UNIVERSITY OF MARYLAND UNIVERSITY COLLEGE
GRADUATE SCHOOL of MANAGEMENT & TECHNOLOGY
TMAN 612 -- Financial Management for Technology Managers -- Fall 1999
Susan M. Anstead
November 24, 1999
Intellectual property can be defined as items that can be assigned, licensed, or used as collateral, but which lack a physical quality. Examples of Intellectual Property (IP) include patents, copyrights, trade secrets, and trademarks.
One of the significant challenges facing companies with respect to IP involves copyrights. If a company obtains a copyright on a product it develops, it retains the exclusive right to publish and reproduce the copyrighted work. Some of the items for which a company might obtain a copyright include computer software, training materials, television commercials, and written advertising materials. In this paper, I will focus on copyright issues of computer software, and the financial implications of compliance versus non-compliance with copyright laws.
A company's behavior in relation to abiding by copyright laws can have significant financial implications. There are many companies who do not have valid license for every copy of software in use, and these companies may be subject to significant penalties. The company must determine not only if there is a risk of getting caught, but also whether the related penalties are significant enough to outweigh the risk of getting caught.
Title 17 of the United States Code protects a person's right to control the reproduction and distribution of his or her creative works such as books, songs, movies, and computer software. In accordance with this Federal Law, computer software can be either sold or licensed, and these licenses generally contain restrictions on copying or transferring the software. Software used in violation of copyright laws is said to be pirated.
There are several different methods that companies use to license their software. Individual licenses permit only a single user to use the software. Suite licenses permit only a pre-determined number of users. Concurrent-use licenses limit the number of people who may use the software at any one time. Site licenses generally permit an unlimited number of users at a company to use the software concurrently. This permits companies of different sizes and financial standing to purchase software licenses that are most effective for their situation.
FINANCIAL EFFECTS OF SOFTWARE PIRACY
In May 1999, the Business Software Alliance (BSA) and the Software & Information Industry Association (SIIA), the two leading trade associations for the software industry, released the results of their study on global software piracy. The organizations estimated that in 1998, revenue losses to the global software industry due to piracy amounted to approximately $11 billion. The United States accounted for approximately $2.9 billion of this total, which was up from the 1997 amount of $2.7 billion. The BSA and SIIA estimate that one in every four applications in the United States is pirated.
It should be noted that both the BSA and the SAII rely on so-called whistleblowers for their investigations. Both organizations publish toll-free numbers and addresses through which individuals can anonymously report suspected violations of copyright laws. The BSA and SAII do not independently audit any company without a report, and it appears that there are few, if any, organizations that do.
FREQUENCY OF SOFTWARE PIRACY
In 1996, the BSA conducted anonymous user polls to determine the extent of software piracy. They found that more than 90 percent of users admitted illegally copying or using software at some time. In addition, more than 50 percent reported that they were presently using unlicensed products.
In 1999, the BSA commissioned another study to determine how illegal software makes it's way into businesses. According to this survey, the most common violations include: bringing software from home (40%), downloading unauthorized copies from the internet (24%), and sharing programs with other employees (24%).
The 1999 study also showed that there is a significant difference in the attitudes towards software piracy in small businesses compared to large businesses. Only 61% of small businesses indicated that they had a software management program in place, as compared to 88% of large businesses. In addition, the interviews of software managers at small businesses showed they are less concerned about software piracy (44%) and less likely to recognize software piracy in their company (28%) than software managers in larger businesses.
Those in violation of computer software copyright laws are subject to both civil and criminal penalties. Civil penalties include actual damages (the cost of the software found to be without license), company profits (the amount of profits the company made by using the pirated software), and/or statutory damages of up to $100,000 for each illegal copy. Criminal penalties include imprisonment of up to five years (or 10 years for a second offense) and fines of up to $250,000.
COMPARTIVE SOFTWARE PRICING
In order to determine if penalties are enough to financially deter a
company from engaging in computer software copyright violations, we must
consider the price of purchasing software at different volumes. For this
example, I will use the recently released Microsoft Office 2000. The following
table outlines the Estimated Retail Price for different licensing volumes
of this product, as of October 6, 1999.
|Estimated Retail Price||Quantity||Total Price|
Significantly lower prices can be obtained by purchasing either an Open License or a Select License. The Open License program is designed to provide a simple volume-licensing solution for small and medium-sized corporate, government, and educational organizations with 5 to 1,000+ PCs (similar to "Suite Licenses"). The Select License is Microsoft's volume-licensing program for business, government, and educational organizations with more than 1,000 desktops (similar to "Site Licenses").
