Beyond Binary

With Windows 7, Microsoft is making some subtle changes to the ways it tries to thwart piracy.

As has been the case for some time, Microsoft's strategy hinges on requiring a user to electronically verify their copy of the software, a process known as activation, and then the software also periodically validates that a copy of Windows is genuine.

In Windows Vista, if a user does not activate their software immediately, they get a warning that they still need to do so. The dialog box offers two options, to activate immediately or to do so later. However, the activate later box cannot be checked for 15 seconds.

Microsoft decided this was a bit too annoying. With Windows 7, users can click activate later immediately, but then get a dialog box touting the benefits of activation.

It's the latest effort by Microsoft to scale back the intrusiveness of its technology while still aiming to deter piracy. With the first service pack to Vista, Microsoft made the software significantly more usable to those whose versions of Windows are determined not to be genuine. Before that, Vista systems entered a nearly unusable "reduced functionality mode" once they were deemed to be non-genuine.

"We think we've gotten it to a pretty good place where it strikes an effective balance," said Alex Kochis, director of product management for Microsoft's Genuine Windows unit. "We're committed to the program for the long term because it works."

Microsoft said in December 2007 that it was seeing Windows Vista pirated at only half the rate of Windows XP. Kochis said that general trend has continued.

With Windows 7, Microsoft is also changing the name of its antipiracy technology, from Windows Genuine Advantage to Windows Activation Technologies. The Windows Genuine name took some beatings in the Windows XP time frame, so probably a good move from a PR standpoint.

The software maker is also adding technology designed to make it easier for businesses to activate multiple machines as well as manage activation for virtual machines.

Attention, software buyers: there's no such thing as Microsoft Office "Blue Edition."

That's the latest ruse making the rounds on online auctions. It feigns to be some sort of technician version of Microsoft's software that happens not to require a serial number or product activation or any of Microsoft's antipiracy mechanisms. In actuality, Microsoft says, it's just the latest wrapping for a pirated version of the company's software.

"That program is entirely fictitious," said Matt Lundy, a senior attorney for Microsoft. "It's nothing more than a scheme by pirates to confuse and deceive consumers."

The so-called Blue Edition of Office shown here is nothing more than a cheap pirated copy, Microsoft says. The problem is that the software has been selling well via online auctions.

(Credit: Microsoft)

Microsoft has targeted those selling the "Blue Edition" as well as several other elaborate schemes in a series of 63 lawsuits in 12 countries, including a number of actions filed this week in the United States.

In addition to targeting Blue Edition sellers, Microsoft is going after pirates in New Zealand that were selling counterfeit copies of Windows XP that were shipped to buyers in the U.S., directly from China.

"It really highlights the global nature of the problem," Lundy said. Windows XP remains the version of Windows most often pirated, Lundy said, although in some cases Vista is also being offered.

Although eBay was among the places where those targeted in some of the suits sold their wares, Microsoft said it isn't blaming the online auction site.

"We hold the pirates responsible for piracy," he said. "All online marketplaces are susceptible to abuse."

Piracy is, of course, a huge problem for Microsoft. The lawsuits, while perhaps necessary, don't seem like they will stop such schemes. But maybe they will force pirates to shift tactics, or at least change colors.

Note: Lundy was originally quoted as saying he holds pirates responsible for privacy. He said piracy. I've fixed it above.

Microsoft is touting its actions in 49 countries its Global Anti-Piracy Day. (Click on the map to go to a Microsoft site for the interactive aspects of the map.)

(Credit: Microsoft)

Microsoft plans on Tuesday to announce "Global Anti-Piracy Day," an effort to gain attention for the steps the company undertakes in order to thwart those who would profit from illegitimate software.

As part of the event, Microsoft is highlighting recent antipiracy efforts in 49 countries, ranging from the filing of lawsuits in the U.S. to a seminar for journalists in Pakistan.

It's the kind of thing that Microsoft does all the time, although the company is aiming for some added ink by grouping together so many actions at once.

"One of the things we want to illustrate with this announcement is the diverse nature of the work," associate general counsel David Finn said in an interview from Singapore.

The third pillar of Microsoft's efforts is its engineering work, adding programs like Windows Genuine Advantage that are designed to make it harder--and less rewarding--to copy Microsoft's products.

Whether it's a testament to tougher engineering or the lukewarm response to Vista, or some combination, Windows XP continues to be copied far more than its successor.

"We continue to see much more counterfeit Windows XP," said Finn, who actually says the company is predicting a rise in XP pirating as the last legitimate copies of the OS wind their way off retail shelves.

Overall, Finn said Microsoft and the software industry are making progress in some areas. He noted that the piracy rate in Western Europe has dropped to about 34 percent from the 78 percent level in 1991.

At the same time, however, rates still top 90 percent in some emerging markets. And even in the U.S., where rates are a relatively low 20 percent, that still means 1 in 5 software installations are illegitimate.

"It thwarts innovation," he said.

While much attention these days has centered around whether Microsoft will buy a big name to boost its online business, expect a lot of attention on Thursday to focus on the areas where Microsoft actually earns money.

The Windows business in particular will get attention after showing less than stellar results last quarter. Microsoft has forecast its Windows client unit will show between 7 percent and 11 percent growth for the quarter.

Overall, Microsoft said in April to expect earnings of 45 cents to 48 cents per share on revenue of $15.5 billion to $15.8 billion. (First Call has analysts pegging earnings at 47 cents per share, on revenue of $15.7 billion.)

