Why Microsoft Windows’ Survival Depends on Piracy

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.

Windows PC

Image Credit: purprin

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.

9 comments to Why Microsoft Windows’ Survival Depends on Piracy

  • I think it’s kinda true, but one comment :

    “That means $5! You think Microsoft is ever going to sell Windows for $5? No way.”

    They sell windows for 4$ in some countries.

  • @Zelrik:

    Thanks for your comment!

    I guess they need to sell it at those rates in India. $4 may be quite a lot in certain countries.

    Currently when I last checked, a copy of Windows XP was selling for Rs. 14,000 or $350 in India!

  • [...] I found this post on amateur economists. It sums up pretty well the issue, but I’d like to add the [...]

  • narzod

    Cloud computing, well-engineered open-source replacements for productivity apps, as well as the low cost of Linux and PC hardware still make for a viable non-pirated competitor. As a software developer looking to make money, you want to write for the platform with the largest market share, but Windows as a desktop OS is becoming more of a generic interface.

    Google, for example doesn’t fit into your model. They want to make your information and the applications that help create it, available on a number of devices and operating systems. I think there are other forces at play. Linux and/or Apple’s modest offerings may yet one day eclipse Windows, despite the help from piracy.

    Piracy may help make Windows more popular. It may be an unstoppable side-effect of making a digitally reproducible products. Either way, piracy and “game theory” don’t necessarily mean that Microsoft will always have a stronghold on the market.

    Remember: piracy is illegal, Linux is legally free. (Customer support and good documentation are another story.)

  • [...] and then we’ll somehow figure out how to collect sometime in the next decade,” he said. But a recent article on the “Amateur Economists” site asserts that the company now depends on piracy for its [...]

  • Lawrence

    Lots of good points in this article, and yes, it is true that MS Windows is where it is in the marketplace due to wide acceptance, not due to inhernet quality. It’s far inferior to OS X and the Unix-like operating systems, BSD and Linux. But…you say that, “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.”

    While I don’t disagree, I believe this overstates the case. Two facts:

    1. Linux has quite a few applications. The version I use comprises about 20K separate programs, total. There is not much I can’t do with Linux, and the biggest exception is pro graphics, which belongs (hands down) to Mac, not Windows.

    2. There is no profit motive involved in writing software for Linux; it’s a matter of designing a better tool for your work, and then sharing that tool with other workers. The model is utterly different from the assumption you make in this article — namely, that people write software in order to make money. That is not at all true of everyone, and if MS died tomorrow, it is unlikely that the “make money writing software” concept would thrive. The economics of open source are a whole new ball game, an alien environment for most economists.

    Here’s a third fact at no extra charge:

    3. Sometimes you hear people say that viruses and all other malware exist almost exclusively for MS Windows because of the vast popularity of Windows. False. It is so much harder to crack into a Linux box that few try to do it. It is also easier to detect an intruder and wall him off so he can’t vandalize anything. MS Windows is an inferior product. No one should go on the internet with Windows, and if you don’t believe that, Google “botnet malware criminal” and “ddos botnet” and do your homework.

  • Some interesting points raised in this post. It’s an interesting thought that piracy might well be one of the things contributing to the ‘popularity’ of Windows. In the past I think that this might have lead Mircosoft holding on to their strangle hold on the market. But the open source movement seems to be changing the game somewhat.

  • business data backup

    This is an epic article, I will be adding you to my morning routine

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