Microsoft Should Welcome Piracy in India and China

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IBM (IBM) was able to negotiate payments of tens of millions of dollars from Dell (DELL) once it left the PC business, and from Cisco (CSCO) when it withdrew from the router business. GE (GE) has exited many white-goods businesses, but it still takes in many millions of dollars by licensing its trademarks for other companies to use in making and marketing those products.

With this simple idea established, let's return to the problem Microsoft is facing with pirated copies of Windows. In the U.S. and Europe Windows has become the dominant PC operating system, with a market share in excess of 90%. So growth in those regions is now quite flat, placing Windows squarely in the Mature Phase of its life cycle. In China and India, however, the picture is quite different. Rising economic prosperity has created a boom in PC sales, so in these countries Windows is just now moving from Emerging Phase to Growth Phase.

Nuanced View

One-size-fits-all thinking would suggest that Microsoft should employ the same weapons against software piracy in India that it uses in the U.S. This would mean vigorously policing the use of its software and undertaking prompt legal action against any and all illegal use wherever in the world such activities are found. And that seems to be the path Microsoft took in Gujarat this spring. A more nuanced view would suggest a dramatically different approach, shown in Figure B.

While Microsoft leads in India and China, Linux is mounting a strong challenge in both nations. The Linux community has signed a deal with Beijing to make Linux the default operating system for computers used by the Chinese government and many parts of the Chinese educational system. In India, the prices of Windows and Office are so high that Linux is the only practical, affordable choice for most of the population.

In this context, applying Western IP enforcement policies to stem the flood of illegal copies of Windows in China and India risks winning the battle (to deter and punish IP infringement) while losing the war (to become the dominant standard operating system on the desktop). As long as Linux remains a serious rival in China and India, Microsoft should welcome pirated copies of its software. Illegal versions of Windows are free, which helps Microsoft offset the initial cost advantage of "free" open-source software.

Every pirated copy installed on a Chinese or Indian computer brings one more person into the Microsoft ecosystem. This strengthens Microsoft's market for third-party developers of applications, tools, and other complementary products. Equally important, it denies Linux that next new customer who would strengthen the open-source ecosystem against Windows.

Helping Linux Spread

If Microsoft succeeds in discouraging piracy of Windows in China and India, it is far more likely to drive the user of the pirated software into the Linux camp than it is to steer them into the land of paid-up Windows users. Microsoft's IP management strategy in China and India should instead focus on securing the victory of Windows on the desktops of all PC users. That may require deliberately lax enforcement efforts against pirated copies of Windows for the short and medium term. Only after the Linux threat lessens might Microsoft have the luxury of tightening up piracy protections, as it is now doing in the West. Microsoft can afford to be patient.

Bill Gates has hinted that Microsoft may be open to this way of thinking—and willing to give China's PC users a break. As reported in an article by Charles Pillar in the Los Angeles Times in April, 2006, Gates suggested in a talk at the University of Washington that if Chinese consumers are using pirated software, he wanted them to be using Microsoft's.

So Microsoft would be well advised to take a different approach to managing its Windows IP rights in India compared with its approach to protecting its Windows IP rights in the U.S. IP management must be driven first and foremost by the business objectives of the company, not by a narrow legal perspective.

And remember, Microsoft has won the war in the U.S and Europe. The growth there is gone. The next billion Microsoft users will come from markets like Brazil, China, India, and Russia—if Microsoft's IP management policies and lawyers don't drive them into the Linux camp instead.

Henry Chesbrough is Executive Director of the Center for Open Innovation at the Haas School of Business at UC Berkeley. He is the author of Open Business Models: How to Thrive in the New Innovation Landscape (Harvard Business School Press, 2006). He is an authority on open innovation, open business models, and open approaches to intellectual property management.