“If I want it, I take it because I can.” – Peter Sunde, co-founder of PirateBay

It seems that piracy is on the rise in the US. Earlier this year, I was at the coffee-shop when a man at the next table asked me if he could borrow a flash drive or something to transfer a file between computers. He needed to give a file to the girl he was sitting with. Being helpful, I let him use my flash drive. A few months later, while looking through the drive, I discovered what he had transferred: a cracked copy of Adobe CS3 (price: over $2000). I was kind of irked that I was inadvertently involved in software piracy.

More recently, one of my neighbors had a problem with his computer, so I took a look at it. He thinks it was messed up by filesharing software that he installed. He had heard from another neighbor of ours that this filesharing program was a great way to get lots of music for free. In another case, I told a friend of mine about how Amazon was selling their top 50 albums of 2008 for $5 each. She immediately responded with, “that’s still $5 more than downloading it”.

I know another guy from the local coffeeshop who does web development. He recently discovered how to pirate software off the internet. Now, without fail, if I mention some software product or another, he offers to download it for me off the internet. I told him how I’ve been using Corel Photopaint for the past 10 years. I’d like to move up to Photoshop, but I’m not willing to pay the $600 for it. Of course, he offered to download it for me. Another time, I heard him talking to a guy who bought some music-production software. He said, “Did you pay for it?” The other guy responded, “Yeah.” “Oh, that’s too bad. I could’ve grabbed you a copy for free!” He told me that he bought Adobe CS2 a few years ago for $2100. I was surprised by the fact that he actually bought it, so I asked him about it. Unsurprisingly, he told me that he didn’t know how to pirate software back then, and he’ll never pay for another copy of Adobe CS. I’ve been unjudgmental about the whole thing, even though I hate the idea of software piracy. I create software for a living, so the idea of losing lots of sales or going bankrupt due to piracy makes me cringe. My fear is that this kind of attitude and tech-savy will become widespread. Part of the reason I haven’t been judgmental is because he’s only one person in a larger trend, because I know him personally, and because I see him as an opportunity to examine the motivation of a software pirate. While I won’t assume his motivations are representative of all pirates, but it’s clear that he’s not downloading software in order to decide whether or not it’s worth paying for. And he’s not downloading software that wasn’t going to buy anyway. He pirates software because it’s cool software and it’s absolutely free. It’s like he’s in a giant shopping mall that’s open 24/7, has all the world’s digital media, and everything is free.

To make matters worse, I related this story to my girlfriend. Before I had explained my position against piracy, she asked me if this guy could get her a copy of Photoshop. (Ah, not you, too.) She’s a poor grad student, and she needs it for school, she explains. Adobe is rich – they won’t need the extra money, she says. I refuse, explaining that it’s wrong to pirate software. (I’m typically the more permissive/liberal one when it comes to social issues, so this was an odd role reversal.) Besides, I’d be a big hypocrite if I pirated software but told people not to pirate mine. This puts me in the weird position where I’m apparently doing something bad to her (depriving her of software, forcing her to pay for it) unless I do the unethical thing and pirate it for her. It’s unfortunate that otherwise good people often see nothing wrong with software piracy.

Such is the reality of software piracy today, and I only see it getting worse. The downloader programs will become more user-friendly. Users will become more tech-savy. PirateBay is working to make their system more secure – so pirates can’t get caught. “All the free software you can download” is the kind of offer that will spread well from person to person. The perfect storm would involve an easy-to-use software downloader, widespread knowledge about using the software (similar to knowledge of say, using google), a culture where piracy is socially, morally, and legally acceptable, and superior to buying software (“why pay for it if you can get it for free?”). In parts of Southeast Asia, more than 90% of all software is pirated. Some misguided people are even trying to make piracy legal.

