Original URL: http://www.theregister.co.uk/1999/11/08/how_fighting_piracy_helps_ms/

How fighting piracy helps MS boost Windows sales

It's remarkable how altruism pays the rent...

By John Lettice and Graham Lea

Posted in Business, 8th November 1999 10:03 GMT

MS on Trial Microsoft can even use the fight against piracy as a mechanism for strengthening its hold on the OS market, according to Judge Jackson's findings of fact. The company has achieved a situation where practically all PCs ship with Windows on them, so nobody much wants a pirate copy of the OS, and where the illegal market that does exist has no effect on keeping the prices Microsoft charges down. It's nice work if you can get it. This is how, according to the judge, it works: "Although there is no legal secondary market for Microsoft's PC operating systems, there is a thriving illegal one. Software pirates illegally copy software products such as Windows, selling each copy for a fraction of the vendor's usual price." That's not much help, is it? But wait: "One of the ways Microsoft combats piracy is by advising OEMs that they will be charged a higher price for Windows unless they drastically limit the number of PCs that they sell without an operating system pre-installed. In 1998, all major OEMs agreed to this restriction. Naturally, it is hard to sell a pirated copy of Windows to a consumer who has already received a legal copy included in the price of his new PC system. Thus, Microsoft is able to effectively contain, if not extinguish, the illegal secondary market for its operating-system products." In this section of the findings of fact Jackson is actually concentrating on possible constraints on Microsoft's ability to charge what it likes, and finding that there aren't very many at all: "So even though Microsoft is more concerned about piracy than it is about other firms' operating system products, the company's pricing is not substantially constrained by the need to reduce the incentives for consumers to acquire their copies of Windows illegally." There are a couple of obvious effects of the regime. First of all, as end-users aren't likely to have much motivation to buy pirate copies, the piracy of Windows that exists is heavily skewed towards the smaller system builder end of the market. These guys are obviously a hell of a lot easier to spot than individual consumers, hence the prodigious number of prosecutions Microsoft mounts against the class of offender every year. Second, although the major OEMs have only (one presumes, but fears perhaps not) agreed to limit the number of no-OS machines they sell, this effectively increases Microsoft's dominance and raises the barrier to new entrants, especially if we bear in mind that it will be operating in conjunction with the dreaded MDAs (Market Development Agreements). At the moment, if an OEM has to ship PCs with an OS, that OS is probably going to be Windows. Most of the big OEMs have announced support for Linux, but right now that support is heavily skewed towards the theoretical. How many of their machines are tested to run Linux? How easy is it for customers to specify Linux as their OS of choice? Linux will be an alternative, but it isn't really rolling yet. Meanwhile MDAs, which we've covered copiously here in the past, incentivise OEMs to maximise their Windows shipments at the expense of rivals. Rather than being straight discount schedules they're pitched in the form of joint marketing deals, so PC companies get marketing subsidies together with extra discounts for meeting targets. We should also note how another aspect of Microsoft's anti-piracy activities allows the company to tithe* the PC market. OEM versions of Microsoft operating systems are licensed only to run on the machine they're sold with, which is why, as the judge says, "there is no legal secondary market for Microsoft's PC operating systems." Now, once upon a time the PC operating system bundled with a PC came on separate disks which you could install on any machine, and take with you from machine to machine, whatever the licence agreement said. But these days that isn't just illegal - it's remarkably difficult to do, and is getting harder. Microsoft doesn't allow OEMs to supply installation disks for Windows. The install files are welded onto the particular machine's hard disk, and can't be (illegally, of course) moved onto another machine and installed there without a deal of hacking about. OEMs who do have a deal to supply system files on CD along with their machines generally supply them in the form of an encrypted Microsoft-approved CD that can be used to restore the files as they were on the hard disk when the machine was first bought, but that will only work on that particular machine. So when it comes to OEM versions of Windows, the licence effectively says that you're already only renting the software, and you'll have to toss it when you buy another machine, both for reasons of legality and because you just plain can't move it over. Microsoft gets its share of the price of every PC sold, and it's all a side-effect of the fight to eliminate piracy. Neat. * The word tithe is no longer particularly appropriate to describe Microsoft's share of the price of a PC. As hardware costs have fallen, and OS costs have not, the Microsoft cut is now frequently in excess of one tenth. ® Complete Register Trial coverage