Saturday, April 28, 2007

Addicting the starving masses

One of the things I recalled from my childhood was grownups (especially my parents) talking about helping the “starving people in India” or the “starving masses of China.”

Of course, the story has changed considerably in intervening 40 years. Particularly in the past two decades, elements of both Indian and Chinese society have enjoyed rapid economic growth and (in some cases) a developed country standard of living, driven in varying degrees by exports of software and electronics, respectively. Still, with billions in rural poverty between the two countries, the mean GDP in both countries remains low ($3,700 & $7,600) relative to more developed countries (e.g. $24,200 in Korea or $30,900 for Singapore).

One of the problems for Western (particularly US) firms has been the high level of IP piracy: people are consuming the information goods (software, movies, music) of more advanced companies, but they’re not paying for them. The issues are complex (as I discussed in a 1995 article). There is also the prospect of change: Japan has dropped from 67% in 1994 to 27% in 2006.

Still (potentially biased) industry estimates place “business” software piracy rates as 82% in China and 70% in India. As with teenagers and music, the motivations boil down to two. One is they can’t pay (or don’t want to). The other is that they don’t have to, because free, copyright-defying alternatives are available.

One response has been to try to export US-based tactics, like seizing bootleg CDs and DVDs. While this may work in Silicon Valley or Los Angeles, developing country enforcement officials haven’t made it a priority. After China joined the WTO in 2001, the hope was that the TRIPS agreement would be enough to force cooperation from WTO countries. And at one point I heard (second hand) that an industry executive working in piracy in China did not feel safe living in China, but instead lived in Hong Kong and only visited China when the authorities were willing to conduct a showy seizure.

Microsoft in particular faces a difficult set of choices. As elsewhere in the world, they want people to get used to using their software, both to create switching costs/lock-in and also a supply of complements (software, books, training, etc.). On the one hand, using the software without paying gets consumers (as with Napsterized US college students) accustomed to never paying; on the other hand, saying “pay or else” could create millions or billions of Linux users.

The problem is particularly severe in China, where Linux is being promoted by Red Flag Linux (a local champion) and widely used for embedded products. In India, there are many companies servicing the global IT industry, and for these companies ignoring Windows is not an option.

Earlier this month, Microsoft introduced its latest strategy, a license for XP and Office in developing countries that goes for $3. (Of course, as Infoworld notes, Google apps are free, and Microsoft has a few conditions).

This particular initiative seems designed to pre-empt any official government endorsement for competing operating systems. One impetus is the One Laptop Per Child announcement last week that its $176 computer is due later this year — and appears to now run Windows. OCPLC is a big deal, because if millions of young kids get hooked on some alternative (like Linux), that’s millions that won’t be hooked on Microsoft product.

Back in the 19th century, other Westerners wanted to get the Chinese addicted to their exports, and the result was two wars. (I’ll admit, the parallel is a stretch). Many scholars of Chinese history would argue that in the past 150 years, the top goal of the Chinese government has been to become independent of such foreign control or influence. Microsoft’s prices are attractive, and they have the WTO on their side, but they clearly are swimming upstream.

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