PIRACY - Lost treasure

The software business in the UK is besieged by pirates, but resellers are also guilty of losing the sector money either through ignorance or negligence.

Imagine the outcry if your local supermarket allowed one customer ins are also guilty of losing the sector money either through ignorance or negligence. every three to wheel their shopping out of the store without paying.

Or if your local authority forgot to collect council tax from a third of the houses in your street. Shareholders, taxpayers and honest shoppers would be furious at subsidising the dishonest and the disorganised. Yet the software industry in the UK suffers this rate of loss every year with scarcely a whimper of protest.

In 1997, the last year for which figures are available, an estimated 31 per cent of the business software applications in use in the UK had not been paid for. Amazingly, this is one of the best records in Western Europe, where the average is nearly 40 per cent. In Eastern Europe more than three-quarters of software is pirated and in the US, piracy levels are 27 per cent.

Price Waterhouse conducted some research for the Business Software Alliance (BSA) which concluded that merely by reducing piracy levels to those of the US, the UK IT industry could generate an extra 31,000 jobs by 2001.

Across Europe the figure is 258,000 jobs.

In leisure software, piracy levels are worse. The European Leisure Software Publishers Association (Elspa) estimates that in 1998, 75 per cent of the leisure software installed was being used illegally. Last year, it received 1,890 reports of pirating, made 670 raids, and seized more than 74,000 fake CDs - several times more than in the year before.

BSA surveys have found business software piracy levels falling by about two per cent a year, which is encouraging, but too slow. 'It's not improving fast enough,' says Mike Newton, campaign relations manager at BSA UK.

'At current rates, it will be a decade before it gets down to acceptable levels.'

The UK's Federation Against Software Theft (Fast) dealt with 49 per cent more cases of pirate activity last year than in 1997, more than 1,000 in all. Of these, two-thirds involved criminal fraud, while the other third was 'corporate over-use' - companies installing extra copies or setting up extra users without buying enough licences.

Corporate over-use is usually accidental, either because staff don't understand copyright rules, or because users are set up in a rush and the IT department never gets around to buying extra licences. 'The vast bulk of corporate over-use cases are accidental or reckless, not criminal or deliberate,' explains Robin Lawrence, head of the digital crime unit at Fast.

Often the problem is mismanagement. 'We see it as a by-product of customers not understanding what they're signing up for, rather than deliberate stealing,' adds Steve Caunce, software marketing manager at Computacenter.

'Often they don't have mechanisms to track the licences they've bought.'

Ignorance also plays its part, especially the fact that one copy of a program cannot be shared among multiple PCs.

'Every time a software house puts in copy protection or an anti-piracy device, we see two things - a quadrupling of licence sales, and irate phone calls from users asking: "what do you mean, I have to buy another 15 copies for my business?"' says Rob Pickering, marketing director of Computers Unlimited. Small businesses are particularly at fault. 'Our feeling is that in large businesses the percentage is down in the low 20s, but in small companies it's nearer 50 per cent,' adds Newton.

Deliberate counterfeiting is a much more serious problem. 'Ten years ago, most piracy was recreational. Now it's for commercial gain,' says Lawrence. The most popular software for pirating is high-volume applications, but no software is safe. Copies of high-value, dongle-protected packages can still be found on the black market, and some pirates are selling CDs of utilities and internet products, even though the software is available for free from its legitimate publishers. Over in the leisure market, 70 per cent of disks seized by Elspa contain PlayStation titles.

At the top end of the black market are almost-perfect counterfeit copies of mainstream applications. These are so good that only an expert could spot they were fake. 'I saw one product that even had flyers from an ISP offering free internet access, the counterfeiters had gone to such lengths to make it look legitimate,' says Newton.

Sometimes, the packaging is a run-off from the printing plant which produced the genuine originals. Or it may be educational editions with the flashes ripped off or the original packaging discarded. Alternatively, it may be 'parallel product' - a genuine product destined for sale in another country.

In leisure software the quality tends to be less good. 'The artwork is usually pretty shabby,' says Terry Anslow, chief investigator at Elspa.

'But a lot of them don't even bother with artwork and just slap a gold CD in a case.' Gold disks at £50 a throw may be crude, but they can be lucrative.

