Microsoft’s Dilemma: The Real Piracy Solution

By Joel Hruska

Date: September 11, 2001

In just over six weeks, Microsoft will launch WindowsXP -- an event the Redmond software company hopes will rejuvenate flagging PC sales and give flagging PC manufacturers a much-needed shot in the arm.

A key part of WindowsXP and one of its most controversial features has been its Product Activation system, which, according to Microsoft, is designed to combat OS piracy.

Microsoft’s Misplaced Agenda

Clearly, Microsoft is taking piracy of its products seriously (a similar activation system is built into OfficeXP). Piracy is a major problem for MS.  As a premier provider of professional-level operating systems and office productivity software, the company has a huge investment in its product base and, therefore, in protecting that product base from theft.

Windows Product Activation (WPA), however, is a fatally flawed system that will fail to accomplish Microsoft’s goals. It will most likely only inconvenience and annoy the legitimate user of MS software, while failing to prevent the continued theft of MS products.

Product Activation has already been broken. Warez designers have cracked the Product Activation on the latest builds (2600) of WindowsXP and discovered how to turn the time-sensitive beta builds into fully-functional Corporate Edition builds.

When bypassing Product Activation is as simple as downloading a ‘patch’ to disable the feature, its highly doubtful that the system will greatly help reduce piracy.

In fact, the Redmond, Washington-based software giant admits as much -- WPA is to prevent "casual" piracy -- family sharing for instance -- but this elaborate and invasive mechanism leaves the real problem -- the one that is demonstrably costing the company big bucks untouched.  [ed: We will outline what the likely true goal of WPA is in an upcoming article.]

Failing to Ask the Right Questions

Microsoft has identified the problem of piracy, but failed to identify a primary cause -- or, out of greed -- has simply ignored it.

The problem here is price.

A new Professional Edition of WindowsXP is $300. The Upgrade (and we all know how well Upgrades work, don’t we?) is $200.

Home Edition weighs in at $200, while an upgrade is just $100.

Now, let’s consider these prices in relation to the computer market itself. For $300 I can currently buy a motherboard, an Athlon processor, 256 meg of DDR RAM, and a GeForce2 GTS. Granted, the OS is a very important part of a computer, but is it more important than the processor? Or, say, the RAM? Frankly, with MS dead-set on forcing OS upgrades every two years or so, my RAM may well last longer than my OS -- and for only 10% the cost.

If we look at Microsoft Office, the prices get even more disgusting. The OfficeXP Standard Upgrade weighs in at $240, while the OfficeXP Professional is $580. The Standard package is $480.

So, if I wanted to build a computer using XP Home Edition and Office XP Standard, it’ll cost me $679 for the software. In today’s computer market, its possible to build an entire system (most likely minus monitor) for that cost.

Anyone else find that slightly ridiculous? An OS and Office programs are certainly important and valuable, but do they equal the cost of the entire machine?

The smartest thing Microsoft could do to prevent piracy of its products is to lower the price of those products. Most people, I believe, would honestly rather own the product legitimately -- if they could afford to purchase it to begin with.

With its pricing scheme, Microsoft is actually the biggest contributor to piracy by making their products prohibitively expensive to many who might desire or even need these software packages.

Greed Trumps Intelligence

Microsoft, however, has not pursued the path of lower prices. Rather than offer a reasonably priced product, they’ve chosen a sales plan that absolutely maximizes profit, but at the cost of consumer goodwill. AnandTech recently published a very interesting story about one business’s transfer from Microsoft to Linux mainly because of the software peddler's own mistakes.

In the short-run, for a company with monopoly power, this makes sense. However, the Redmond software giant, in its arrogance has forgotten history. Monopolies don’t last. Standard Oil once controlled 95% of the entire US oil industry in an age when government was far less involved in business affairs than today, yet its monopoly failed. Ford Motor Company failed to keep its monopoly on the automobile. 3Dfx failed to keep its control of the video card industry, and went from market leader to bankrupt in less than two years.

A word to the wise at Redmond: Your most important asset is not your programmers, your buildings, or Bill Gates -- it’s the goodwill of your customers. Don’t confuse loyal customers with those who use your products because they have no other choice. Huge product margins may make the stockholders happy in the short-term, but draconian product activation and the assumed criminal intent that it implies coupled with price gouging does not make for friendly customers.

Cutting prices won’t fix the entire piracy problem by any means, but it would certainly help.  And it’s a solution that would win MS major points with customer’s and OEM’s alike.

Both choices carry a penalty. Dropping Windows and Office to prices that more reasonably reflect the current computer market would certainly make the stockholders unhappy, but it would build long-term goodwill towards MS. Or, MS can continue to exploit their customer base, release buggy products (Windows ME, anyone?) and abuse their market position.

If you’d like a nice example of what happens when modern-day tech companies ignore the wants and needs of their customers to satisfy their own high margins…just ask Intel. AMD has more than tripled their share of the PC processor market in the last two years—and that’s money out of Intel’s pocket. Learn a lesson, Microsoft—or you might as well start writing checks to your competitors now for the business you’re going to be handing them, and save yourself the trouble.


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