Fight against fake software sees results in China

In his first official visit to the US in 2006, China president Hu Jintao arrived for dinner at Microsoft chairman Bill Gates' house with a gift for the host.

Shortly before Hu's Seattle visit, the Chinese government had issued a decree requiring all personal computers manufactured in China to come with a licensed operating system before leaving the factory gates.

Now, nearly two years later, that gift keeps giving. The software company co-founded by Gates is seeing the benefits of more stringent intellectual property policies in China, with a decline in counterfeit software rates and improved results at its mainstay Windows division.

China is by no means the worst offender.

More than a dozen other countries — including Indonesia and Ukraine — have higher counterfeit software rates, according to a study from the Business Software Alliance and IDC. None of those countries, however, offers the promise of China, the world's second-largest PC market, growing at more than 10 percent a year.

China's piracy rates, the level of counterfeit software in a particular country, dropped to 82 percent in 2006 from 90 percent in 2004, the study said.

"In China, where piracy is the way things are done with respect to software, any marginal money Microsoft gets back is super important," said Kim Caughey, portfolio manager and senior analyst at Fort Pitt Capital Group.

Reducing unlicensed software and selling more expensive versions of Windows are ways for Microsoft to generate sales growth that exceeds the overall PC market, a task made difficult since its global market share already tops 90 percent.

Microsoft said improvements in fighting counterfeit software accounted for about $164m (£83m) of the $822m revenue gain at the Windows client unit in the quarter ended September.

Windows is Microsoft's most lucrative product with an operating margin exceeding 80 percent.

"Every pirated copy that Microsoft converts into a paying customer all flows to the bottom line," said Morningstar analyst Toan Tran. "It could have a dramatic effect on its profit margin."

Counterfeiters at work
Despite the progress being made, counterfeit software is still readily available on the streets of Shanghai.

Fuzhou Road in the former British concession near the Bund, an area famous for bookstores and art boutiques, is also locally renowned as a place to buy unlicensed PCs and software.

The small alleyways running off Fuzhou Road host dozens of counterfeit PC shops, which usually have no signs. Locals ask passers-by if they want to buy "cheap" PCs or software before leading potential customers to the store.

Once a computer is assembled, the customer is given a list of counterfeit software options, ranging from Microsoft Office to Adobe's Photoshop. If a software program is not there, it can be ordered.

The government decree requiring PC makers to pre-install an operating system sought to address the problem of Chinese consumers buying computers without software and then opting to buy less expensive counterfeit software.

Beijing went one step further, calling on any Chinese companies wanting to do business with the government to run properly licensed software.

"The whole situation is heading in the right direction," said Hao Jing, spokeswoman at Founder Technology Group, China's second-largest PC maker. "Pre-installing genuine copyrighted operating systems has become an industry standard."

Earlier this year, the Chinese police and the US FBI seized $500m worth of counterfeit software, including counterfeit Microsoft and Symantec products, from a Chinese counterfeit-software syndicate.

"We've seen in the last two years significant emphasis on legitimate intellectual property use in China," said Cori Hartje, director of Microsoft's genuine software initiative.

Microsoft said it needs to do more in educating consumers to the benefits of getting genuine software, such as access to software updates and better security. Improved technology also serves to deter counterfeit software.

Windows Vista, the latest version of its operating system, has been more effective in preventing counterfeit software. Microsoft has said rates for unlicensed versions of Vista are half the level of its predecessor Windows XP.

In Vista's first major update due out next year, Microsoft said it plans to close two primary methods used to illegally copy Windows Vista.

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