Microsoft Emerging Market Growth Threatened by Rampant Software Piracy

By: Mike_Caggeso

Earlier this month, Microsoft Corp. ( MSFT ) announced its second "Fair Play Day" in 14 Latin American countries, where investigations led to the seizure of more than 160,000 counterfeit copies of Microsoft software. The contraband had an estimated street value of $18.2 million.

This is just the latest attempt by the software giant to try to stem the rising tide of counterfeit products that costs the company millions of dollars annually in some of its most promising markets.

"The crackdowns are part of Microsoft's global Genuine Software Initiative, which aims to help protect legitimate distributors and customers from the effects of software piracy," said Microsoft SA partner executive Mark Reynolds.

Microsoft is also trying to protect its bottom line, which has been sharply undermined by the rise in piracy.

For its fiscal third quarter ended March 31, Microsoft net income fell 11% to $4.39 billion, or 47 cents a share, mostly the result of a 24% drop in sales for the company's flagship Windows software.

Microsoft's general manager of investor relations, Colleen Healy, attributed much of the sales decline to the cottage industry that has sprouted around an upswing in the number of unlicensed PCs on the market. 

"Q3 was a tough quarter on the unlicensed front," Healy told CNET . "We had been making gains there for the past several quarters."

The company made special notice of it in its fiscal third-quarter earnings , released Friday:

"While piracy adversely affects U.S. revenue, the impact on revenue from outside the U.S. is more significant, particularly in countries where laws are less protective of intellectual property rights. Similarly, the absence of harmonized patent laws makes it more difficult to ensure consistent respect for patent rights," the company said.

Skeptics of the growing piracy epidemic may find it difficult to empathize with Microsoft, a $276 billion company with its own legacy of piracy dating back to the company's founding. But the black-market distribution of counterfeit software is also a hurdle for emerging economies by siphoning off tax revenue and strangling legitimate software retailers.

Arrgh-dent Piracy Concern

Software piracy is so widespread in South Africa, it's almost thought of as commonplace rather than illegal.

A 2006 piracy study by IDC - a technology and telecommunications advisory firm - found 35% of the software in South Africa is illegal, costing software publishers more than $150 million a year in that country alone.

"Piracy remains one of the major hurdles to realizing the potential of the information economy in South Africa and on the continent," Business Software Alliance SA Chairman Alastair de Wet told IT Web . "There is great concern for our local economy that over a third of software in use is illegal."

Indeed, South Africa's IT industry employs more than 355,000 people and for every rand that Microsoft earned last year, partners working with Microsoft would have earned 9.69 rand, de Wet said.

But Microsoft is not one to stand on the sidelines. To continue its pursuit of protection, Microsoft has launched the Genuine Software Initiative.

"We want to protect legitimate computer businesses and resellers who do the right thing in selling genuine software," Microsoft's Reynolds told IT Web . "Microsoft won't stand by and allow unscrupulous vendors to destroy the businesses of our channel partners or the jobs of their employees."

Earlier this month, Microsoft settled out of court with 21 South African computer dealers that were selling computers loaded with unlicensed Microsoft software.

And last week in China, police broke up a piracy ring in Shenzhen , seizing programs worth upward of $750 million on a tip from the Federal Bureau of Investigation.

News and Related Story Links:

• CNET: Increased piracy hurt Microsoft's quarter
• IT Web: Microsoft mashes misbehavers
• Microsoft Corp: Quarterly report
• Xinhau: Police break up pirated software ring in S China
• Cape Business News: Computer Dealers Caught in Anti-Piracy Net

By Mike Caggeso
Associate Editor

Money Morning/The Money Map Report

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