Software Piracy: Under Fire

Last year recorded a 37 per cent rate in software piracy worldwide and it cost companies $11.9 billion. While software companies feel the pinch, the subtle consequences of piracy on the economy of a country are only now beginning to surface. Piracy seems to have taken its toll on the employment rate, held multinational companies back from investing in the region and destroyed the indigenous software industry. Windows Middle East takes a fresh look at software piracy and its actual victims.

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By  Vijaya George Published  January 28, 2002

I|~||~||~|When anti-software piracy organisation Business Software Alliance (BSA) announced an amnesty in the United Arab Emirates (UAE) and Kuwait during the Holy month of Ramadan urging companies to legalise their software without penalty, 1918 companies took advantage of the “great opportunity” and agreed to get their software licensed, pledging annual budgets for the same. While the success of the campaign remains to be quantified in terms of the revenue recovered, it is comforting to software companies to hear that, of the 6,580 companies contacted by the BSA, over 5,500 responded and more than 56,521 PCs were enlisted to be audited in the UAE and 32,563 in Kuwait. This is but a small speck within the larger framework of software piracy, which has cost companies worldwide $11.7 billion in the year 2000 and offending countries potential IT investors.

Over the last decade, there have been unconfirmed reports of reputed software companies pulling out of the region as a result of uncontrolled piracy. But the situation is gradually undergoing a change thanks to frontrunners like Jordan and the UAE, whose rulers have woken up to the fact that to lure software companies and individuals to invest in their land, they must be assured that their copyright interests will be protected. As a result, the law has clamped down heavily on all forms of piracy in these countries maintaining sustained vigil over the city’s small shops, where there is mass duplication of software, and over companies, where use of unlicensed software is rampant.

Keeping an eye on the region at large and maintaining detailed reports about the annual progress in each country in terms of anti-piracy law enforcement is watchdog agency International Intellectual Property Alliance (IIPA). According to the IIPA, Kuwait is deemed “one of the worst pirate countries in the Gulf region” as a result of lack of sustained law enforcement, with 80 per cent piracy, “where private street vendors continue to set up stalls right in front of legitimate retail video outlets, and street vendors sell their pirated cassettes right in front of police cars without fear of sanction.”

Another major offender that has been elevated to the priority watch list is Lebanon, which has a piracy rate of 83 per cent. Reports from the IIPA state that “no effective measures have been taken to eliminate egregious illegal software usage in government offices, as well as in large companies or banks in Lebanon.” Compilation CD-ROMs (with thousands of dollars worth of software) sell on the streets of Lebanon for as little as $10. In 2000, total loss to U.S copyright-based industries in Lebanon is approximated to have been $15 million.

Others that remain on the list include Saudi Arabia (59 per cent), Egypt (56 per cent), Oman (78 per cent) and Qatar (81 per cent). The organisation commends Omani officials for taking all “the steps needed to establish a legal framework for copyright protection” especially in Buraimi, which used to be a depot for pirated software. Pirates seem to have shifted base to Qatar instead, which the IIPA calls an “attractive haven” for copyright pirates from other parts of the Gulf. While the organisation is pleased with the attempts in these countries to amend their copyright laws in accordance with international standards, they have asked to continue keeping them in the watch list for some more time.

||**||II|~||~||~| Meanwhile, those removed from the watchlist include the UAE and Jordan. And with good reason. “The UAE, especially Dubai and Jordan lead the way by example,” said Simon Swale, regional anti-piracy manager, Microsoft Middle East and North Africa. “They have both identified the value and necessity of a flourishing IT sector to their general economic development and will provide the business and legal structure for this to happen. Additionally, this is a transparent plan from the top down, which is supported by the King or State or Government, whichever is applicable.” The UAE has seen an almost 50% drop in piracy from 87% in 1996 to 44% in 2001, while Jordan is fighting to lower its piracy rate from the current 71 per cent.

In these countries, the governments have been working in close association with anti-software piracy organisations such as the BSA and the AAA (Arabian Anti-Piracy Alliance) to ensure that the rights of software companies are not violated. To this end, awareness campaigns have been held regularly in the region to establish a mindset of “legality” in the channel and amongst consumers. This has been followed up with frequent raids by the UAE Ministry of Information, which confirms any tip-offs that it receives before taking any action.

Mohammed Muttawa Salem, senior censorship officer at the Ministry of Information and Culture, Dubai overlooks the raid operations in Dubai. “Sometimes the BSA informs us about a shop that is selling illegal software. Sometimes, an individual who has bought a CD from a shop finds it is pirated and comes and reports it to us and sometimes, our staff—we have five to six staff who deal only with this—they inform us,” commented Salem. “Before conducting any raid, we cross check our information thoroughly. Only then do we take any action. If we catch anyone, we close the shop for one or two months. If they violate the law too many times, we close the shop down permanently.”

