Software Prices and Piracy in the Developing World: Correlation vs. Causation

02/09/2012 04:20 pm ET | Updated Apr 10, 2012

Software piracy rates are highest in the developing world, where per capita incomes are lowest. For some observers, this correlation is evidence of causation. Software costs too much for people in emerging economies to afford, the argument goes; that's why they steal it. Charge less, and the problem will take care of itself.

But this pricing argument does not hold up under close scrutiny. Never mind that software is in fact typically priced lower in emerging markets than in developed markets. Consider all this instead:

First, the correlation between income and software piracy itself breaks down upon inspection. Just look at China and India. China has more than twice the per capita GDP of India (roughly $7,600 versus $3,500). Yet India has a considerably lower software piracy than China (64 percent versus 78 percent in 2010), and it spends three times more on legal software per PC currently in use -- $31.40 versus just $9.15 annually. (The math: India had $1.5 billion in legal software sales in 2010 divided among the 49 million PCs that were in use there, according to IDC, while China had $2.2 billion in legal software sales divided among its installed base of 240 million PCs.)

Second, look at the gap between hardware spending and software spending. If the software-pricing hypothesis were to stand up, then you would expect to see something at least vaguely similar in the hardware market -- namely, computers would have to be priced considerably lower in emerging markets than in more developed markets in order to achieve similar sales. But that is not the case. In fact, the average price of a new PC in the four so-called BRIC markets was $726 in 2010 versus $704 in the US. This, while new PC sales were surging an average of more than 32 percent in the BRIC markets, compared to less than 6 percent in the US. Indeed, China this year will pass the US to become the world's largest market for new PCs.

Finally, remember that the most concerning sort of software piracy around the world, economically speaking, is enterprise software piracy -- the piracy that occurs when otherwise legitimate businesses buy a few copies of the programs they need and then ignore the licensing terms by installing the software on too many computers. (In large companies, that can quickly become hundreds or thousands of illegal copies, and avoiding those costs amounts to an unfair competitive advantage.) It simply defies logic to believe that medium-sized and large companies in emerging markets -- companies that may own sophisticated industrial equipment, operate factories, and export products to global markets -- would be pirating software because it costs too much. How do they afford all the rest of their plants, equipment -- not to mention their PCs -- if they can't afford software to run them?

The answer is they most certainly could and should pay for it. But in many developing markets, ineffectual enforcement of intellectual property laws encourages a general disregard for them. Too often, companies act as if software licensing terms need not be taken seriously. This has broad economic impact. So it is in every country's interest to enforce the law in a way that sends clear deterrent signals to the marketplace.

This post was also featured on the Business Software Alliance's blog, BSA TechPost. The Business Software Alliance is a trade group that represents software makers against copyright infringement.