How will the digital industries of the 21st century cope and survive? In general, I think piracy will devalue both the companies involved in digital-content creation, and devalue the skills, intellect, and education behind it. It will also devalue the economies of the first-world (which is skewed towards intellectual work), and favor manual labor based economies of the third world. No doubt some of the trade imbalance between the West and China is due to widespread piracy of digital products. We pay for their work, they don’t pay for ours. On the positive side, more and more people around the world will have access to computers, so the new consumers will partially offset the losses caused by piracy – assuming their entrance into the marketplace isn’t outstripped by the growth of a pro-piracy culture. Not all digital work will get hit hard with piracy. In general, we can think of the digital-media world as a forest – lots of plants, animals, and biodiversity. Piracy strips away the rain (money) turning the forest into a desert. But, things live in the desert, too – the spiders, snakes, scrub-brush, and cactus. Things will get more difficult as piracy chokes out the life of the forest, but it won’t die entirely.

Part 1: What industries are getting hit the hardest?

Some digital-content industries will get hit harder than others. So, what business models will get hit by piracy, and what can they do?

Server-based software, including: Cloud Computing (i.e. applications delivered through a web-browser), Server-Farm Based Software (e.g. social networking software, such as Facebook), Server-Farm Based Games (e.g. World of Warcraft, other massively-multiplayer games). By keeping some critical part of the software out of users hands, this software is pretty safe from piracy.

Server-based games also offer an interesting test of the damage of caused by piracy. In January 2007, it was reported that there were 3.5 million World of Warcraft players in China (nearly half of the world’s WOW players). It’s a big business there. But, companies trying to sell traditional single-player games can’t make a profit. Why not? Because single-player games can be easily pirated. As a result, (non-piratable) massively-multiplayer games make a profit, while (piratable) single-player games can’t. It’s not that the Chinese aren’t willing to pay for games (otherwise, there would be no WOW players). It illustrates the fact that when provided with two options: (1) don’t pay + don’t play (2) pay + play, the Chinese are willing to pick option 2. But, when provided with the third option: (3) pirate the game, the Chinese largely choose the third option over the second one. If piracy didn’t exist, single-player games could actually turn a profit.

Multiplayer Games played online, but not on company servers (Team Fortress 2, etc)

In this model, the game isn’t played on company servers (people setup their own computers to act as servers), but company servers are used for matchmaking, game updates, and new game content. This model is relatively safe from piracy because the online portion of the game requires talking to company servers to find other players, and this allows them to kick-out anyone running pirated copies of the game. Of course, with a fair amount of work, it’s always possible for pirates to setup pirate-servers for matchmaking.

Games with Some Online Content (Halo, Spore, Galactic Civilizations, Starcraft, etc)

This includes games that can be played online or offline (in single-player mode), games that have some content on company servers (e.g. Spore), or have frequent game updates/patches. These games have some protection against piracy in that players must have a legitimate copy in order to access online content. Many pirates will chose to simply play the single-player campaign, but at least the presence of online content provides some incentive to upgrade to a legitimately purchased copy. The size of the incentive depends on the value of the online content. If the only online content is upgrades and patches, it’s not much of an incentive, since there will be pirated versions of the software that has the latest patches. When selling software with some online content, keep in mind that – for pirates – you’re actually selling the difference between the non-internet connected copy (which they already have for free) and the internet connected copy. Software developers need to ask, “Are the online benefits *alone* worth the full cost of the $50 product?”

Games with no Online Content (Doom 3, Civilization, etc)

These games are in the most trouble. At best, they can try to buttress their profitability with some non-intrusive DRM – although even DRM gets broken. Games with little or moderate popularity are in the best position because there are fewer people trying to crack the software. This gives them a small window of weeks or months where there are no cracked copies available. Big-budget games (Halo, Half-Life, Spore, etc) attract so many hackers that they get cracked within a day – often before they are officially released.

Software that is Free, but acts as a Portal to Sell Something (e.g. iTunes)

This software will be pretty secure, because it’s not necessary to control the client software. In fact, the more people that have the client software, the better. The software merely acts as a conduit to something you are selling. Unfortunately, the market for this is very, very narrow since web-browsers can fulfill this role.

(Non-Game) Software

Software follows much the same pattern as games – if there’s a need for frequent updates (e.g. Operating Systems, Virus-Protection), then there’s some incentive to buy a legitimate copy. Unfortunately, most software is far less connected than games are. There isn’t much need for your wordprocessor or paint program to connect with other users. This means a pirated copy works just as well as a legitimately purchased copy.