Last year, 43 arrests were made during a raid on Barras Market in Glasgow, leading to the recovery of £12.4 million worth of fake software (PC Dealer, 18 November 1998). Inspector Pat Ferguson, who led the raid, said Barras was the focus for pirated software from which the rest of the UK was supplied: 'These illegal traders can make £20,000 in a weekend and millions in just months.'

Often the counterfeiters are involved with other forms of crime as well.

Anslow says nearly 80 per cent of Elspa raids find evidence of other criminal activity, from fraud and pornography to drugs and firearms. He claims paramilitary groups in Northern Ireland have also been involved in piracy: 'It's far more profitable than drugs.'

Advances in technology have brought efficient disk copying and high-quality colour printing within the range of almost every pocket. 'It's so easy to set yourself up as a counterfeiter, you could do it from a bedroom,' says Anslow. One 11-year-old lad in Fife was caught doing exactly that, selling bootleg PlayStation titles to his schoolmates for £10 a time.

Other operations are more substantial. In April, Elspa moved against a West Midlands man who was producing between 2,000 and 3,000 disks a week. Four premises had to be searched, involving more than 50 police officers. Seized consignments of bootleg business software from the Far East have had street values of millions of pounds.

The Net is becoming a boom area for pirates. Fast estimates that a third of all criminal pirate activity takes place online, including sales of pirated products and the tools to create them with, plus more conventional scams where buyers pay, but never receive their goods.

Newton has found about 90,000 Websites in Europe alone offering bootleg software to download, sometimes for free. One Danish outfit sold $30 million worth of software over two years. 'It's CDs even had a skull and crossbones on them, so there's no way people could not have known they were pirated,' he says.

Resellers are often involved in software piracy, whether deliberately or accidentally. The BSA estimates that between 20 and 25 per cent of illegal copies of business applications are due to the channel pre-loading software onto PCs and then failing to buy the necessary licences for it.

The problem is particularly acute in operating systems and network software.

'We estimate that we're losing at least $200 million a year, and 80 per cent of this is happening in the reseller channel,' says Martin Smith, EMEA licensing manager at Novell. 'The vast majority of resellers are honest, but a minority are trading in illegal products.'

Most cases involve sales to small firms that do not have in-house IT professionals who understand the rules on licensing, or bespoke systems built on top of NetWare, when customers are charged a turnkey price and may not even realise NetWare is part of the package. Some resellers charge the customer for NetWare, then illegally copy it and pocket the money.

But most simply ignore the licence fee, reducing their quote accordingly.

When Novell investigates, it usually finds one of two scenarios. Sometimes the reseller was competing with a dishonest rival and felt forced to waive the licence fees to put in a competitive bid - having done it once, it found it paid off so it continued the practice. 'It means honest resellers are faced with a tough decision,' Smith admits. 'Hardware margins are under so much pressure that it's difficult for them to differentiate themselves any more.'

In other cases, the reseller was in difficulties with credit limits or cash flow, and temporarily ignored the licence fees, intending to settle up when its financial position improved. But things never did improve and the licences went unpaid. Often resellers in this situation have gone bust before Novell catches up with them.

Some resellers are also involved in selling counterfeit copies of shrink-wrapped business software, but these tend to be innocent dupes rather than partners-in-crime - especially if they are only acting as brokers and may not even see the physical product before it is shipped to the customer.

'Most resellers we investigate aren't aware of what has happened,' says Lawrence. 'Counterfeiters need resellers because the best way to move a fake product is to "launder" it by mixing it with legitimate products.

We've had corporate customers come to us because one box of software was a different colour from the others, and it turns out to be fake, when the rest of the batch are legitimate.'

In the leisure market, where forgeries are cruder and more common, resellers have less excuse for not being on their guard. The Kent dealer who bought 100 copies of Tomb Raider and Premiership Manager for £10 each from a man who walked into his shop off the street should have known better.

The case comes up in court soon.

Legal redress against pirates usually comes under the Copyright Designs and Patents Act 1988 and Trade Marks Act 1994. Civil and criminal actions can be brought under these laws - by the police, trading standards officers, software publishers or their agents such as the BSA and Fast - with unlimited fines or imprisonment of up to 10 years (trade marks), or two years (copyright).

Anti-piracy organisations would like to see tougher maximum penalties for copyright offences.

