China Software Piracy Has Staying Power

CIO Magazine, published out of the Netherlands, just did an excellent article detailing why software piracy is so rampant in China and why it will not be going away anytime soon.  Entitled, Why Piracy Isn’t Going Away in China, the article’s thesis is that software piracy in China will exist in large numbers until the ratio of software prices in China to average income in China comes closer to the ratio of software prices to average income in the West:

Piracy is exceptionally simple: it’s cheaper to reproduce and sell software in which you didn’t invest, market, or frankly do anything else except slap a disc into a replication machine. That’s one part of the equation.

However, piracy as an issue is far more complex than, say, the Business Software Association (BSA) makes it out to be. Certainly companies that invest in and develop new software deserve a fair return on investment. But that must take into account local market conditions.

There is a false impression that China is now a rich country. Certain sectors of the society have done very well for themselves. They’ve made real money. But the average monthly salary in the nation’s major cities — the wealthiest areas — remains around US$250 to $400 per month.

Compare that to average salaries in the U.S. If someone makes $2,000 to $2,500 per month, then a $250 operating system upgrade doesn’t seem too terrible. But when that price is approximately the same in dollar terms in a lower-income country, as it is in China, then suddenly a potentially buggy, definitely pirated edition of the same software for about $5 to $10 sounds much more attractive.

If software companies want better results out of China, then pricing needs to be commensurate with local market conditions. Software developers and their policy representatives have attempted, futilely, to make piracy a moral issue. It isn’t. It’s an economic issue. Piracy doesn’t flourish in developed countries where the cost of legitimate software doesn’t outweigh its benefits. But it flourishes in developing countries, where the cost-benefit ratio is different. Authentic software will never be as an inexpensive as pirated goods. But when its value helps to close the gap between price and usability, more people will pay the appropriate price.

I agree because I think it is mostly economics that drives counterfeiting, not culture. Counterfeit goods in China are way cheaper than the genuine ones, and in developing nations like China, wages are low. Like everywhere else, those in China who can afford the real thing, prefer to buy the real thing. As Chinese wealth increases and as more Chinese companies seek to protect their own brands, counterfeiting will decrease. This is what happened in both Japan and Korea, both of which were at one time, notorious for counterfeiting. And even before that, this is what happened with the United States as well.

In addition to a country’s per capita income and the cost of its software, a country’s enforcement of intellectual property rights (IPR) can also reduce counterfeiting. As China’s legal system continues to step up enforcement of its own copyright laws, the risks for those producing illegal software will increase, leading to an increase in the prices charged for illegal software and a decrease in demand.

China’s central government seems to have turned the corner in terms of actually believing it is now in China’s interests to increase IPR enforcement. Chinese companies are innovating in ever larger numbers and they want to see their IPR protected. China also has made clear its aspirations of unseating India as a software outsourcing center and it has to know that to realize this goal it must step up its intellectual property (IP) enforcement.

Producing counterfeit software in China is easy right now. But as the costs of counterfeiting continue to rise due to China’s increasing IPR enforcement and as the wealth of the Chinese consumer continues to grow, we should expect to see declining sales of counterfeit software. To the extent foreign software producers are willing to charge less for their software in China, the decline in counterfeit software sales will accelerate.

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