Steer clear of piracy

Resellers can easily run aground on the software licensing rocks. But, as Paul Bray reports, such dangerous waters can also offer good fishing.

More than a quarter of the software in use in the UK is stolen. Some is downloaded from iffy web sites or swapped on gold disks in school playgrounds, while some is used accidentally by legitimate businesses that have too few licences.

But other stolen software is either 'laundered' as counterfeit packages sold through a largely unwitting channel, or deliberately traded by bent resellers.

These characters 'give away' software to reduce the price of PCs or turnkey solutions, charge customers for software licences but don't pass the money on to the publisher, or fraudulently give educational or trade discounts to customers that don't qualify.

In tough times the temptation to haul up the Jolly Roger becomes more acute, and piracy rates rose slightly in 2002 for the first time since 1994, according to the vendor anti-piracy body the Business Software Alliance (BSA).

Struggling resellers may see it as the only way to stay afloat, and others reluctantly turn crooked when they find their prices undercut by pirate competitors.

But the channel is not just the perpetrator of piracy; it is also its victim. "An awful lot of honest resellers are suffering because of the actions of the dishonest or naive," says Julia Phillpot, Microsoft's chief pirate-catcher (or licence compliance and channel enforcement group manager, to give her official title).

"The results of piracy - incomplete code, viruses, inability to get upgrades and support - give people a very negative impression of the channel as a whole," she says.

The cost of piracy
"From the reseller's point of view, any piracy is effectively a lost margin opportunity," says Mark Floisand, UK chairman of the BSA.

"We know resellers that have lost business to unscrupulous competitors who've thrown in software 'for free'."

A study conducted for the BSA by research firm IDC estimated that reducing piracy from 25 to 15 per cent of all software in use would increase the value of the UK IT sector by £16.9bn and create more than 40,000 jobs over four years.

More than 90 per cent of pirates who are rumbled settle out of court, paying the full cost of all the licences they are missing plus a 'previous usage' fee, which may amount to almost as much again.

But penalties for 'professional' pirates can be severe, with unlimited fines and up to 10 years in jail.

"If resellers are engaged in defrauding their own customers they can expect to go to prison," says Paul Brennan, general counsel at the Federation Against Software Theft (Fast).

"When you cheat your own customers, judges will see you as having been in a position of trust. It makes sense that unprofessional resellers should go to prison for this sort of deceit."

He adds that VARs that give customers the wrong advice on licensing also can be sued for negligence, and that Fast intends to encourage its members to exchange experiences about which resellers to use.

Some resellers seem woefully ignorant of the nature or extent of piracy. "Many think counterfeit software is a gold disk at the car boot fair," says Phillpot.

"Many directors of resellers don't even know they are trading illegally. It really can happen to anyone."

Even close partners of Microsoft have been duped into buying pirated products.

Yet ignorance of the law is no excuse. If a customer finds it has been sold illegal software and cannot get upgrades or support, its point of redress is with the reseller, even if the software was sold in good faith.

How many resellers have a cost model that covers the possibility of legal costs and damages? And owners and directors of resellers can be personally liable for the dishonest actions of their sales representatives or technicians.

"There's a real legal incentive for management and directors to ensure their organisations are clean," Floisand says.

Vendors try to be sympathetic to companies that have been genuinely duped or made mistakes in good faith, and the BSA doesn't prosecute those that own up.

But major software houses such as Microsoft and Symantec have specialist enforcement teams to track down the careless and the downright dishonest.

During 2002, Microsoft investigated more than 2,200 reports of software piracy within the channel, and last autumn the company stepped up its operations with a channel compliance engagement programme, involving spot checks and surprise visits by Microsoft inspectors.

And in early December the company confirmed that pirated versions of its next operating system, code-named Longhorn, were being sold in Malaysia more than a year before the system is due to be officially released.

Resellers have a duty to help combat the pirates, Phillpot argues. "There's a serious lack of awareness and respect for intellectual property across the board, so it's important that the legitimate channel pushes and lobbies to stamp out this kind of problem," she says.

The BSA, Fast, Microsoft and others provide phone numbers and web sites where the honest or conscience-stricken can inform on suspected pirates, anonymously if they wish.

The BSA alone gets several thousand tip-offs a year. Most come from insiders such as employees of pirate companies, but increasing numbers are from resellers that suspect they have been undercut by pirate competitors. Others come from end-users that believe their rivals are gaining unfair advantage by not paying for software.

Getting found out
With both vendors and users on their tails, the channel's Del Boys and Arthur Daleys risk being trapped in a pincer movement.

"Many unscrupulous resellers believe they won't get caught, but Fast is in a good position to get evidence from the publisher and the end-user against cheating resellers caught in the middle, and welcomes complaints against unscrupulous resellers," Brennan says.

"With IT managers becoming more informed, the chances of the 'corner-cutting' reseller being found out are increasing.

"A reseller's true value-add will be its professional reputation in the marketplace. Those that don't adequately train their staff or that turn a blind eye to sharp practices will lose out."

The more information and evidence the authorities receive - quotes for systems that look too good to be true, invoices stating that software is supplied free - the more quickly they can achieve a result.

The BSA even offers a reward of 10 per cent of the settlement fee, although it says the majority of whistle-blowers do not take this.

However, before sharpening their cutlasses to do battle with suspected pirates, resellers should make sure they are running a tight ship themselves.

Internal processes should be carefully examined. Is it possible for technicians to install software that has not been invoiced for? Are purchase orders always matched up with the software that is installed?

Is a licence management system in place? Are sales staff fully aware of the legal position on copyright so they are not tempted to offer 'free' software as a sweetener?