Expensive Software (Photoshop, 3D Studio, Autocad, Dreamweaver, Visual Studio, etc)

This software takes a big hit due to piracy. In fact, this is probably the hardest-hit software. A lot of this software is used in business (meaning people must have it). In many cases, the software is expensive because it is complex (lots of development), is extremely beneficial for users, and/or there is a small pool of people who need it (so development costs fall on relatively few customers). The high expense of this software makes it very attractive for pirating. I think companies tend to be more willing to buy this software than individual people are. When software costs $3500 (3d Studio), $600 (Photoshop), Visual Studio ($800), people find lots of ways to justify getting a copy without paying for it. Large companies (like Disney, Pixar, movie studios, etc) probably do a lot to keep these companies in business because they seem to be risk-adverse to lawsuits due to software piracy, and they want tech support.

Also, “expensive” is a relative term. $100 in the first world is a moderate expense, but $100 in the third world is a month’s pay. This is part of the reason the third-world has rampant piracy, while it’s much lower in the first world.

Cheap Software / Free Software / Podcasts / Websites

The difference between buying a copy and pirating it becomes negligible as the price of software (or music, movies, electronic books, etc) declines towards zero. As a result, people are more willing to purchase a copy instead of pirating it. Also, if software, podcast, or website is supported by advertisements, then pirating is a non-issue since the content is already free and convenient. Unfortunately, ad-based revenue models only work for the cheapest products, and products with very high volume – products where “pennies per user” supports your work.

Complex Software with Repeat Releases (Windows, Microsoft Office, Visual Studio)

Some software that gets pirated has the effect of training users to use it. They get used to it, comfortable with it. In the case of Operating Systems, they get locked into it because they buy software to run on top of the OS. When new versions come out, that software company is in a better position to make a sale – because some pirates might decide to purchase a copy this time around. Microsoft has gained some long-term benefit by the fact that people in Asia pirated its OS and Office software so widely. Now that the users are becoming more affluent, Microsoft is in a better position to make a sale. The problem with this is that most companies can’t take advantage of this trend. This trend requires: creating updated versions of earlier software, selling the updated versions (rather than free upgrades), the software has a significant learning curve or “lock-in”, and that the company is around for a long time. A company that makes one product and then goes bankrupt cannot take advantage of this trend.

Music

With musicians and record labels getting hit with piracy (causing a dent, but not a collapse of recorded music), musicians can retreat to other sources of revenue:
– concerts
– royalties when their music is used in movies, television, advertisements, re-sampled in other music
– band-related shirts, posters, etc.
Musicians also might benefit from piracy in the sense that a heavily pirated first album can lead to better sales on later releases.

Movies

Since movies are (often) released first in theaters and the theater experience isn’t reproduced with pirated copies, movies have some defense against piracy. Also, theaters are a social activity (“let’s go out to a movie!”), and that is not reproduced with pirated movies. Some older movies have moved towards the advertisement model of television. For example, the Monty Python group recently placed high-quality versions all of their movies on YouTube – with advertisements, of course. This allows them to make a little money from advertisements (compared to no money with piracy), plus their presence can potentially spur sales of DVDs. And since this work is old, anyway, it’s not high value content like new releases are.

Television

Television companies have taken advantage of the internet by placing their episodes online. Comedy Central, Saturday Night Live, South Park have all done this. Hulu.com hosts lots of TV programs, and movies, too. In order to generate revenue, they place ads. This model largely mirrors television revenue models, and has reduced the incentive for piracy.

Books

A number of publishers and authors have released their books online in digital format. Tor Books, for example, released electronic versions of some books and saw physical sales of those same books increase by 0-30% (but not decline). This isn’t terribly surprising since people prefer physical copies of books over digital ones. It’s conceivable that some people read the first chapter or two of the book, got hooked, and bought the physical book to save themselves the irritation of reading the rest of the book on a computer monitor. This positive effect on sales could lessen or become negative if e-paper becomes the preferred/widespread method for reading books. Further, books aren’t an expensive item (unlike some software which costs thousands of dollars) so people don’t need to think too much about the cost of buying.

