Software piracy: Understanding the larger picture

Vendors may lose the most through software piracy, but the economic consequences are much greater, points out SHIPRA ARORA. The government loses tax revenue, FDI looks for a home elsewhere, developers are demoralised, GDP growth slows down, and the country gets a bad image

According to Harish Krishnan, reduction of piracy is synonymous with increased demand for legitimate software. This will lead to greater manpower deployment to cater to demand, increased FDI, and more legitimate transactions

The 70 percent software piracy rate in India in 2002 (according to a BSA study) can well turn out to be the nemesis of our software industry, or maybe even the country’s entire IT industry. The argument that this is still well below piracy rates in countries like Vietnam (95 percent), China (92 percent), Indonesia (89 percent), Russia (89 percent), Ukraine (89 percent) and Pakistan (80 percent) does not hold, as none of these economies rely on the software industry as heavily as India does.

Fact sheet—2002

Even though last year India’s piracy rate remained the same as in 2001, what is cause for concern is that our position in the list of countries with the highest piracy rates jumped from 23 in 2001 to 16 last year. This even though countries like Malaysia, Nigeria, Romania, Bulgaria and El Salvador came further down the list with reduced piracy rates in 2002 as compared to 2001. India’s laxity in dealing with piracy is even more glaring when compared with improvements made by countries like Japan, Taiwan, Philippines and South Korea. Japan had the largest drop in piracy rates in the Asia-Pacific (APAC) region, from 66 percent in 1994 to 35 percent in 2002. Taiwan followed with a drop from 72 percent to 43 percent, the Philippines from 94 percent to 68 percent, and Korea from 75 percent to 50 percent. During the same period, India’s piracy rate dropped only from 79 percent to 70 percent. The overall piracy rate in the APAC region declined from 68 percent to 55 percent during this eight-year period. With this 55 percent figure, APAC tied with Latin America for the second highest piracy rate in the world after Eastern Europe, which ‘topped’ with 71 percent in 2002.

Nevertheless, the BSA study also states that in terms of retail revenue lost to piracy in India, there has been a decline from $365 million in 2001 to $342 million in 2002. As compared to this, China’s retail revenue loss during the same period shot up from $1.6 billion to $2.4 billion, even though its piracy rate also remained the same in both years. The APAC region as a whole saw the highest dollar losses in 2002, accounting for almost 43 percent or $5.5 billion out of global losses of $13.08 billion.

Economic impact

Considering the role of the software sector in driving the country’s growth, the impact of piracy on
the Indian economy is substantial. As India moves towards being a knowledge-based economy, the protection of knowledge capital bec-
omes essential for future growth. And with the software industry growing more rapidly than traditional industries, it will become a prominent driver of economic growth.

According to Harish Krishnan, director of information technology at CII, parties affected by the piracy scourge include:

• Individual software vendors: Increase in financial loss, loss of reputation, loss of quality manpower, loss of market share.
• IT industry in general: Reduction of growth, lower manpower growth, lower economic growth, loss of motivation.
• Government: Loss of tax revenue, wrath of the industry.

Waning revenues for vendors on account of piracy might make India an unattractive foreign direct investment (FDI) destination for existing affected as well as prospective software vendors. While Adobe pegs the piracy rate for its software in India at 90 percent, for Macromedia the rate is between 85-90 percent. According to an industry expert, vendors are keeping a constant tab on piracy trends across the world, and if they find the Indian market unprofitable they may shift focus to other profitable markets. Declares Sandeep Mehrotra, channel account manager for Adobe Systems in India, "If software piracy in a country is not taken care of, investments in that country will get affected because then you are developing a lot of products but not getting revenues." He cautions that though Adobe’s investments in the country have not been affected so far, the situation could change in future. Though other companies are not as vocal on the effect of piracy on their investment plans, they consider the existing situation while evolving their strategies. Punit Vanvaria, Microsoft India’s manager for business development points out that Indian and foreign software companies which invest in local employees, research and business partners cannot compete with those selling illegal software at a fraction of the original cost. "The cost of software products is reflective of the R&D that is required to develop the product for sale—not reflective of the CD that it is burnt onto. Prices also incorporate a component for intellectual property," Vanvaria explains.

Jeffrey Hardee explains that every dollar of software package revenue generates about $2 in services revenue and $1-$3 in channel revenue

Benefits of piracy reduction

A BSA-IDC study points out the impact of even a slight reduction in piracy in India. According to ‘The Benefits of Reducing Software Piracy,’ a reduction from the current 70 percent level to 60 percent by 2006 will add $2 billion to India’s economy, increase local industry revenues by around $1.6 billion, generate 48,435 new high-tech, high-wage jobs (two-and-a-half times more than the present size of the domestic-focused portion of India’s software industry), and generate $92.4 million in tax revenues for the government. The relative benefit of a 10-point reduction will be the highest in the APAC region as compared to the other regions because of its high piracy rate of 54 percent in 2002. According to Kapil Dev Singh, IDC India country manager, local industry will gain more than multinational importers because many of the benefits will accrue to local services and channel firms.

Key benefits

IT sector growth
What does this entail for the IT industry in India? The projected IT growth during 2002-2006 will stand at 148 percent if the piracy rate continues at the present level of 70 percent. However, the 10-percentage-point reduction can up that growth to 163 percent. Says Vanvaria, "Since the infotech sector is now an engine of global economic growth, it is quite evident that a curb in software piracy will lead to huge benefits in terms of catalysing the industry into its next phase of growth."