Resellers that deal in bulk licences tend to be well on top of these issues, says Floisand, largely because licensing is so complex that they have to be. Those more at risk tend to be resellers that specialise in hardware sales.

It is also important for resellers to ensure their sources of software supply are legitimate. There are several rules of thumb that can reveal that software is counterfeit, but some of today's forgeries are so good that it takes an expert eye to spot them.

"I recently attended a Microsoft event where we had the opportunity to look at some counterfeit software products," says Richard Hales, general manager of the software business unit at distributor Computer 2000.

"It was almost impossible to tell; none of the delegates at the event could spot the counterfeits."

Sales documentation can be forged as easily as the product itself, and even price is not always a foolproof guide. "Importers and copiers of illegal software are getting smarter," says Hales.

"Not only do the products look like the genuine article, they are being sold at very close to standard price, so from a reseller point of view all may look well."

Too good to be true
That said, if a deal looks too good to be true, it probably is, and 'fire sales' and claimed end-of-line reductions should be treated with caution.

"Unlike hardware, software rarely causes distributors a stock-ageing or obsolescence problem," says Hales. "If a reseller is offered a great price because the product is reaching the end of its life or the supplier has excess stock, it should beware."

If resellers are in doubt, vendors will happily verify whether products are genuine. This is well worth doing. Microsoft says about 80 per cent of the software submitted to its Product Identification Service turns out to be faked.

The only safe route is to buy from authorised channels, which should not be difficult for any legitimate reseller because most software is on open distribution.

"To protect yourself, make sure you know the source of the software you sell," advises Richard Althorp, chief executive of reseller Sol-Tec. "Buy software from authorised distributors or reputable distributors only.

If you're not sure about the status of a certain distributor, contact the software publisher directly."

Resellers that take over rival firms must ensure that their acquisitions have been just as rigorous. Last year Microsoft VAR Ramesys discovered that a reseller it had acquired had supplied customers with counterfeit products.

However, it would be wrong to imply that all piracy is due to dishonesty or wilful negligence. Much of it is accidental, the result of under-licensing - companies using more copies of software than they have bought licences for - or using unauthorised software brought in by individual employees.

"Most organisations' software licensing purchase records are a tangled mess, stashed away in a backroom filing cabinet, if they have any records at all," says Randy Britton, communications director at asset management software vendor Tally Systems. "This makes it virtually impossible to see at a glance what they own."

SMEs are particularly at risk, lacking IT professionals on the staff and often with a limited understanding of what constitutes illegal use of software.

But even corporate firms whose IT departments monitor centrally purchased licences can get caught out when individuals or departments buy extra products off their own bat.

"Our channel works with all levels of customers, from large corporates to smaller businesses and individuals, and no one is immune to software piracy and mismanagement," says Phil Robins, channel and partnership director at Symantec.

"This is why we need to continually educate users, regardless of size or type of business."

Part of the problem is the complexity of software licensing. Can users install the software on their portable or home PCs? Does the licence cover servers, concurrent users or installed PCs? Is it charged per company, per site, in bands or per individual? What if the licence is traded in for a discount against an upgrade?

Deciphering licensing
Fast and the BSA acknowledge that licensing is complex, but believe competent resellers should be able to understand and explain it.

"The reseller is in the best position in the value chain to interpret licensing for the customer," says Floisand.

"Resellers that have focused on software licensing have done very well by almost becoming an outsourced procurement and management partner for their clients. As everyone knows, where there's mystery there's margin."

Such partnerships are becoming more common, especially given the increased focus on good corporate governance post-Enron, creating a significant opportunity for the channel.

Professional procurement and asset management by a reseller can save the customer money. Uneconomic one-off purchasing can be spotted and replaced by bulk licensing, and it's not uncommon for badly organised firms to discover they have over-licensed just to be on the safe side.

The benefits extend well beyond combating piracy. Comprehensive asset registers can speed up helpdesk calls because support staff can look up the exact spec and contents of each user's PC.

They help with migration planning, allowing managers to work out whether PCs have sufficient capacity to run new software. And disaster recovery and insurance claims are simplified if a company knows exactly what software and hardware it has.

Effective asset management requires good auditing tools. Britton outlines what he believes to be the essential elements: "Auditing tools should include not just basic inventory, but also be able to track installation history; take an application-centric (not file-centric) approach; show software usage on a minute-by-minute basis; include a licence reconciliation process; and integrate with software distribution and remote control tools."

Sol-Tec has developed its own asset-tracking software that tracks, monitors and controls hardware, hardware maintenance agreements, software and software maintenance agreements, and the BSA offers free asset-management software via its web site, as well as auditing tools.

"Resellers offering software asset-management as a service are growing very rapidly, over 50 per cent a year in some cases," says Floisand. "Not only are they offering a value-added service, but they are able to manage all of the customer's software procurement."

It is important not to get software piracy out of proportion. The great majority of channel companies are honest, and the UK has the lowest piracy rate in Europe.

But, as Althorp points out: "Piracy creates unfair competition and results in revenue losses for honest businesses. The health of our industry depends on everyone being able to generate a profit."

Here are the BSA's top tips for spotting dodgy software:

• Prices that are 'too good to be true'.
• Software without the usual quality packaging and materials.
• Software without the manufacturer's security features, such as holograms and medallions.
• Software without an original licence, registration card, manual and so on.
• Software on a gold disk.
• Software offered on auction sites.
• Packages from different vendors on the same CD.
• Software distributed via mail order or online without appropriate guarantees of legitimacy.