Software comes of age: Piracy crackdown pays off
By Michael Kanellos
Staff Writer, CNET News.com
July 11, 2002, 4:00 a.m. PT
BEIJING--Mao Yi Ding has the same problem that high-flying dot-com executives had a few years ago: He needs more office space.
In a cramped room with no air conditioning on a sweltering Beijing afternoon, nothing could dampen Mao's enthusiasm. His company, an antivirus specialist called Beijing Rising Technology,
has 10 times more employees than it had in 1999 and was able to raise prices in June because of high demand.
"We're going to go public on the Hong Kong stock market soon," Mao, the company's vice president of marketing, said through a translator.
Success like this wasn't likely a few years ago. But the industry's outlook has changed dramatically since the national government began cracking down on piracy in a substantial way for the first time.
Combined with foreign competition and a lack of expertise, rampant piracy had curbed the country's software sales and thwarted new businesses for years. Even with the advantage of low labor costs and tariffs on imported products, local companies could do little to compete in a market awash with illegally copied operating systems selling for $1.
But with China's push to become a member in good standing of the World Trade Organization, the situation has begun to change. Last year, the government issued "Document 18"--a directive that outlined harsh penalties for software piracy.
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Global software piracy rose
in 2001, according to a report
Under the new laws, people who buy pirated goods can be fined five to 10 times the value of the pirated software. Manufacturers face jail time and equipment confiscation. In some cases, executions have been ordered. The laws have served as a watershed moment in the ongoing reforms, sources said.
"We fully understand the importance of intellectual property protection. We treat it is as one of the most important elements of attracting foreign business,"
said Jian Daning, director of the Shanghai Waigaoqiao Free Trade Zone, a government post. "There is an old saying: 'If a mouse crosses the street, everyone will try to beat it.'"
The results of the reform movement, combined with growing demand, have been percolating down. Three years ago, Rising had fewer than 20 employees; now, with piracy declining and demand rising for a wider variety of products, it has 280 employees and scant places to put them. Revenue has grown by 100 percent in that time, and the company now leads its field in market share in China.
That success is reflected throughout the industry. The Chinese software market totaled $1.6 billion in 2001, led by IBM, and is expected to grow by 36.7 percent per year through 2006, when it is projected to reach $7.8 billion. Attracted by those numbers, foreign software providers are bringing more development business to China.
Local companies are grabbing their portion of the market too. Founder Group, which was created at Beijing University and became independent in 1992, is one of the leaders in desktop publishing throughout Asia and sells software to Chinese newspaper publishers worldwide.
Still, piracy--which only takes a CD burner and some discs--remains a formidable obstacle even with the new laws. Roughly 90 percent of the software in the installed base in China was illegally copied, according to some estimates.
Software makers aren't the only crime victims. Counterfeiters also build shoddy servers and PCs out of smuggled, defective and old components and sell them as branded products. Hewlett-Packard, among other manufacturers, has worked with authorities to bust these rings, which cost companies millions. Last December, the government announced plans to crack down harder on counterfeiting.
"They are never going to have a software industry in China if they don't take it seriously," said Xueni Ye, director of ChinaConnect, which specializes in Java middleware. The company is a subsidiary of Lionbridge Technologies, a Massachusetts-based company that translates applications.
Piracy is generally more prevalent on the consumer market than among businesses. On a recent shopping tour of Beijing's largest PC mall, dealers offered to bundle illegal copies of Windows XP on computers, swapping the new OS for the legal copies of Windows 98 already included on the PC.
"Software piracy is still a problem for consumer applications, but not for enterprise applications, which require a large amount of implementation and training efforts," said Dorothy Yang, an analyst at industry researcher IDC.
Before the crackdown, the government started helping the industry by investing resources in software. Founder, for instance, has received government support for years. In 1998, it kicked off a research project that led to the creation of Red Flag Software, a Linux developer. Now, a program is under way to build 35 colleges for software engineers, Red Flag CEO Liu Bo said.
The push to build up the engineering base can be traced to piracy as well. Because buying illegal software was so easy, few people wanted to start software companies,
which meant few students wanted to study computer science. The lack of engineers in turn guaranteed that the number of start-ups would be low.
"In most countries, hardware revenue is 2-to-1 over software revenue," Liu said. "In China, the ratio is 9-to-1."
Plotting to win
With illegal copying fading, local entrepreneurs see an opportunity to compete against brand-name multinationals. Like most markets, their primary weapon is price.
A 25-seat license of Rising's enterprise product, including the server management features, sells for $592 after the $12 increase in June, roughly one-third the price of Symantec's competing product. A 25-seat license for Symantec sells for $1,727, according to Symantec ($1,362 for 25 seats and $365 for the server.)
The lesson, though, isn't lost on Symantec. Rising sells its PC antivirus package for $24.14 (199 yuan), while Symantec sells its for $24.27. Despite the additional costs involved in exporting, that's half the price Symantec sells the same product for in the United States.
Technology and product proliferation are part of the company's strategy. Rising, which intends to expand its lines of firewalls and other security products, has obtained patents in Asia, Europe and the United States. And capitalizing on its bilingual expertise, the company in May began selling an English-Chinese version of its software.
Jun Tang, president of Microsoft China, acknowledges that U.S. companies face difficult challenges. "We are far below our expectations. The software market is not what we would like," he said.
But Microsoft and other foreign companies are trying to build success beyond the sale of products by focusing also on China's relative dearth of support services. The company is aiming to fill the void with its first two joint ventures created with investments by Microsoft and Chinese companies.
The first, called Wicresoft, will begin operations this month to provide help-desk services to companies hoping to outsource. The second, Censoft, is providing business software and consulting.
Beyond software revenue, Microsoft hopes that these joint ventures will generate the kind of goodwill that is essential to doing business with China.
As Tang said, philosophically: "The only way to generate more revenue is to make the cake bigger."
ZDNet China's Wei-Zhong Li contributed to this report from Beijing.