(updated: April 6th, 9th)

We’ve argued at some length that piracy is part of the software business model in developing countries because, as Microsoft exec Jeff Raikes put it,

In the long run the fundamental asset is the installed base of people who are using our products. What you hope to do over time is convert them to licensing the software (Mondok 2007).

In middle and low income countries (or, for that matter, lower-income segments of high income countries), piracy creates that installed base.

This logic is pretty clear when looking at a company like Microsoft, which benefits from the massive network effects of being a near-monopoly in the operating system and office software markets.  There is vast and valuable software ecology built around Microsoft Windows, and Office is a de facto standard.  Such a position provides enormous leverage in consumer and business decisions to buy software.  It’s not for nothing that Microsoft owns roughly 90% of the operating system market (in spite of Apple’s resurgence).  But Microsoft is not unique: these factors also come into play for companies without monopoly positions but trying to enter new markets.  As  CEO Michael Simon of LogMeIn observed (echoing comments made over the years by Bill Gates), “If people are going to steal something, we sure as hell want them to steal our stuff ” (NYT 2010).  LogMeIn is a $300 million company, not a $222 billion company, so scale is not the only factor here.  Rather, LogMeIn wants to become a standard, and do so in countries where it can’t efficiently invest in marketing and distribution (and won’t lower prices).

Of course, the software sector is very diverse and we’ve only scratched the surface in exploring how these dynamics play out across it.  One case that I’ve been curious about is Adobe, which has a very high profile in antipiracy and enforcement efforts.

My general assumption was that Adobe was just a variation on the theme.  Although Adobe’s Creative Suite tools don’t function as platforms in the same way as Windows, they do clearly benefit from network effects that crowd out competitors.  And they do clearly require a lot of training to use properly.  So piracy helps maintain Adobe’s tools as standards, and at the same time shifts a lot of the training costs associated with its tools into the informal sector–at home, in school, or in small businesses.  Because Adobe charges $1300-2600 for its Creative Suite tools, it can anticipate a lot of piracy in these contexts–and close to universal piracy in developing countries where price/income ratios become absurd. Such a strategy seems to make good business sense for Adobe.  It made $3.8 billion in 2010, up 29% from 2009.

I thought this was probably the whole story.  Then I got involved in the production of the MPEE report.  Like a lot of publishing projects, the production of MPEE was a small scale collaboration involving free lance help for book layout, maps, and proofing. Once the text is laid out in publishing software (for us, InDesign), all of these stages are most easily done in InDesign.  Here, we learned a painful lesson.  Adobe has released 3 versions of InDesign in 4 years.  All of them break compatibility with the previous versions.  So when our layout designer (CS3) handed the doc off to our map illustrator (CS4), the document saved up and was no longer readable by the former.  We bought CS5 in our Columbia U office (via a not-ridiculously-priced academic license at $300), but the original layout had used Mac fonts, which the PC rendered differently.  Ultimately, everyone had to upgrade to the trial version of  CS5, and then the clock was ticking and we had 1 month to finish.  When you visit the Adobe site for help after going crazy with these issues, you get advice like this:

I don’t see keeping 3-5 versions of InDesign as being too much to expect of a freelancer. Also probably a good idea to keep Illustrator CS3 at minimum for the compatibility. I think it just comes with the territory.

Or the ‘Community Support Specialist’ who offers:

If you want to work with people in CS3 you’ll need to use CS3. Folks on CS4? Same thing.

Here’s a loyal customer who expressed the dilemma pretty clearly:

I bought my software 21 months ago and in this time Adobe has expected me to upgrade twice–I haven’t even finished expensing  the initial cost of the software on my books yet. Upgrading that often just can’t happen in a small firm–it’s prohibitively expensive for a one man shop.

So now from what I understand, to do this properly, I am supposed to buy the upgrade and keep both versions running on my machine and track with every client which version of the software I need to be working in. What happens when I have to add an employee? I will have to buy the CS3 version of the software in addition to the CS5 Suite because otherwise we can’t work on the same files. I’m finding this frustrating.

Now, mind you, such incompatibility doesn’t involve exotic functionality, just straight text layout into columns and boxes.  The kind of stuff that has been core functionality of publishing software since the early 1990s.  Translate this dilemma to Brazil or Russia, where incomes are a fraction that of the US and you get a very simple outcome: massive piracy of Adobe products.   In fact, go through this process in the last month of a 4-year project on a deadline and one could understand becoming extremely sympathetic to such a perspective.  This, as we’ve argued, is not a defect of the Adobe business model, it is the business model.

The fact that Adobe won’t maintain compatibility across versions for such basic functionality seems hugely anti-consumer, but obviously very good business.

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Ps. One more thing while I’m complaining: at no time does an older version of InDesign indicate why it won’t open a newer file.  Instead, it asks you to upgrade a zillion plug-ins.  Which you can’t do!

Pps. The insightful ‘stenchwarrior’ over at Slashdot offers this comment :

I can tell you from experience that Intuit (Quickbooks, Quicken, Peachtree…etc.) are the worst about this. A company can effectively run the same version for several years, but if they want to share their books with an accountant (as most probably will), then the client and the accountant must all have matching software versions. If the account decides to take the brunt, then they must have enough licenses to run multiple copies simultaneously which becomes VERY expensive, plus a version for each year that their clients have. Not only do the licenses cost money, but you better have at least a 100Gb drive on every computer to hold all versions, plus a hefty dose of RAM to handle the app, plus all the others that a typical accounting firm needs to run (Office, PPC, CCH…etc).