In fact, we can do a little comparison within the world of books: stories versus encyclopedias. Fiction is usually pretty cheap. Further, you want to read it cover to cover (and you don’t want to do that on a computer monitor). On the other hand, encyclopedias are expensive, cumbersome, and are used for reference. The fact that encyclopedias are used as reference means you don’t read them cover to cover (so you don’t mind reading it on a computer monitor), and the digital version’s search and hyperlinking are very valuable (you can do that will digital versions, but not physical versions). This means digital versions of encyclopedias are better than physical versions (exactly the opposite of stories). So, what has been the effect of digital encyclopedias on the sales of physical encyclopedias? The encyclopedia companies are watching their revenue collapse – first, they preferred to sell physical encyclopedias over CD-ROM versions (which hurt them), then they got hit by online versions of encyclopedias. If Tor Books was trying to sell copies of encyclopedias by giving away digital versions, they’d be pulling the rug out from their own feet.

So, while some books might benefit from electronic versions being freely available (because it can drive sales of physical copies – which is the preferred format for fiction), it’s highly suspect that this pattern can be generalized to other digital media (or even other types of books). This is especially true when you consider that the “book reading” demographic or the “Tor Book newsletter subscriber” demographic might differ substantially from consumers of other digital media.

It’s also worth pointing out that Tor Books discontinued their free e-book program. Why? Well, they never released any figures, but it seems unlikely that a program that was increasing sales would be stopped. One possibility is that the free book program was hurting sales of their other books — i.e. readers were less likely to order a book if they had an e-book that they were planning to read. Or maybe the free e-book giveaway would cause a short spike in book sales, but harmed book sales in the long run. It’s also worth pointing out that Tor’s book program was introducing readers to authors they’ve probably never read before. This contrasts with the normal pattern of piracy where a pirate knows about a product, then goes and finds it online. We would predict that the second pattern would be much more damaging to product sales than the first.

Part 2: Strategies for dealing with the damage of piracy

Most pirates would claim that piracy doesn’t cause any damage because getting a copy of some software doesn’t cost the software company anything (in contrast, for example, to stealing a truck owned by the company – which is a material loss). The problem is that companies have revenue and they have costs. If a company loses half of it’s sales to piracy, it’s revenue is cut in half. This can quickly change a company where revenue is larger than costs (i.e. a profitable company) into the reverse – a company slowly sliding into bankruptcy. So, how can companies limit the damage of piracy?

Three Strategies that (only) work for complex, business-targetted software:

1. Provide Support – People can pirate your software, but you can incentivize a purchase by providing tech support. Unfortunately, this strategy works poorly for most software. If your software is highly complex (like a database or enterprise-level Operating System), then you can get away with it. In general, companies are more willing to pay for support than individuals are because companies are risk-adverse. A CEO doesn’t want any surprises, so for them, “paying for support” is kind of like paying for insurance. It’s generally much harder to get individual users to pay for support. The downside is that there are far fewer companies in the world than there are individual consumers, and companies are only going to pay for business-related software. Additionally, most software shouldn’t require any support. It happens to be my design philosophy that software *just works*. If you’re making video games that require a lot of support, then you’re doing something very wrong. Trying to incentivize legitimate game sales with a promise of “tech support” is downright bizarre, but it will work for a few (complex, enterprise-level) software products.

2. Sell Customization – Even if you give the software away for free, you can charge for customization. If you’re the software developer, you’re the best person to do the customization. This is a strategy that only works if you’re selling to a corporation, and you’re selling complex software. Something along the lines of an airline reservation system, maintaining hospital patient records, etc. There’s virtually no market for this if you’re selling to individuals or gamers. The downside to this is that this market might have limited longevity. If you’re doing customization, then you’re not doing new development (so the software gets dated). Also, someone can come along and scoop your market by producing more user friendly software. (I wonder how many custom-software companies took a hit when Microsoft Office came along with macros, automated calculations, and a simple database.) Some people have made careers out of doing custom software, but most of the off-the-shelf software out there isn’t going to survive using a software-customization business-model.

Note: There are a few games that sell customization, upgrades, or in-game items (RuneScape, Battlefield Heros, Maplestory). But, these games are already pirate-proof since they are run on server-farms. Customization is just their way to get some revenue (since the games are already free).

