I have a software product that sells in the consumer utility market. 
It is priced around $100, and is sold through online resellers,
regular stores (like CompUSA), and through catalogs.  It is available
globally.  The software is a disk utility for creating CDs.  When you
buy it, you get a serial number to activate the software.  This is our
only copy protection.

Sometimes, a serial number shows up on the web on 'warez' sites. 
Sometimes people simply zip up the entire software after it has been
activated and give it to a friend.  And sometimes, typically in a
small office or at a home, someone will just install the software on
two or more different computers.

This is a two part question:
 1) How much is typically 'lost' due to the type of software piracy
that I describe?  For analysis purposes, assume my revenue on the
product is $1M today.  I'm looking for an answer that targets my
specific type of software, and not software in general.

 2) If I put a more secure product activation in place, like
Microsoft's Product Activation used for Windows XP and Office, such
that the same serial number is only allowed to be licensed once (since
it is tracked from a server side), what effect can I expect on my
revenue?

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Request for Question Clarification by missy-ga on 21 Nov 2002 14:30 PST

Hi Eric,

How specific are the figures you're looking for?  I'm having a great
deal of difficulty locating figures for "CD creation utilities". 
Would "application utility" figures suffice?

--Missy

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Clarification of Question by eric123-ga on 21 Nov 2002 14:42 PST

Yes, application utility would be fine.

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Request for Question Clarification by haversian-ga on 22 Nov 2002 01:38 PST

How would you like losses measured?  There is a big difference, for
example between the sale price * number of unpaid copies and the sale
price * number of copies that would be purchased were it not possible
to get for free.  Not to mention using numbers other than sale price
in your computations.

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Clarification of Question by eric123-ga on 22 Nov 2002 08:51 PST

For the question of "how much is typically lost", this can be a
percentage, multiplier, or specific number based upon the example of
$100 product and 10,000 unites = $1,000,000 revenue (without
protection).

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Clarification of Question by eric123-ga on 22 Nov 2002 08:59 PST

One additional clarification.  The software I'm talking about is much
more than just a "cd utility", but it's too difficult to go into that
in detail.  It's sufficient to know that there are no shareware or
commercial alternatives that provide the same functionality.

There are 4 different types of people who pirate the software:
 1) people who find a serial number online (like on a warez site) and
use it to install the software.  These people don't need the
functionality, but probably try or use the software just because it is
'free' to them.  They won't buy it if it has better protection, since
they really have no need for it.

 2) people who need the software, but feel that pirated software
available free is ok.  If they need it, they need it.  If the software
isn't available free, they'll buy it.  (This is one of the primary
targets for my question.  How many of these are there...)

 3) people who buy one copy and install it on multiple computer.  They
could get their job done using the software on one computer, but it's
convenient to just copy it to multiple systems.  The example is:
having one computer in the office that can burn CDs versus having
every computer have the ability to burn CDs.  Sure, everyone could go
to use the single central computer, but it's a pain.  There are some
people who will live with the pain, and some who will find the
annoyance just enough to go buy another copy.  (This is a secondary
target for my question.)

 4) people who buy one copy and but really need it on multiple
computers.  Like #3, but the pain threshold is a necessity. Consider
the idea of a small office buying one copy of Microsoft Office. 
Really, everyone needs it.  It can't be shared on a central computer. 
(This is a primary target for my question.)

Hi again, Eric,

I thought I might have had a lead with "application utilities", but it
was not meant to be.  The studies I found mentioned "application
utilities" as a segment of the industry prone to pirating, but did not
give specific figures for any segment - instead, piracy losses were
broken down by country, not type of software.

Perhaps another Researcher will have more success with the topic than
I have.

--Missy

As an economist I have these comments on your situation.  I do not
work for google and am responding pro bono, and I disclaim all
responsibility for the following free analysis.

There is no theory that I know of to give you exact numbers... if you
want to learn more about the principles, pick up Varian's "Information
Rules".  It is a great book for learning practical e-biz economics.

1. Many substitutes.  You do realize that some of your competitors are
hobbyist products that are given away for free...? For instance, the
software "CDRTOOLS" is a legal, very basic CD writer, which has a
price of $0.