It’s a f*****g racket, I tell you. The partners at my accounting firm hate me when I have to deliver the budget.

Any more versions of this story worth sharing?

Ppps. This is an interesting idea from the same thread.  From ‘thisnamestoolong’:

I think the best way to fight it would be for professional organizations representing the trades that use it (graphic designers, accountants, etc.) to try to force better terms on the software companies. Software should ALWAYS be backward compatible with files from older versions, and should have an option to save a file to be compatible with the old version whenever possible.

Surely the accounting professional associations like AICPA could make a stand here.  Or have they?  Or do the high costs benefit the bigger incumbents?

More ps. Alternatively, Europe has some pretty strong software interoperability laws but these appear to  be invoked mostly in cases related to securing access by competitors to dominant file formats (in the hope of creating open standards).  But what about de facto monopolists that disable interoperability within their own set of products as a means of forcing upgrades? With the debate about a new EU enforcement directive underway, shouldn’t commercial behavior that effectively induces piracy be on the table as well?  Why ratchet up enforcement while allowing these sorts of games?

I’m told that the most relevant doctrine here would probably be “copyright misuse,” asserted not as a positive principle of regulation (which would be a mess in the software business) but as a defense against liability for infringement, on the order of : “It shall be a defense to a claim of infringement of the copyright in a computer program if a rightsholder induces the infringement by preventing interoperability.” Apparently findings of copyright misuse are pretty rare, but find a judge with some experience of these issues and who knows?  Is there a comparable story for software regularly used by lawyers?

More… We’ve also written about how little price discrimination there is in retail software markets, especially in developing countries where prices are generally at or above US levels.  So I was interested to see ‘geirlk’s Slashdot comment about Adobe prices in Norway:

They (Adobe) defined Norway as a “High cost country”, and doubled the prices here compared to say, the US.

They charge us $5436 for the CS5 Master Collection. Same pack, same site, US web shop: $2599
Our poor neighbors in Sweden are charged almost $6100

Seems like their trying to take back their entire loss to “piracy” through charging us the double.

With a pricing policy like that, it hardly seems strange that someone would elect _not_ to pay’em.

Maybe it’s worth noting Adobe’s official position here:

Software developers face a devastating financial impact when pirated software is used. Time and money that could be used to create innovative new technology must be diverted to the frustrating task of protecting the software they have already developed. …

Perhaps the most victimized group are the software users themselves, and that includes all of us. We are hurt when developers cannot focus on development. We are hurt when retailers are forced to limit our options. And we are hurt by the viruses, spyware, and adware that can be invisibly embedded into pirated software.

Worldwide, the economic loss associated with software piracy is estimated in the tens of billions of dollars. In the end, the only people who really benefit from pirated software are the pirates themselves.

Btw, in Europe, Adobe appears to be involved mostly in enforcement against commercial intermediaries that sell pirated copies.  As long as the definition of ‘commercial’ doesn’t get stretched so far as to create liability for marginal revenue streams like Google Adwords (or worse, the US NET Act standard of “receipt of anything of value”) I’m fine with that.

The Business Software Alliance, on the other hand (of which Adobe is a leading member), spends a lot of time going after small businesses for these license compliance issues, and has also pushed hard to criminalize “organizational end-user infringement” by businesses (which is arguably already criminal in the US under the NET Act).  I find this part of the piracy dance objectionable, bordering on racketeering given the dynamics above.  If Adobe really wants to enforce its licenses, let it do so through strong server-based authentication and forgo the benefits of a massive pirate market.  If it values the benefits of piracy more highly than the added licensing revenues it would get from enforcement, then it shouldn’t authorize the BSA to pursue punitive civil suits and settlements against small businesses.  Certainly public resources shouldn’t be spent to let it have it both ways.

Still more… on the value of network effects in software markets.  Pulling out a couple more Slashdot comments to emphasize the point:

charlievarrick responds to a commenter:

If you’re a small company, just starting out, and you’re not locked into Photoshop for some reason, there’s no reason to start producing files in that format.

But when you want to hire employees or freelancers or accept files from clients or send files to a printer or basically do anything beyond doodling in your bedroom you are locked into the Photoshop/Indesign/Illustrator/PDF/EPS Adobe ecosystem because it’s the defacto standard in the creative market.

Anonymous Coward notes:

And just to add, if you are a small company, you will eventually start becoming a stopgap for big companies, and then you WILL need your Adobe products to open their files. If you are in the graphics business you must be very, very small and isolated to not need an Adobe product. I am in a small 2 person business, but our clients can have anywhere between 10 to 50000 employees. We need Adobe products even though we are small.

And still more… Here’s a recent video of Adobe CEO Shantanu Narayan talking about how the move to cloud-based services will reduce piracy.  More power to you, guys.  Here’s my prediction:  high prices + endless games with version incompatibility + low tolerance of piracy = loss of monopoly position.  Someone will drink that milkshake.