3. Sell Training – Some software is extremely complex (e.g. Autocad), and companies can get involved in selling expensive training to their users. This has limited value because: 99% of all software requires no expensive training, and third-party companies can crop up to sell training (effectively stealing away your trainees, and they don’t have the development costs you do). You could also sell expensive training to the third-party guys who go and do the training. This only works in the thin sliver of software products that are highly complex, are being sold to large (cash-rich) companies, and where the company CEO is risk-adverse enough that he wants training from the guys who wrote the software, not the third-party offering training for discounted rates.

Avoid creating software that can be easily pirated. Easily pirated software includes most single-user software and single-player video games (which is, in my opinion, the majority of the software industry). Piracy will drive changes in the marketplace where companies produce less of this type of software (which will harm consumers in the sense that less software diversity will exist). Essentially, piracy is going to cause a “flight to safety” – rendering vibrant portions of the software industry less profitable or unprofitable. Piracy will drive companies to the safety of interconnected, validated software which is dependent on company servers in some way. (This will have negative effects on consumers, since the servers will be shut-down if the company ever goes bankrupt.)

Write Software with Significant Online Content – Unfortunately, this limits companies to producing a particular type of software. It might be useful to create games with both single-player (off-line) content and online content. If 10%-50% of the game is available in off-line / single-player / pirated form, then it can act as a demo for the full purchased version of the game. The pirate may, then, pay to access the other 50%-90% of the game. This is an interesting strategy because it attempts to use piracy as a hook to drive sales up. It essentially uses the single-player functionality as a free demo.

Demo – Gamers want to know if your software will work well on their system (good framerates, memory, etc), and want to try it out to get a feel for whether they actually like the game. Further, the demo should be representative of gameplay (if there’s a section of the game that slows the animation to 2 fps, the demo shouldn’t stick to the easy scenes that always run at 30fps). When companies don’t put-out a demo, people might be tempted to download a pirated version to see how it runs on their system. But, once they’ve pirated it, even if they like it enough to pay for it, they may not feel motivated to actually make the purchase. Companies should work to insure that their customers don’t get home with a new game only to have their excitement drain after seeing it run horribly on their machine. We should work to make sure pirates don’t have the “chance to see if a game runs well / is a good game before paying money” advantage over the paying customer.

High Volume Sales – If you make software that *lots* of people want, then even if half of your users pirated the software, the other half of your users will provide enough revenue to support your company’s survival. In that case, you have to attract twice as many users to be profitable as compared to a world where piracy didn’t exist. Basically: make great software, and try not to dwell on the lost revenue. Despite the unwillingness of half your users to pay, you still cross the threshold of profitability.

Make Stuff People Love – If people love your stuff (good design, bug-free software, fun, powerful, responsive customer service, …), they’ll be more willing to pay you for it. Some of your pirates might even go out of their way to buy a legitimate copy. Some companies (Apple computers) have done very well building up a love for their company. It not only builds brand loyalty (they’ll buy later products), but they’ll want to pay for the current one, too. (Personally, I don’t think most pirates can be converted into buyers, but anything you can do to convert any of them is a good thing.)

Be Nice – People will often take out their anger on a company by pirating digital media, rather than buying it. If you’re well-liked, they’re more apt to want to support you. Stardock has largely used this strategy to gain publicity (along with “make software that lots of people want”). They championed gamer’s rights, ignored DRM, didn’t dwell on their piracy problems, and gamers wanted to support them. The RIAA and record labels, on the other hand, have provoked enough animosity that some music listeners want to punish them by pirating instead of buying their products. If people don’t like you or your company, they won’t want to pay you – which gives them one more reason to pirate your stuff.