Accompanying him on some of the raids is senior censorship officer Juma Obaid Alleem, director of Censorship Department, who states that the piracy rate has gone down considerably after the Ministry of Information began to take more aggressive measures to counter it with penalties that make businesses feel the pinch.
“You can’t compare it to the past. The percentage of piracy has gone down a lot,” said Alleem.

Jawad Al Redha, regional director, BSA Middle East agrees. “Software piracy costs this region $376 million. The three largest economies in the Middle East-Turkey, Israel and Saudi Arabia-each saw a decline in the piracy rate last year. Saudi Arabia’s piracy rate declined from 64% in 1999 to 59% in 2000. Africa was the region with the largest drop in the piracy rate. This year, piracy was 52%, down from 59% in 1999.”

||**||III|~||~||~|Clearly, the law firmly believes that software companies have been wronged and have been taking necessary measures to placate them. Some individuals and companies, however, don’t agree. One IT user vehemently condemned the complete disregard for the consumer in the region stating that there were no laws to protect people or help them seek compensation for having suffered losses as a result of using buggy licensed software. “Is the law only for the big software giants?” he asks. “If I have a grievance against one of the software giants, can I take it up with the Ministry of Information or with the BSA? Who is there to represent the consumer, who uses their shoddy products for want of alternative choices? What rights do we have when a loophole in the software has made our system vulnerable to a virus and has cost us thousands to get rid of it? What rights do we have that will enable us to demand compensation for the loss caused to us?”

Yasser Zeineldin, marketing manager of Microsoft Gulf says his company’s response to that would be to “read your end user license agreement carefully. For any commercial product, there is always a limited liability.” Meanwhile, he assures the public that “Microsoft has been acting very responsibly by telling the media and the press every time there is a virus or a bug. We put patches up immediately and inform our users through our web site and through the media so that they can secure their systems.”

Software companies are pushing for tighter legislation in the region to ensure that copyright laws are reviewed and comply with international standards. The UAE is in the process of amending its copyright law as are countries such as Kuwait, Morocco and Turkey to name a few. Although companies are unwilling to voice their concerns to the press, several begrudge the fact that licenses to use software are very expensive. Some have, however, recognised the need to use licensed software and have decided to go legal. The most recent instance is of a contracting company in the UAE that was using illegal Autodesk products for daily operations on its 30 PCs. The company bought 30 licenses of Autocad 2002 and has budgeted $100,000 for hardware and software in the coming year. But one wonders if most companies in the region can afford such generous annual budgets.

Turkey-based Swale explains that the pricing debate is caused by a vicious cycle that has its roots in piracy. Software companies need to recover the money they spent on research and development, employees, developing the software, conducting training in rural areas, sponsoring college students and the daily running of their operations. If everybody pays for their software, prices will undergo a natural reduction but for as long as piracy rates continue to remain as high as they are, in an attempt to recover money, prices tend to stay high. Moreover, high piracy discourages investors, reduces competition and keeps the prices up.

On the other hand, there are software companies that have had to suffer major dents to their profit margins as a result of software piracy. One company that decided to adopt alternative measures to safeguard its interests is Sakhr Software, a leading publisher of Arabic software and a member of the BSA. “We used to rely a lot on sales of CD titles, but due to piracy issues, we’re departing from this kind of business. Only 5% of our software sales now come from CD titles,” stated Salah Malaeb, general manager, Sakhr Software.

The Kuwait-based company has reason to be angry. “We were forced to stop most of our development efforts in this market, and concentrate on other markets to remedy the situation. For example: One of our CD titles that comes on 4 CDs and sells for $150 was selling as a pirated copy for $1 on a single compressed CD with the printed manual too. We can’t invest in such a market anymore if governments don’t apply the already existing laws to protect us,” explained Malaeb.

Sakhr used to sell software to the educational sector but seeing that it was the most pirated, it gradually moved away from “producing CD titles that rely on CD protection schemes.” Instead, the company has begun to target the corporate sector with custom-made solutions and have adopted the ASP model (Application Service Provider) where they install their applications on their secure servers on the Internet, and sell access to these applications by providing customers with restricted access.

||**||IV|~||~||~| There are software companies, however, that can’t simply change their business model to counter piracy. Microsoft has instead introduced the concept of product activation for the first time and incorporated it into two of its products, namely Windows XP and Office XP. But for the most part, they have had to make do with awareness campaigns and threaten offenders with a legal stick. The biggest victims of software piracy simply by virtue of the popularity of their software are thought to be Microsoft, Adobe, Autodesk and Symantec.

However, the ethical arguments that some of these companies use on why people should not use unlicensed software are weak deterrents to stopping the offence. Kevin Isaac, regional director of Symantec Corporation, Middle East and North Africa, for instance, says “It is a false economy because you are saving money by pirating software but if you lost data, you would spend a lot more money recovering it because stolen property is unsupported.”

