It's Windows vs. Windows as Microsoft battles piracy

By Ina Fried
Posted on ZDNet News: Feb 3, 2005 12:00:00 PM

In an effort to boost sales of Windows, Microsoft has its sights set on its nearest competitor.

But it's not Linux. And sorry, Apple Computer fans, it's not the Mac.

The biggest rival to Windows sales is Windows itself--or rather pirated copies of the OS. And Microsoft is starting to put its foot down.

In its most serious bid yet to reap revenue from those who've been getting Windows without payment to Microsoft, the company plans to require computer owners to verify that their copy of Windows is properly licensed before allowing them to download software from Microsoft's site. By mid-year, the once voluntary Windows Genuine Advantage program will become mandatory.

Those with unlicensed copies of Windows will be blocked from getting both add-ons to the OS and security patches through Microsoft's download site (though they will still be able to use the Automatic Update feature built into Windows).

"They've let it go until now because PC growth has been so good," said Matt Rosoff, an analyst at research firm Directions on Microsoft.

But that's begun to change.

Sales of Windows have started to lag those of the PC market as a whole. The issue has become more acute as an increasing amount of the growth in computer shipments is coming from emerging markets, where piracy is far more prevalent.

Analysts agree that cracking down on unlicensed copies of Windows is one of only a few ways Microsoft can grow the business, which is a key generator of profits. But they also point to significant risks involved in taking a harder line.

Historically, Microsoft has trod carefully when it comes to crackdowns, particularly in emerging markets. Though clearly eyeing growth, the company has not wanted to push too hard in countries where piracy is rampant, and thereby force customers toward Linux. Also, some say that by threatening to withhold security updates, Microsoft is making the entire Internet less secure, harming legitimate customers as well.

In an effort to placate that concern, Microsoft will allow those with unlicensed copies of Windows to continue getting security patches by turning on Windows' Automatic Update feature.

Despite the risks, though, the potential increase in sales by cracking down on piracy is hard for Microsoft to ignore.

Piracy is a big problem for the software maker--one that has cost it billions of dollars in recent years. Last quarter, for example, Microsoft saw revenue in the Windows client unit grow by 5 percent, but PC shipments grew more than twice that fast. Until this year, the client unit had been growing its revenue at a compounded growth rate of 12 percent. Any slump in the Windows client business is cause for concern: Last quarter, the unit accounted for $2.5 billion in profits--more than half of the company's total $4.7 billion earnings.

In a presentation to financial analysts last summer, Will Poole, head of the Windows client unit, identified a reduction in unauthorized use of Windows as a key growth opportunity for the business. He mentioned it alongside efforts like Tablet PC and Media Center, which are designed to spur buyers to get a second or third computer.

Poole said that 92 percent of software in China is pirated, which means the software on 13 million computers. And though the rate is estimated at only 22 percent in the United States, that still amounts to 12 million PCs, because the computer market stateside is so much larger.

"That's a big number," Rosoff said. "If they could get a fraction of that (population) to buy legitimate Windows, that could boost the business."

Rosoff notes that with the release of the next version of Windows--code-named Longhorn--more than a year off, there are not that many ways Microsoft can increase its sales, particularly to business customers.

In the presentation last summer, Poole didn't offer specifics, but he did pledge more action, planting the seeds for the current effort. "We see good revenue opportunity for us to try and work with the channel and work with consumers to have them understand the value of genuine Windows," he said at the time, promising that a variety of pilot programs would quickly follow.

This is not Microsoft's first stab at trying to combat piracy. The company added an activation requirement for Windows and spends a lot of time and money working with regulators to fight piracy through legal channels.

Microsoft said Wednesday that it believes the latest effort will raise sales but declined to offer any specific targets.

"Microsoft expects some revenue from this effort--revenue from licenses that are in effect already in use," Kurt Kolb, general manager of Microsoft's system builder and license compliance unit, said in a statement provided to CNET News.com.

A careful course
As a way of lessening the danger of driving customers to Linux, Microsoft is offering some compassion to those whose copy of Windows is found illegitimate. The company is testing a program in three countries in which those who are found to have an improperly licensed version of Windows can get a legal copy at a discounted price.

Analysts say the offer to "go legit" is a good idea, but may not go far enough.

"In some parts of the world the copy of Windows costs a lot, relative to the cost of the PC so it still may be a tough sell," said Gartner analyst Michael Silver. Plus, there are technological hurdles. A new copy of Windows will likely mean computer owners will need to back up all of their other data, reformat their hard drive and start from scratch, something many novices may be unwilling or unable to do.

Microsoft has also been trying to avoid being perceived as all stick and no carrot. The company has been offering various contests and freebies aimed at giving an added benefit to those who do have genuine copies of Windows.

"They are trying to show some value, because basically there is not a lot of difference between a genuine copy and a pirated copy," Silver said. "It kind of looks the same and works the same."

In Singapore, Microsoft has been giving away prizes to those who sign up for Windows Genuine Advantage, while in the United States, the company is offering free copies of Photo Story 3, along with other incentives.

This effort has been building quietly for almost a year. The company tried out the idea with a "Windows Club" in China--essentially a series of perks rewarding the estimated 8 percent of users there that do buy genuine software.

Later in the year, Microsoft quietly debuted Windows Genuine Advantage, pitching the downloadable tool as a way for consumers to double-check whether their copy of Windows was genuine. At the time, there was neither a benefit for those who authenticated their software, nor a penalty for those who didn't.

After a few weeks, Microsoft started offering incentives for those who participated in the trial, while still not penalizing those whose copy was found to be illegitimate. Last week, though, Microsoft announced plans to make the program mandatory and prevent anyone with an unauthorized copy from downloading from its site.

Although some analysts speculated the company might eventually block all patches for unauthorized copies of Windows, Microsoft told CNET News.com on Thursday that it is "committed to delivering security updates to all users, with or without Windows Genuine validation through the Automatic Updates feature."

Despite announcing the rather bold plan, Microsoft is clearly aware of a potential perception issue. Recently, the company started asking some of those on its Windows Genuine site to take a survey about their feelings toward the effort.

The survey asked if customers believed the program would reduce counterfeiting, whether they believed the program was more a benefit for Microsoft or more for consumers, and how they would feel if the program was made mandatory.

Gartner's Silver said that ultimately, the issue for the consumer boils down to the impact on the pocketbook.

"It's going to come down to some extent on pricing," he said. "What's it going to cost to get legal?"