DRM – While there’s campaigns aimed against digital rights management, I don’t have any kind of philosophical problem with it. A lot of DRM ends up getting cracked, but I think DRM for software can still be effective. In the long-run, I’m more optimistic about the possibility of DRM being effective in software than I am for other types of media (music, video). Popular software products probably benefit less from DRM than smaller software products, because larger projects attract more crackers. Small software products might fly under the radar of software crackers – giving them months or years of exclusive sales. According to my publisher, the DRM we’re using hasn’t been cracked in years. I do think developers should avoid onerous DRM, though. That can drive-down sales, even if it prevents piracy. And if a pirated version does exist, then onerous DRM will give them one more reason to get a pirated version. (Additionally, it might be a useful idea for companies to release non-DRM versions of software after a few years. DRM is most useful during the first few years of a product’s release – when most of the sales happen. Companies can follow-up a few years later with a non-DRM version as a favor to their existing customers – it’s a way of saying “no matter what happens, you can still run this software 10 or 20 years from now”. Working to help the customer will make them happier with you.)

Avoid the Pirate Demographic – Write software for people who aren’t tech-savy enough to pirate software. Unfortunately, the percentage of computer users who know how to pirate is growing, but there will always be people who are too busy with other things to know or remember how to do it. These are largely casual computer users and casual gamers. My guess is that “Big Game Hunter” and “Barbie’s Playhouse” isn’t heavily pirated. Why not? Because blue-collar hunters and little girls aren’t up on their piracy know-how. I’d guess that “ground zero” for software piracy involves males between the ages of 15 and 30.

Convenience – Make it easy for users to buy your software. If it’s easier to get a pirated version than a legitimate version, then you will lose some customers. If you can sell digital copies off of a website, rather than forcing users to drive to a store, that’s useful. Unfortunately, selling software has two inherent disadvantages over pirated copies: (1) people have to pay money, and (2) they have to go through the process of giving you their credit-card information. Pirates are working to make it easier for people to pirate software, and they won’t ever have those disadvantages.

There are a couple things the software industry (as a whole) could do to preserve their survival:

Keep Piracy Illegal – Unfortunately, there are people trying to legalize filesharing. Legalizing filesharing would have the effect of telling everyone that getting it for free is perfectly okay, which could drive up piracy rates, make piracy morally acceptable, and everyone who resists piracy on moral grounds would be viewed as suckers. For example, even if my parent were tech-savy enough, I know that they wouldn’t install filesharing software in order to pirate software – if for no other reason than the fact that it’s illegal. On the other hand, if piracy were legal, there would be a big reversal. I’m sure my parents would resent it if I *didn’t* tell them that the software they just bought could be grabbed off the internet for free. No doubt, filesharing programs would spread from person to person more quickly than Firefox or OpenOffice, and legal filesharing would transform “paying for software” from “something you’re supposed to do” into having a status of “this software is free, but our suggested donation is…”, which would hugely affect revenue. Computer manufacturers would pre-install filesharing programs on their machines to help hardware sales. The Linspire company (formerly Lindows) already includes a software downloader, and prominently advertises it. I assume they only include free/open-source software, but if filesharing were legalized, it would include all software. If computer manufacturers did this, then users would assume that they already paid for the software via some kind of package deal, which would cut revenues even deeper. I’m sure Firefox would include filesharing capabilities. Legal filesharing would create a middle-man industry devoted to helping users freely get digital content produced by unpaid third-party digital-media workers. We could also expect companies to create TV-set boxes that would give viewers access to all movies (say goodbye to Netflix and pay-per-view). Viewers would not be opening up their checkbooks to write checks to the people who created those movies. All of these things would cause a huge collapse in sales – easily bankrupting lots of digital content creators.

On several occasions, I’ve heard people tell stories about being a poor college student who pirates software, but that (after getting a job and money) they changed to buying software. Apparently, they had a change of heart about the legitimacy of pirating. If software piracy were legalized, it could have negative effects on that transformation from pirate to customer.

Fortunately, I don’t foresee the United States or most lawful nations legalizing filesharing, but the side-effect of the “legalize filesharing” arguments is that it supports the idea that people should be allowed to pirate – allowing pirates to feel justified in their actions. This has the effect of driving up piracy.