Surely, loading one licensed copy on more than one computer does not make it more vulnerable, for instance, to loss of data? His second argument states that using unlicensed software affects your business in that a hotel, club or accounting company, for example, that used pirated software risked losing clients who saw that they were using pirated software. A rather weak argument, given that most people don’t check to see if a firm is using pirated software before they sit down to talk business or use their services.

But a crucial reason worth considering comes from Scott Butler, regional director, Arabian Anti-piracy Alliance, who represents motion picture associations, interactive games and satellite channels. He quotes Pricewaterhouse Coopers as saying that “for every job created in the software industry, there are seven support jobs that crop up” in terms of solution providers, distributors, resellers and so on. Zeineldin of Microsoft seconds that. “For every dollar that we make, our partners make seven and that is only going to multiply,” he said.

Zeineldin’s explanation of how a country’s economy is determined by the rate of piracy is convincing given that his chief examples are two of the most developing IT markets today, namely Jordan and the UAE. “The least hurt by piracy is the software company itself. This is what we want people to understand,” he said. “Rather, it is the economy that it generates that is at stake. When governments begin to realise this, they step up action against pirates. If you don’t have a proper IT infrastructure in place, everything you do is going to be slower, less efficient and more costly.” And it is the infrastructure that attracts and retains manpower and, in turn, helps the economy. He points out how one logical move creates a positive upward spiral, beginning with Information Technology, which has helped build an entire industry, created jobs in the process, put infrastructure in place, attracted investors and made trade flourish.

||**||V|~||~||~| Butler explains the same concept within the context of movie industry. “Earlier, most of the movies were pirated and there was no law to stop them. So there was no point in putting up cinemas as owners were not likely to get returns. But now, look at the number of theatre complexes that have come up in Dubai. That’s because piracy has gone down. And this contributes to the country’s economy.”

Another negative consequence of piracy is brain drain. Home-grown talent flies the nest if they feel that their work will get stolen. “It’s not just important to bring in multinational software vendors but generate an indigenous software industry as well,” explained Swale. “There is enormous skill in the Middle East and yet the technically adept are prevented from displaying their products for fear of piracy. So they would rather go to countries that have copyright laws to protect them and assure them good returns on their investments. This is why brain drain happens.”

Microsoft realises that awareness such as this can’t be done in a day. While it may take several years for the region to realise the value of using licensed software, the vendor community and the legislation are working hand-in-hand to accelerate that process. Dubai has successfully warded off pirates by not just instigating continuous raids but subjecting offenders to harsh penalties that sometimes include deportation as well. Saudi Arabia, although wary about interference from outside organisations such as the BSA operating within its premises, has set its own Ministry of Information behind offenders and has initiated a unique copyright project called the Falcon Eye.

Falcon Eye targets all end-users from small and medium businesses to large enterprises. Businesses are required to fill a form stating all hardware and software installed in the company and provide copies of the licenses to the Ministry of Information and Copyright department (MOI-CRD). Within 14 days, this has to be submitted to the MOI-CRD; which examines the forms and awards a certificate of compliance to the company. Those not compliant are given another seven days to license their software. “The MOI-CRD follows this up with regular visits to the companies in the Kingdom and conducts an audit on all the computers installed and requests the licenses accordingly,” said Mazen AbuSalem, anti-piracy marketing manager SMB, Microsoft Arabia. Those who don’t comply with the law are closed down for a maximum period of three months and financial penalties will apply. “Moreover MOI CRD will notify the concerned software companies to sue the accused,” added Mazen. Despite this, the piracy rate for 2001 in Saudi Arabia for business application software is reported to be 59 per cent.

||**||VI|~||~||~|But governments in the region have refused to panic and have been going after the offenders persistently. In the last year, the media has been replete with instances of resellers that have been raided and brought to book for selling illegal software. Dubai’s Ministry of Information recently conducted a raid against a computer company in Dubai and confiscated 12 computers that were found loaded with more than 136 illegal software packages including software products from Microsoft, Norton and McAfee. Kuwait has been working just as hard to acquire a better name in the industry and recently took action against a well known reseller of computer hardware and software. Two people were arrested and detained under criminal charges and more than 7200 illegal CDs and four computers seized at the reseller’s showroom.

While all this action is geared to reduce the rate of piracy in the region, it would be foolhardy to presume that such action would bring the practice to a complete standstill. As Sanjeet Dabral, regional manager, IDC Middle East rightly states “software piracy per se is not going to go away”. And he is also quick to remind software companies that “but for pirated software, there would be no widespread penetration of such products in the market.” Nevertheless, he assures us that what the Arab region is undergoing is “not a unique phenomenon” and need not concern us unduly. He calls the Middle East “an emerging market where software and services don’t yet enjoy a high growth rate like hardware does.” Like all developing regions, hardware expenditure is currently very high in the Gulf and little attention is being paid to software. But as it slowly becomes a more mature and developed market like the US or Europe, focus will gradually shift to software. “Until then,” he said, “software piracy will be high. This is nothing new. It’s following a typical global trend.”
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