You can mark the beginning of the modern software industry in the mid-70s, with the launch of the Apple II, TRS-80, and various CPM systems as coterminous with the dawn of software piracy. Copying software san license, permission, and payment has always been prevalent and ubiquitous in the business, with far more copies of MS DOS, WordStar, Lotus 123, and dBase II in use than were ever sold.
The software industry’s public reaction to piracy has always been one of outrage and dismay, Of course, as we wrote in In Search of Stupidity: Over 20 Years of High-Tech Marketing Disasters one of the industry’s little secrets is that over the years, companies have used piracy as a means to influence and build market share.
The industry has, of course, fought back over the years. Disk-based copy protection, hardware dongles, online based activation, etc. In the U.S. (though not in China, Russia, and similar venues) the issue has lost much of its relevancy. Millennials find the idea of loading software from CDs and DVDs quaint and many hardly know what Microsoft Office is (until they graduate), corporations these days are fairly responsible about managing their desktop software licenses, and if you don’t want to pay for a full-featured word processor or spreadsheet to reside on your desktop, there’s always Open or Libre Office.
SaaS and apps seem to make worries about software piracy even more distant. The online model is steadily penetrating enterprise and niche markets once the exclusive preserve of on premise product while simultaneously opening up new markets. It’s nearly impossible to “pirate” a SaaS account (though passwords can be stolen) and while the underlying code driving a SaaS firm’s infrastructure can, in theory, be stolen, a SaaS firm’s business and operations infrastructure can’t be.
The idea of pirating mobile apps is even more unlikely given that this market segment relies heavily on the freemium model and upgrades to pro (revenue generating) versions are tracked, managed and billed from centralized servers. Given all this, isn’t it time for the pirates to run down the digital Jolly Roger and software firms to focus on other issues?
That’s why when Ted Miracco, president of Smart Flow Compliance, reached out to us about how his new SaaS-based piracy prevention product, we were intrigued (a SaaS firm protecting on-premise?) and skeptical about the need for such a system. Their product works by baking a code library into your on-premise product, then transmitting information about product usage (and misuse) back to the SmartFlow servers. But given the above discussion, the whole concept seemed a bit oxymoronic.
“Not so fast,” said Ted when we sat down to talk. He pointed out that despite our initial skepticism about piracy concerns in today’s software market, Smartflow, founded in 2014, is now up to 25 employees and enjoying year to year revenue growth of 100%. Clearly, there’s a market need for piracy protection. But where is the demand coming from? Several sources, according to Ted. These include:
Markets where some products will never be available online ““Certain classes of software, for example CAD/CAM and EDA and other engineering applications, will never go online and are at risk,” notes Miracco.” If you’re Cisco, Lockheed, Qualcomm, Boeing, etc you are using specialized software internally to create designs and develop content you will never send over wires or the air. In fact, companies are increasingly turning to “air gapping,” setting up work areas in their businesses (sometimes with lead-lined walls) that are totally cut off from online connectivity to protect both the software and the content it produces. The most advanced airplane in the Chinese arsenal, the J-31, was built from plans for the U.S. F-35 hacked off the Internet notes Miracco.”
“Software appliances and embedded systems have been targeted by pirates for years. “I first became interested in software compliance systems when I was EVP at AWR Corporation (now part of National Instruments). We developed a very sophisticated vertical CAD program for cell phone design. In 2002, we developed an embedded feature in the software to “phone home” and report on who was using our software. We found 50% of our users were using pirated copies of our product.
“Let’s look at a more contemporary example of what I’m talking about. Last September, a Louisiana auto parts distributor pleaded guilty to stealing Mercedes Benz diagnostic software and loading cracked copies on tablets and selling the units to auto dealers. Mercedes sold a proprietary bundle of the software/hardware for around $22K. The cracked versions were sold for $11K. About 1K units were sold before the operation was exposed. The Louisiana firm worked around the issues of receiving updates to the software by obtaining it from a Mercedes customer in the UK.”
The Jolly Roger remains very much alive in the U.S. “America remains a safe harbor for software swashbucklers in many markets. It’s true that the amount of desktop and on-premise software being pirated has dropped over the years, but counteracting that is the trend to steal higher level and value packages. Specialized CAD and design systems are particularly vulnerable markets.”
China is a significant driver of software piracy. “The fact remains that despite soothing words from the PRC on piracy, the Chinese aren’t buying software. This puts pressure on the Taiwanese and Koreans to also resort to piracy and remain competitive with Mainland China. And you can’t rely on international courts and law to protect you. The IP enforcement agencies in India and China if not corrupt, just don’t seem very motivated to come to the rescue of U.S. firms being ripped off.”
Piracy does represent a significant revenue opportunity. “There are four types of pirates. A significant number of three of the types can be converted to paying customers but don’t bother with the fourth,” Ted observes.
“The first pirate type are the anarchists, the Open Source purist who believe information should be free. They sometimes blend into the Pirate Bay crowd, Lulz, Anonymous and similar movements. They’re not going to be buying anything.
“The second type I call ‘soft pirates.’ These can include people using student versions of a product for business purposes, OEM versions, evaluation copies, sometimes “cracked” copies that someone has purchased. Most of the time, a person knows they’re not “in compliance” with a software license but their usage feels somewhat legitimate. A popular nexus of “soft piracy” is universities. They’ll often look the other way at startups who return to campus to use expensive design tools and products. We don’t recommend chasing down every soft pirate and it’s usually best to leave the universities and kids alone.
The third type we call “victims.” These are people using pirated products but don’t realize it. The software might be preinstalled on a company laptop for example, or a colleague at work put a package on a system without thinking much about the license. These types of pirates are typically very willing to adhering to software license requirements once they become aware they’re misusing them.
More serious problems can flow from your own channels. When I was at AWR, we discovered our distributors in Russia and Vietnam were selling cracked copy of our design CAD software and pocketing the entire sum.
The fourth and most dangerous pirates are the rogue companies. These are firms that make a deliberate top-down decision to use pirated software. They’re located in the usual suspect countries—China, Russia, Vietnam—etc. These firms are doing tremendous damage to the U.S. economy. Russia’s newest weapon’s systems were designed with stolen U.S. software. China’s big telecom companies built their businesses by stealing American software worth hundreds of millions in the aggregate and providing it to their engineering staffs to compete against firms such as Motorola, Lucent, and others. The widespread use of stolen software has provided some of China’s biggest technology firms with an unfair competitive advantage and the U.S. government does very little to stop it.
“The U.S. government did seize the show assets at CES of a Chinese firm trying to sell a ripped off American hoverboard. That’s a start. Maybe the feds can now focus not only on Back to the Future, but also on the numerous hacking attacks and industrial espionage being carried out by China.
“In terms of the business opportunity, Smart Flow has learned that if you’ve built up a significant “pirate base” for your software, about 20% can be monetized over time, with consistent yearly revenue increases of 10%. This can be higher; we’ve seen these numbers go as high to 20 to 25%, but 10% is a reasonable baseline. But be selective on who you target. Of course, you need to know who your pirates are, which is the point of the Smart Flow application.