Microsoft’s New Anti-Piracy Strategy For China May Win The Battle But Lose The War

Give credit where credit is due: Microsoft’s new approach to anti-piracy in China is awful clever. Heck, it might even work. But by filling up its coffers on yesterday’s technology and an outdated business model, Microsoft may end up winning the piracy battle but losing the war completely.

Have State Attorneys General, Will Sue

As The Wall Street Journal reports, Microsoft has enlisted unlikely allies to get Chinese companies to pay for pirated software: U.S. state attorneys general.

Microsoft has tried all sorts of ways to cut piracy globally, and more particularly in China: Lawsuits, cheaper prices and technologies that seek to make piracy harder. None of them, however, have really worked to dent the estimated $63.4 billion in revenue lost to software piracy.

That’s why Microsoft is trying a different tack, one that still relies on the legal system but in a different way. From the report:

Attorneys general don’t typically get involved in overseas disputes involving companies from outside their state borders. But Microsoft, based in Redmond, Wash., has helped persuade attorneys general that overseas software piracy leads to job losses at manufacturing companies in their states. That’s because foreign manufacturers exporting products to the U.S. can shave business expenses by using stolen software, gaining an unfair cost advantage over American rivals who pay for software, according to Microsoft and its allies, including the National Association of Manufacturers trade group.

By blocking Chinese companies from doing business in the U.S.—unless they come clean on Microsoft software licenses—Microsoft might manage to generate a few billion dollars more in revenue.

But that’s the bad news.

Microsoft’s Problem Isn’t Piracy

Microsoft’s anti-piracy efforts are a suggestion that it continues to fight the wrong battle. While Microsoft is tapping China to pay for its licensed desktop software, the world has moved on to mobile. There, Microsoft is a still a nonentity, as recent Asymco data on smartphone shipments shows:

Windows barely registers in this chart. As such, Microsoft could squeeze China for the estimated $63.4 billion in lost piracy revenues and would still lose the war. That war has nothing to do with the desktop. It has everything to do with mobile and cloud.

In both spheres, Microsoft’s business model is irrelevant.

Granted, pirates prey on Apple iOS and Google Android ecosystems. Within minutes of a paid app hitting one of these app stores, a free version is available on alternative sites. But even so, mobile app piracy is far less serious today than desktop software piracy is, in part because the major ecosystems are distributed through centralized app stores. Yes, some people get their apps from warez sites, but they’re the exception, not the rule.

The Real Problem Is Adoption

In 2014, Microsoft’s “license an app, get paid billions” business model looks antiquated. Apple sells a seamless hardware/software/cloud experience. Google distributes apps for free and then monetizes them through advertising. (How much of Google’s advertising business is threatened by piracy? None of it.) Google’s business in China is projected to scale with Internet adoption there.

In other words, Microsoft’s problem isn’t piracy. It’s adoption. And it’s a matter of the company’s business model.

Microsoft understood this years ago. As then-CEO Bill Gates declared, on the topic of desktop Windows struggling to compete with Linux in China, “It’s easier for our software to compete with Linux when there’s piracy than when there’s not.” Bingo.

Horace Dediu of Asymco captures this point nicely:

Microsoft’s software licensing business model is severely limited in China because what it offers is not what is valued. Both on the PC or on the mobile device, what China values is the tangible. Software can be made valuable only if it can affect the purchase decision of hardware and it can do so only if it’s sold as part of an integrated product.

Microsoft keeps fetishizing software licensing when the world has moved on to tangibles like hardware and advertising. Until Microsoft stops fixating on making money on yesterday’s technology with yesterday’s business model, it will struggle to become relevant for current and future users of its software—in China and elsewhere.

Image courtesy of Shutterstock.