Keep Piracy Stigmatized – In the long-term, maintaining the culturally-based stigma of piracy is critical. Many people (like me) don’t pirate because we feel it is morally wrong. It will be very bad if there is a shift towards the social/moral accepability of piracy. The critical question is not “are there a lot of people who think piracy is acceptable?”, but rather “what percentage of people think piracy is morally acceptable?” If half of the public refuses to pirate, then those people can support the existence of the software industry – even if piracy cuts revenue in half. We can withstand lots of freeriders if there are enough people paying. It would be devastating to the software industry if piracy in the first world matched piracy rates in Southeast Asia. On the flip-side, if over 90% of users rejected piracy on moral grounds, it would be a great boon to everyone: we could stop putting DRM into our software – saving us time and money, and users wouldn’t have to deal with DRM. Unfortunately, I don’t ever think society will ever reach that level of consensus – and certainly not when there are people advocating and legitimizing piracy.

Bad Strategies for dealing with Piracy

Open Source your Software – Admittedly, this can work in a few narrow areas. If you are writing complicated business-related software, you might be able to use the three strategies (Provide Support, Sell Customization, Sell Training). Open-source can also work to reduce costs – if you open-source a component of your own software, and then sell a product built on top of it. Open-Sourcing won’t work for the majority of the software industry. Some people point to the success of open-source software to argue that it can work as a business model. But there are numerous problems with that idea: (1) A lot of successful open-source software was originally proprietary software (OpenOffice, Blender 3D, Firefox, NSIS, etc). This means some of the development was paid for back when it was proprietary. When they failed as proprietary products, they were changed to open-source — not as a strategy, but as charity. The failed proprietary software was pretty-much worthless to their parent companies, anyway. (2) Open-source is often byproduct of the proprietary software industries. Many products (Blender 3D, NSIS) were created as internal tools by companies and then released into the world as open-source. In these cases, the software wasn’t originally being sold as a product, it was being used internally by the company. I also know of companies who have open-sourced some part of their product (e.g. a 3D engine), and then they sold a product built on top of that open-source component (e.g. a game). IBM has also done this. But, if the proprietary software didn’t exist (or is undermined by piracy), then those companies couldn’t act as sponsors of open-source products, either. (3) Software Developers aren’t getting paid for their open-source work, they’re doing it because it’s interesting and it’s charity work. Open-source isn’t really a business-model, it’s a charity staffed by volunteers. It’s obvious that the OpenOffice project will never earn 1% of the money that Microsoft Office earned. This lack of money means most people working on the project can’t be paid. Most of these people have day-jobs writing software, and if you take-away their (proprietary software) day-job, most will move to other careers and they won’t stick around to write open-source software for free. (4) If the whole software-industry open-sourced, there would not be enough programmers to actually handle the projects. Most of the people who want to write open-source software are already doing it, so increasing the number of open-source products by 10x will result in the average project having 1/10th as many programmers. (5) While open-source has produced some good products, it is notably lacking in diversity and time-to-market. Open-source products usually come along late to the game, duplicating what proprietary software has already done. Open-Source typically aims at high-volume products, leaving nitch products under-served (except by the proprietary market). The reason for this is obvious: open-source is terribly underfunded, and that’s because it is a bad business model. Compare, for example, the variety and quality of open-source video games to the variety and quality of proprietary video games. There is simply no comparison in terms of the number or quality of these games. In many cases, the open-source games simply duplicated the gameplay of previously-released proprietary games.

Use piracy as a demo version of your software – Unfortunately, many gamers prefer to try the full-version of the software (i.e. pirated) rather than try a game demo. If some percentage of pirates end-up paying for the software as a result of piracy, then piracy can drive-up legitimate sales. There are a couple complications to this. First, pirated versions can canabalize legitimate sales. In other words, the extra sales you get because people tried a pirated version and then bought a legitimate version is probably outnumbered by the number of people who would’ve bought a legitimate version but grabbed a pirated version for free instead. This is especially true for big-budget games (Halo, Half-Life 2, etc). With less advertized games, the piracy can act as a kind of “lesser ad campaign” — someone pirates your software, likes it, doesn’t pay, but recommends it to someone else. Personally, I don’t believe very many people who pirate software end up buying a legitimate version. Like they say: “Why buy the cow, when you get the milk for free?” Even if people intend to pay the game creator, it’s just too easy to forget to pay for a legitimate copy, procrastinate, etc. They play the game, beat the final boss, and suddenly they aren’t thinking about the game anymore – which includes not thinking about paying for it. My guestimate is that only around 1% of pirates end up buying. You’d lose a lot of sales due to piracy – because people who would’ve paid, suddenly don’t need to anymore. At the same time, 10,000 pirated copies could result in 100 extra sales. In some ways, this reminds me of the shareware strategy for selling software. People put software out on the internet for free, and (sometimes) nag users to pay for it. In the software industry, shareware is generally viewed as a way for people to make a couple extra bucks, but almost never enough to let them leave their day-job or support a team of programmers. Admittedly, most shareware is also of inferior quality, which might play into the low returns. My opinion is that this strategy has already been tried with shareware, and seems to be quite a bit inferior to regular software business models. Sure, piracy could lead to some sales, but the sales numbers will probably be so weak that it’s not worth the time spent creating the software.