In cases of corporate misuse, the perpetrators are usually willing to settle out of court. The BSA usually forces them to pay a settlement equal to the value of the software, plus paying for all the necessary licences, so in effect they pay double. Settlements in the past year have ranged from between £5,000 and £100,000, although the bad publicity may be even more damaging to a company's reputation. Even some big names have been caught, including America Online and All Nippon Airways.

But many in the software sector would like to see stiffer penalties.

'The industry has not yet seen a director or an officer of a business given a custodial sentence for intellectual property infringement,' says David Gregory, anti-piracy manager at Microsoft. 'Although fines can run to hundreds of thousands of pounds, this still does not deter some managing directors and IT managers from allowing or promoting piracy.'

If pirates profit from their wares by selling them, criminal actions can be brought. Most cases result in fines, forfeitures of equipment or community service orders. The enforcement agencies say they nearly always win because they do not prosecute without hard evidence. Of the 22 criminal cases initiated by Fast last year, 21 succeeded, while Elspa has won all its recent cases.

The ability of publishers to protect themselves against piracy is limited, especially now that copy-protection has become such a dirty word. 'You could protect yourself 100 per cent, but you would turn off a lot of your existing customers,' says Ricky Liversidge, marketing director at Adobe.

'Hardware protection is feasible, but it makes software more difficult to use and people want to use it straightaway.'

'We have tried out dongles etc, but they're a nightmare,' adds Jay Huff, European director of advanced technologies at Computer Associates. 'Honest people resent them, and the dishonest get around them anyway. There's no easy way to protect your assets.'

A certain amount can be done with registration procedures, serial numbers and key codes, but these are only effective against corporate mis-users who would prefer to keep things above board. Crooks simply ignore them.

This leaves only two options for combatting piracy. The first is to educate buyers, so they know that when they buy a software package, they are buying a licence to use the software in a specific way, rather than buying the software itself. They must learn that it is important to get a licence document, and know whether to expect original disks and manuals when they buy a PC with pre-loaded software.

They also need to manage software properly: maintaining an asset register; doing periodic audits of hardware and software; checking portable PCs for illegitimate copies; ensuring they buy from reputable resellers; putting someone in charge of licensing; alerting staff to the issues; and putting anti-piracy clauses into employment contracts. 'Everyone in the firm has got to buy into the need to crack this issue,' says Newton.

It is in their own interests. 'Everyone suffers, but especially consumers, who risk viruses, lack of functionality, tech support and upgrade assistance,' adds Gregory. 'The time to check is now - they don't want to discover a year 2000 problem and then find they can't get support because their software is illegal.'

Publicity campaigns do what they can. The BSA runs an annual Crackdown campaign, which this year sent mailshots to 80,000 small businesses. Elspa is writing to advertising managers of newspapers and computer magazines, warning them to watch out for small ads which might be from pirates trying to sell counterfeit software.

The other weapon is the vigilance of honest resellers and price is the best guide. 'If you think software is too cheap, then it probably is,' says Gregory. Other warning signs might include increased customer complaints about software problems, or packages that are normally copy-protected but have no dongles or keys. OEM products are a favourite with counterfeiters, because there is less packaging and documentation to forge.

Fast recommends keeping up with the paperwork. 'Get as much documentation as you can on the pedigree of the software,' advises Lawrence. 'Get a warranty document from the seller that it's legitimate, that the seller is licensed to sell it, and it's licensed for use in the EU. Wherever you fit in the chain, you are legally required to show some degree of diligence.'

There could even be money for resellers in combatting piracy. Newton says: 'Resellers could offer audit services to their clients, informing them which software licences they're short of and the most economical way to obtain legitimate licences.'

NOWHERE TO RUN TO

The Federation Against Software Theft (Fast) has been granted legal authority to crack down on corporate software misuse with the introduction of the Civil Search Warrant. The powers, which came into effect on 26 April, means software users and publishers will be able to bring actions against those misusing license agreements in a much reduced time frame.

Fast will take advantage of the changes to prevent cases dragging through the courts.

'The detection of corporate software fraud is on the increase and I welcome any reforms that help crack down on the illegal use of software,' says Robin Lawrence, head of the digital crime unit at Fast. 'Our division handles upwards of 1,000 cases each year, a figure that, in my opinion, will increase in light of these reforms and the EC directives due in the coming months.'