel partner," Beare says.

For partner-company executives who are motivated by the results to act, there's more to do than cross their fingers and hope software publishers and governments are successful in reducing software piracy.

"From a software asset management standpoint, we feel that there's actually an upside to the story here. We feel that there's actually something that the partners can do to address this as well," Beare says.

A call to action in the 13-page study, based heavily on IDC's interviews with the handful of international Certified and Gold Certified Partners, suggests:

  • Creating a formal internal policy for what to do when partner-company employees encounter counterfeit or unlicensed software in customers' sites.
  • Preparing a document that spells out how clients benefit from using compliant software.
  • Investing in software asset management tools that can be used to help clients determine their compliance levels.
  • Giving vendors feedback about confusing or counter-productive licensing policies and standing ready to negotiate favorable compliance terms on behalf of customers.

Ultimately, channel partners have a big role to play in preventing piracy, Gantz says: "In a way, they can be the eyes and ears and ambassadors for the software vendors."