IT jobs growth
A 2.5 percent reduction in piracy every year from 2003 onwards will lead to creation of an additional 9,465 jobs in 2003, 20,120 by 2004, 32,939 by 2005 and 48,435 by 2006.

IT taxes growth
IT-related tax revenues, which stood at $216.2 million in 2002, are projected to rise to $543.7 million by 2006 in case software piracy continues at the present rate. However, if the piracy is brought down to 60 percent by 2006, these tax revenues can climb to almost $635.4 million, which means an additional $91.7 million.

IT contribution to GDP
The decline of piracy to 60 percent will also increase the IT industry’s contribution to the GDP. An additional $162.8 million can materialise in 2003, $358.5 million in 2004, $609.3 million in 2005 and $938.5 million in 2006, totalling around $2 billion.

But how are these targets going to be achieved? Jeffrey Hardee, vice-president and regional director for Asia at BSA, explains that every dollar of software package revenue generates about $2 in services revenue and $1-$3 in channel revenue. Krishnan says that reduction of piracy is synonymous with increased demand for legitimate software. This will lead to greater manpower deployment to cater to demand, increased FDI (which will add to new investments and start-ups), and more legitimate transactions (which will increase the government’s revenue from taxation).

Dynamics of piracy

The projected benefits are hard to resist, both for the government and vendors. This is likely to speed up the whole process of curbing the menace. Experts say that evolving the right methodology will require a proper understanding of the whole piracy nexus.

According to CII, piracy can be as simple as unknowingly copying or allowing someone to copy software from one PC to another, or it can mean organised criminals with a well-established network selling pirated software to knowing and unknowing customers. Shriram Krishnamachari, country manager, India, Macromedia, believes that in channel piracy the nexus is between hardware vendors and people who create duplicate CDs, while in the case of end-user piracy there is a lot of under-licensing wherein a company does not buy enough licences to cover the number of PCs loaded with the software. A typical company may buy one copy or a few copies of original software, and then use the original copy/copies to download the software on to more computers in the workplace than it has purchased licences for. The difference between the number of licences it has purchased and the number of software copies downloaded into its computers is deemed to be pirated copies.

Says Hardee, "The greatest piracy problem faced by software vendors is one of corporate end-user piracy. The increase in piracy rates in India seems to indicate an increase in acts of illegal copying in the workplace." However, the most common form of piracy (where the end-user does not even realise that he/she is engaging in software piracy) is when the dealer engages in ‘hard disk loading,’ whereby he illegally pre-loads illegal software onto a PC prior to sale. According to Vanvaria, it has been found that the cheapest and most readily available software programmes are pirated as much as the most expensive programmes.

Factors driving piracy

According to Sangeeta Gupta, vice-president, Nasscom, one of the most important factors that encourage piracy in India is the high cost of commercial software. The street price of software is very high, and forms one-sixth of the price of acquiring the computer, which encourages consumers to use pirated software to save costs. Some of the other reasons are lack of stringent enforcement laws, lack of awareness of IPR laws by users, easy availability of pirated software in the grey market, high usage of assembled PCs in India, wherein unauthorised bundling of pirated software with hardware takes place, growing availability of illegal software on the Internet, and improper software asset management by organisations. According to Krishnamachari, Internet piracy is one rising trend driving piracy in the country: "As India increasingly gets wired to the Internet, we see increasing instances of pirated software for sale on auction sites. There are cracked serial numbers available on Internet and FTP sites from where illegal software can be downloaded."

Punit Vanvaria points out that Indian and foreign software companies that invest in local employees, research and business partners cannot compete with those selling illegal software at a fraction of the original cost

What next?

The above factors throw open for debate the question whether we have gone wrong in our approach towards curbing piracy—and what the ideal approach should be. Should the strategy be based on education and creation of awareness, or should it be based on stricter control through harsh measures, or should it be a combination of both? While end-user education campaigns will continue, an emerging trend is the growing emphasis on employing effective enforcement to deter copyright infringement.

According to Gupta, curbing software piracy in India needs a combination of raids, litigation and an active education campaign; the campaign is imperative to educate users about the advantages of using legal software, the problems associated with copied software, legal penalties, etc. An education campaign helps to address issues like creating awareness among users on how to differentiate between legal and counterfeit software. Over the last year Nasscom has deliberately shifted to focusing more on the corporate audience since piracy is rampant in this segment. As the BSA study points out, there is a need to increase both educational and enforcement activities to ensure effectiveness in achieving the desired results.

However, Mehrotra of Adobe insists that while awareness and education are important factors, stricter enforcement of the law is the need of the hour: "The first level, education, is already done. While this ought to continue we should now move to the second level, action. The focus must now be on ensuring that the laws which have been framed are followed. India has some of the most stringent laws in place, but they are not being implemented. The fear factor needs to be instilled effectively." One of the suggestions that has been made is for the government to set up an independent body to conduct surprise checks on the software licences of companies.

According to Hardee, there is an expectation that software piracy in India will gradually decline in the coming years. A major factor driving the decrease will be the current working relationship between the government, police and private sector agencies. Going ten steps further, Nasscom expects to bring down the piracy rate in India to 50 percent by 2006. While these scenarios indeed look good, whether they actually take place will depend on the soundness of the strategies that vendors and the government evolve.

25 countries with the highest software piracy rates