At first glance, it would appear that a small-sized, struggling company would save a rather significant amount of money by decreasing the number of licenses it purchases for Office 2000. However, since there are copyright laws in effect, if the company is caught using pirated software, the penalties could be significant. This would eliminate the cost-benefit they maintained by purchasing fewer licenses.
In most situations, a company does not make a conscious decision to purchase fewer licenses. Rather, as a company grows, or users request new software on their computer, the software is quickly installed without auditing the licenses to determine if additional users are permitted. Those involved in finance and software installation need to work together to develop software management programs to ensure that proper auditing is taking place.
An audit is the most effective and useful approach to establishing and enforcing a software copyright compliance policy within a company. The audit involves going through all of the company's computers and recording all applications installed. Any unauthorized or unlicensed software should be immediately deleted.
The audit can also provide additional benefits beyond copyright compliance.
When users receive error messages during regular application use, these
are typically researched by the company's software specialists. Frequently,
it is found that the user has installed unauthorized software, and that
software is creating a conflict with company applications. By removing
any such unauthorized software, software specialists can spend their time
dealing with their regular responsibilities, rather than in fixing such
In addition, the installation of unauthorized software takes up otherwise-allocated space in the user's hard drive on their computer. If this goes unchecked, the hard drive will fill up quicker than normal, creating both storage and memory problems. This could require a larger hard drive to be installed, or the entire computer replaced, earlier than it would otherwise.
Although organizations like the Business Software Alliance and the Software & Information Industry Association are making strides towards combating software piracy in the workplace, they still have a long way to go. In 1998 the loss to the software industry from software piracy in the United States amounted to $2.9 billion. Yet the organizations also state that in 1998, Software piracy cost US businesses $4.5 million in fines and legal fees. This shows that the amount fined was only 0.0015% of that which was lost by the software industry. In effect, the illegal users paid $4.5 million to use $2.9 billion worth of software.
Where then is the financial incentive to companies to comply with copyright laws? These statistics show that the likelihood of them getting caught and fined is extremely low. Take for example a relatively large-size company of approximately 5000 employees using Microsoft Office 2000. According to the table presented earlier, purchasing licenses for all 5000 employees would cost the company $1,715,000.00. However, if they purchased only 1000 licenses for $343,000, the company would save in excess of $1,400,000.00. Should the company be caught engaging in software piracy and fined the full amount of that difference, they would be accounting for almost one-third of all fines brought against U.S. companies in 1998. Of the penalties noted on the BSA website, the largest was against a Chicago manufacturing firm that was fined $350,000. Either the BSA has not been presented with a large-scale software piracy case, or the settlements are for far less than the initial loss to the software industry.
Despite these statistics, and the apparent unlikelihood of a company being fined for software copyright violations, it is still in the best interest of companies to comply with copyright laws. Although the fines outlined throughout this report appear very low, and the likelihood of them being applied even lower, there are other costs associated with software piracy that cannot be measured.
If a company, especially a well-known company, is convicted of software piracy, there will most probably be some kind of press coverage regarding the situation. This kind of negative publicity could damage the company's reputation, and result in decreased business. Many companies also have stringent policies and procedures that would require the termination of a software manager or other employee who is found to be involved in software piracy. There are certain costs associated with the termination of an employee, and the hiring of a replacement. Finally, purchasers of software often bear the brunt of software piracy, as software companies are forced to raise their prices to make up for the loss of revenue resulting from pirated software.
From existing statistics, it appears that the battle against software piracy is being lost. At this time, the financial benefit of noncompliance with copyright laws does not seem to be outweighed by the risks of being fined. As noted above, fines in 1998 amounted to only 0.0015% of the total amounts lost by the software industry. Investigation of alleged violations of copyright laws rely on whistleblowers, not independent audits by software companies.