2. Downward sloping demand. More people will buy something at $1 than
$100.  This is especially true when there are many substitutes for a
product -- and your utility (a cdwriter) sounds like it is something
that faces many substitutes. Therefore, many of those who would steal
your software, for free, are not willing to pay $100 for it. You can't
really get the $100 out of those people by improving copy protection
or registration -- because they will just use a competing product
(your competitor may be a cheaper legitimate product, or your
competitor may be a pirated version of a poorly protected legitimate
competing product, or your competitor may be a free product like
CDRTOOLS.  You will face competition from all 3 of these sources).

3. Versioning may help you make money.  You can make more money by
charging different people different prices.  This sounds sleazy, but
businesses do it all the time... the best example being airline seats.
 One guy pays $1000, another $99 -- why? the airlines charge $1000 to
the person who must fly at the last moment and has no choice... Do you
remember when Netscape was free to download, but cost $$ in stores? 
This worked well for netscape until MS started giving away IE for
free...  Why? Some people preferred to buy netscape because it took
too long to download via modem.... others simply didnt have download
skills. You should consider creating different priced versions of your
product, and pricing them in markets according to the kind of buyer
you are facing.  For instance, you can charge more for the disk in the
store than you probably can for downloadable, because many of the
store buyers are less sophisticated and don't know how to download. 
More of the people who do know how to download are attracted to your
competitors, or to piracy, so you have to price lower for that crowd
if you want to sell into it.  You do not have to sell into every
possible market.  The trick is to figure out which markets are worth
it, and this includes considering whether the users in one market can
find the lower priced marketing channels or not.

4. Bundling.  A CDWRITER+Computer Bundle may make sense for many
unsophisticated users.  Of course, you may not get $100/copy this way,
but
you may get more volume than you would by selling only to people who
realize that they want your product in particular.

I think the idea of 'losing money' through piracy is sort of strange
to begin with. How many of the people who pirate software, or music
CDs for that matter, would actually *buy* the product if it were not
available illegally? With respect to expensive operating systems and
software especially, the answer is probably 'not many'. Sorry not to
have given you any sort of insight, I just thought it might be an
interesting perspective.

I remember reading some years ago about a software company who were
quite easy about their product being pirated.  Their reasoning was
that (a) the vast majority of the pirates would probably not buy a
legal copy under any circumstances, (b) a minority would find the
software important enough to them to want a legal copy either for
upgrading or for the tech. support, and (c) a proportion of that
minority would never have tried the software in the first place if
they had not had a pirate version offered to them.  Overall,
therefore, the company concluded that piracy could well end up in
increasing the total number of legal owners.

Hi, 

I have to agree with some of the "not much" replies here. A huge up
turn in sharing copies and offering "keys" in file sharing areas, and
anonymous FTP sites started when software companies began declining
refunds for packages that were opened, or already installed. Demos are
no real help to a prospective customer, and the idea of purchasing a
package for $100.00 which may or may not work, is a bit un-nerving if
you are going to test 5-10 packages before deciding on the one to use
or recommend. In fact I can't remember the last time I bought a copy
of a package before having a "pirated" version of it go take through
the paces.

Being in business I always purchase the proper licence once I've
decided on a package of software to use. But I don't even consider
them until I have a version I can go through and see how it really
works. And I don't know many SysAdims' of companies of any size which
do spend 1000's of dollars purchasing single copies of things they are
going to test, before proposing a single package for the company. They
get a copy of them, by some method, and test it, looking for the "real
picture" not the picture on the box.

Any study you find is going to be one-sided. As I've said, I purchase
all the software "I use", and I think anyone who would be a possible
customer, does purchase a licence. The rest of the packages I delete
and thank my stars I didn't have to pay for them. Because there is a
lot of software out there for 100.00 that's not worth the box it came
in, and I've purchased more than my fair share of those packages.

I believe (my own little world opinion here) that the ones worried the
most about piracy are those companies that make really poor software
to begin with.

The money lost to piracy is about equivalent to the cost to burn the
software onto CDR's. This averages about 25 cents per illegal copy.
Furthermore, if the software has been downloaded from the internet,
this incurs costs as well. The typical cost of wholesale internet
bandwidth varies greatly, but $5 per gigabyte is a good estimate.
Therefore, if the progrm in question takes up about 100 megs to
download, and each user would burn it to a cd, the cost of piracy
would be approximately $75 cents per pirated copy. I hope this helps.