Microsoft Should Welcome Piracy in India and China

By prosecuting copyright infringers in Asia, it drives consumers into the Linux camp. Better to ease up and build market share—for now On July 25, in a rare collaboration between U.S. and Chinese law enforcement, the FBI and China's Public Security Bureau raided a southern Chinese operation that had allegedly pirated Microsoft Windows Office and Vista […]

By prosecuting copyright infringers in Asia, it drives consumers into the Linux camp. Better to ease up and build market share—for now

On July 25, in a rare collaboration between U.S. and Chinese law enforcement, the FBI and China's Public Security Bureau raided a southern Chinese operation that had allegedly pirated Microsoft Windows Office and Vista software. Microsoft praised the raid, saying it was a milestone in the battle against pirated software.

Two months ago, 350 independent computer dealers in Gujarat, India, held a one-day strike, protesting Microsoft's (MSFT) raids of their stores. In these raids, Microsoft sent fake customers to request that the dealers load Windows onto their computers. The dealers did so at no charge—using pirated versions of Windows. Microsoft sent notices to six of the offending Gujarat dealers demanding substantial payments and fines.

Around the same time, Microsoft's general counsel, Brad Smith, publicly alleged that open-source products Linux and OpenOffice infringe no less than 235 of Microsoft's patents. Smith further announced that Microsoft was prepared to meet with offending parties to discuss the alleged infringements.

In these situations, Microsoft is striving to obtain full benefits from its substantial investments in innovation by seeking enforcement of its intellectual-property (IP) rights.

Different Strokes

From Gujarat, India, to Santa Clara, Calif., Microsoft is simply doing the right thing for the company and its shareholders, as any company should. But is the giant shortsighted in treating these two situations in the same manner? The answer could be yes. It's a mistake to manage IP the same way during different phases of a technology's life cycle rather than adjusting along the way. It's a fumble that many companies, not just Microsoft, would be wise to avoid.

In the earliest phase of any technology—and this holds true for the introduction of an established technology to a new territory—it pays to be very open. At this point, neither the maker of a new technology nor observers know the best use of it, and no one has an appropriate business model to commercialize applications either (the Creation Phase).

Figure AAs the technology starts to take hold some key applications develop, and the technology enters the Growth Phase. The key here is to drive growth so a technology becomes the "dominant design"—the standard everyone uses. It still pays to be open because the most important task is to win the battle to be the dominant design. Openness can help enlist allies and fellow travelers to tip the market in a favorable direction. Remember the Betamax vs. VHS video-recording showdown? While many factors led to the VHS format winning the popularity contest, it's key that JVC was willing to license its VHS technology broadly, including to other manufacturers, while Sony allowed the Betamax format to run only on Sony machines. So VHS won market share.

Focusing narrowly on protecting IP interferes with that most important task. There's little value in taking a strong IP position for a technology that loses the race to be the dominant design and can wind up being a lame duck before it has had a chance to prove itself a winner.

Ride the Wave

As the technology matures and the Growth Phase starts to slow, the focus on being open must change. New impetus for IP protection emerges, and tightening the protection of ideas becomes more important. In a technology's Mature Phase, growth is largely over, so stricter enforcement of IP is less likely to swing the market away from a product. At the same time, more enforcement helps companies harvest the investment they made in a technology.

Still, companies shouldn't be too demanding—or licensees will either go out of business or find another technology that avoids strict enforcement actions. Eventually the technology will become obsolete, and the market for that technology will go into the Decline Phase. In this final phase, companies can aggressively harvest the fruits of their earlier investments in IP protection. Since the market is going away anyway, they can be even more demanding.

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