In criminal justice, it is said that for a law to be perceived as enforced by the authorities, the punishment must be swift, severe, and certain. At this time, the punishments for violations of copyright laws do not meet these criteria. Until more stringent monitoring and prosecution is in place, many businesses will likely continue to engage, either knowingly or unknowingly, in software piracy.
1 Yoches, E. Robert; Legal Protection For Computer Software; Communications
of the ACM, v32, n2, p169(3); February 1989; [Online] Available at http://polaris.umuc.edu/~dgilber2/tman612/yoches.htm.
2 Elgison, Martin J.; Capitalizing on the Financial Value of Patents, Trademarks, Copyrights, and Other Intellectual Property; Corporate Cashflow; November 1992; [Online] Available at http://polaris.umuc.edu/~dgilber2/tman612/elgison.htm.
3 Software Piracy and U.S. Law; Business Software Alliance; 1998; [Online] Available at http://www.nopiracy.com/swandlaw_c.html.
4 Sicilian, Jim; The Software Police Take a Hard Line; The Recorder; 1996; [Online] Available at http://www.ipmag.com/softcop.html.
5 Worldwide Business Software Piracy Losses Estimated at Nearly $11 Billion in 1998; Software & Information Industry Association; May 25, 1999; [Online] Available at http://www.siia.net/piracy/news/ipr98.htm.
6 Sicilian, Jim.
7 "Employer Beware..."; Business Software Alliance; September 16, 1999; [Online] Available at http://www.bsa.org/pressbox/enforcement/937503928.html.
8 "Employer Beware...".
9 Sicilian, Jim.
10 Sicilian, Jim.
11 Microsoft Licensing Online; Microsoft Corporation; October 6, 1999; [Online] Available at http://mlo.on.microsoft.com/mlo/intOrderSummary.asp.
12 Microsoft Licensing Online.
13 Microsoft Licensing Online.
14 Microsoft Licensing Online.
15 Microsoft Licensing Online.
16 Microsoft Licensing Agreements; Microwarehouse; November 4, 1999; [Online] Available at http://www.warehouse.com/customerservice/license/ms.htm.
17 "The Facts on Software Piracy"; Business Software Alliance; November 7, 1999; [Online] Available at http://www.nopiracy.com/intro_c.html.
18 "Chicago Company Pays Software Watchdog $350,000"; Business Software Alliance; September 9, 1999; [Online] Available at http://www.bsa.org/pressbox/enforcement/936891849.html
Yoches, E. Robert; "Legal Protection For Computer Software"; Communications of the ACM, v32, n2, p169(3); February 1989; [Online] Available at http://polaris.umuc.edu/~dgilber2/tman612/yoches.htm.
Elgison, Martin J.; "Capitalizing on the Financial Value of Patents, Trademarks, Copyrights, and Other Intellectual Property"; Corporate Cashflow; November 1992; [Online] Available at http://polaris.umuc.edu/~dgilber2/tman612/elgison.htm.
"Software Piracy and U.S. Law"; Business Software Alliance; 1998; [Online] Available at http://www.nopiracy.com/swandlaw_c.html.
Sicilian, Jim; "The Software Police Take a Hard Line"; The Recorder; 1996; [Online] Available at http://www.ipmag.com/softcop.html.
"Worldwide Business Software Piracy Losses Estimated at Nearly $11 Billion in 1998"; Software & Information Industry Association; May 25, 1999; [Online] Available at http://www.siia.net/piracy/news/ipr98.htm.
"Employer Beware..."; Business Software Alliance; September 16, 1999; [Online] Available at http://www.bsa.org/pressbox/enforcement/937503928.html.
Microsoft Licensing Online; Microsoft Corporation; October 6, 1999; [Online] Available at http://mlo.on.microsoft.com/mlo/intOrderSummary.asp.
Microsoft Licensing Agreements; Microwarehouse; November 4, 1999; [Online] Available at http://www.warehouse.com/customerservice/license/ms.htm.
"The Facts on Software Piracy"; Business Software Alliance; November 7, 1999; [Online] Available at http://www.nopiracy.com/intro_c.html.
"Chicago Company Pays Software Watchdog $350,000"; Business Software
Alliance; September 9, 1999; [Online] Available at http://www.bsa.org/pressbox/enforcement/936891849.html