Use piracy to build fame, use other revenue streams to earn money – This one might work for certain types of creators. Musicians, for example, could release albums for free, and charge for concerts. The Beastie Boys did this. Nine Inch Nails did this with The Slip. (Actually, the strategy of releasing free digital music isn’t “piracy” – it’s just a strategy of releasing your work into the public domain in order to enhance other revenue streams. It’s not piracy if the creator intends for it to be free.) There are some piracy-advocates who claim that piracy can help artists, and say things like, “The problem for most artists isn’t piracy, its obscurity”. The problem with this is that piracy knocks-out the ability to make-money. Isn’t that the big gripe people have about the recording industry — that the recording industry gets musicians into recording contracts, makes them famous, but gives none of the CD sales money back to the artist? The recording industry is doing the same thing to the artist that piracy is, except that programmers can’t make-back their money doing concerts. The “free copies for fame” thing doesn’t really work for software because it’s a totally different business with much more limited revenue streams. We don’t give concerts, and software isn’t used as a soundtrack in movies and commercials. Most software companies have one and only one revenue stream: sales of their software, and you can’t pay your mortgage or your employees with fame. Maybe if you were charging for technical support, customization, or something else, this could work. But for 95% of software companies or game companies, this one falls flat.

Build 1000 “True Fans” – A while back, Kevin Kelly provided some ideas for turning a profit with digital content. I actually find many of his ideas to be unworkable and naive. In one article, Kelly argues that you should attempt to appeal to a niche, and get a thousand rabid fans who buy everything you create, and sell $100 worth of merchandise each year to each of them (that’s $100,000, but once you add-in costs, it’s significantly smaller – maybe half that amout in profit). There are numerous problems with this. First of all, it’s extremely difficult to build “true fans”. Second, it should take at least five to ten years to build that kind of a fan base – and during that time, you’re probably a starving artist. Third, his model assumes you maintain those “true fans” for long durations of time – perhaps several years per fan. Fourth, it’s difficult to produce $100 worth of content per year. I certainly can’t produce $100 worth of content as a game developer (I’ve been working on one game for the past four years!). Heck, most bands don’t produce $100 worth of content every year (and that’s four band members plus manager plus other associated workers). Rather than trying for “1000 True Fans”, creators should just acknowledge that “good fans” and “fairweather fans” will be far more numerous, and they aren’t mutually exclusive to “true fans” (who will be few and far between). Kevin Kelly’s “1000 True Fans” idea is the kind of thing that looks good on paper, but seems virtually impossible from a practical standpoint. I’d compare it to someone saying, “If I can sell my $1 trinket to 1% of the world’s 700 million Catholics, then I’ll make $7 million!” Yeah, the “1%” makes the idea seem like a conservative estimate, but in reality, I don’t think that’s going to ever work out, even if it sounds good on paper. It’s just plain unrealistic. The one positive thing I can say about it is this: it is a good idea to be attentive to your customers (which is similar to my earlier strategy of “be nice” and “make stuff people love”).
John Scalzi also has a similar critique of Kevin Kelly’s idea.
And Musician, Robert Rich, talks about the sysiphean task of building 1,000 true fans.

On a related note, in his essay “Better than Free”, Kevin Kelly had a few other ideas about making money from digital-content, but many of them are either limited or unworkable for the games/software industry.

(The image of the forest is creative commons via flickr user wildxplorer. The image of the desert is creative commons media via flickr user CS Clark.)