Piracy, it has been claimed, causes the loss of billions of dollars worldwide. I’m not about to launch into a discussion of whether or not that is true (perhaps another day?), but one thing has always bothered me: why doesn’t Microsoft (a good example) stop piracy of Windows, once and for all?
It’s easier than you might think. A company that has amazing technological and financial resources at its command should actually find it quite a trivial matter to simply enforce over the Internet the policy of a unique copy of Windows being installed on just one computer. I believe it can certainly be done. Why then has it not happened?
To answer this, we need to understand the facts about something called “network externalities.” In game theory, the term “network externalities” relates to the phenomenon of something becoming more valuable simply because more people use it. Since it’s more valuable, even more people use it, and it is, therefore, a self-propagating mechanism.
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For example, the telephone is an amazingly useful piece of technology. But how would you like to be the only one having a telephone? I’m betting you wouldn’t. Who would you call? Who would call you? Without other people having a telephone, the instrument is worse than a paperweight! The more people who have a telephone, the more people you can call and who can call you back. The value of the telephone increases simply because more people use it.
This means that products that have network externalities associated with them and have a large user base might completely wipe out the competition even though their product is of a poor quality. Since the value of a product can increase due to the number of people using it and not because of its inherent quality, a dominant product can get away with having a worse product than the competition.
Let’s take the case of Windows. Most people install Windows on their PCs. Why? One major reason is that there is a lot more software that is written for Windows than for, say, Linux or the Mac OS. Why is there more software for Windows? Say I’m a developer and I’m just going to start writing code for my new software. Should I write it for the Windows platform or for another one? If I write it for, say, Linux, then no one using Windows can use my software. Since the overwhelming majority of people use Windows, I would get a better payoff if I wrote my software for Windows because there are more chances of people buying it.
So the more number of people who use Windows, the more software there is out there for it, and, therefore, when I purchase a new computer, I would choose one that has Windows running on it because of the larger amount of software available for it.
Windows has a dominant market leadership in the OS world simply because it has a dominant market leadership! Such is the self-propagating nature of network externalities. Now let’s assume that Microsoft stops piracy completely. Almost all of India, China, and other Asian countries would be forced to use another software simply because, in these countries, the price of Windows is too high for almost anyone to purchase. In India, people would maybe buy Windows if they could purchase a copy for Rs. 200. That means $5! You think Microsoft is ever going to sell Windows for $5? No way.
So now that half the world has stopped using Windows since there is no more piracy, Windows has lost the only advantage it ever had – a dominant market leadership. When half the world starts using Linux, for example, then more developers will write software for Linux, and so even more people would buy it. It might happen that Windows will never recover from this shock (since you cannot improve your position unless you improve your position – a catch-22 situation).
This is the real reason why Microsoft will never stop piracy. They know that if they do, then half the world will stop using Windows, and they figure that, if that happens, they’re doomed.