As for the outlook for the current quarter, which stretches through September, analysts are currently expecting earnings of 49 cents per share, on revenue of $15 billion. It will be interesting to see where Microsoft's forecast comes in, as well as what it has to say about the broader economy and IT spending in particular.

Expect analysts to push for some more details on Microsoft's plans to significantly boost Windows marketing, particularly as Apple is gaining not only mindshare with its anti-Vista ads, but also market share.

Here's another thing I'm going to be watching--piracy rates. Last quarter, the company noted an uptick in piracy rates after making some significant gains. With Vista Service Pack 1, Microsoft also made life for pirates somewhat less onerous.

And of course, folks will be hanging on every word regarding Yahoo, AOL and anyone else Microsoft is thinking about buying. I would expect company officials to have only the expected things to say, that they are still interested in transactions that would accelerate their growth, strong go-it-alone strategy, etc. More interesting will be if they give any of the investment levels that go-it-alone strategy will entail.

We'll have the earnings report just as soon as its out, as well as some insight ahead of the earnings conference call and then frequent updates once the call gets underway.

When it comes to software piracy, Microsoft may just be aiding the enemy.

Microsoft has been counting on gains against unlicensed software to boost revenue from the Windows unit, which accounts for a huge chunk of overall profits and sales. However, one of the company's own decisions could make its antipiracy battle more difficult.

With Windows Vista, Microsoft took an extremely tough stand on piracy. Computers that were not properly activated within a short period of time went into a virtually unusable state known as "reduced functionality mode."

In the newly released Service Pack 1, however, Microsoft is softening its stance somewhat. The reduced functionality mode is gone, and in its place, a series of warnings and visual indications that a computer is not running a genuine copy of Windows.

I would argue, though, that having an unusable copy of Windows is a far greater deterrent than having one that simply labels its user a pirate. Microsoft has maintained that the new approach will be just as effective and is more palatable to customers and partners. Color me skeptical.

But, will the changes automatically lead to an uptick in overall piracy rates? That's a more complicated question.

On its face, it would seem the answer would be a clear "yes."

However, there are a couple of other factors to keep in mind. First, Windows XP is pirated far more than Vista (at least 2 to 1, according to Microsoft). Also, Microsoft did close several notable hacks to its Vista protection scheme with SP1. So while the price for piracy is arguably lower, Microsoft has closed a few loopholes that let pirates bypass the security features altogether.

Time will tell whether Microsoft's technical changes will have an impact on the broader piracy issue. Enforcement is also key, with Microsoft CFO Chris Liddell noting that a couple of legal actions can make a big difference in any given quarter, suggesting true gains (or losses) from piracy require looking at a longer time horizon.

What is clear is that piracy rates remain a critical issue for Microsoft, which needs to continue growing its Windows revenue and profits to help fund its advertising battle against Google.

Microsoft had seemed to be making major headway against piracy, surprising analysts and itself in the September quarter by gaining 5 percentage points of growth through piracy reductions. Last quarter, though, Microsoft actually saw piracy rates head upward, reversing what had been a particularly positive trend for the company.

Microsoft now expects its gains for the year to be just a percentage point or two, though it believes it can continue to see improvements next year as well.

"Piracy is a tough battle and an area where we will need to continue investing," said Colleen Healy, Microsoft's general manager of investor relations.

For several quarters, Microsoft has been seeing a drop in piracy rates, which has been helping fuel improved business in its Windows unit. In the just-reported March quarter, however, Microsoft saw an increased rate of piracy, an executive told CNET News.com on Thursday.

Colleen Healy, Microsoft's general manager of investor relations

(Credit: Microsoft)

In an interview, Colleen Healy, Microsoft's general manager of investor relations, said that the number of unlicensed PCs, particularly in Asia, increased during the company's third quarter. That was one of the factors that caused the Windows unit to come in shy of what the company had forecast.

"Q3 was a tough quarter on the unlicensed front," Healy said. "We had been making gains there for the past several quarters."

Overall, Healy said the PC market came up about a percentage point shy of Microsoft's growth forecast.

"We saw the PC market take a different mix," Healy said. "Emerging markets on the PC hardware came in a little stronger; mature markets came in a little weaker."

Weakness in the Windows unit and the Microsoft Business Division, which includes Office, was offset by higher-than-expected sales in the Entertainment and Devices unit, which includes Xbox, Healy said.

Healy said that the company expected the piracy reduction trend to return in the current period, the company's fourth quarter, which runs through June.

She also said that Microsoft continues to see a strong market for software, despite rumblings about the economy.

"When we look at the envirnonment, IT and software spending continues to look healthy," she said. "From where we sit, the economy is looking good from an IT and software spending standpoint."

Microsoft said Monday that it's seeing piracy rates for Windows Vista that are half those of Windows XP.

Now cynical me wanted to write this up as "even pirates prefer XP two to one over Vista," but that wouldn't be fair. In reality, the decline in piracy rates is largely due to the fact that Vista is much tougher to counterfeit than XP.

"Piracy rates are lower because it's harder," Microsoft Vice President Mike Sievert said in an interview Monday.

There are a variety of reasons for that, including the fact that businesses no longer have volume license keys that can be used to activate an unlimited number of machines. Another is the fact that Vista machines that aren't properly activated pretty quickly become basically unusable once they enter "reduced functionality mode."

For Microsoft, the gains have been significant. In its last earnings call, Microsoft said that five percentage points of Windows growth could be attributed to gains in piracy.

Interestingly, though, Microsoft makes the experience a little less harsh for those running pirated versions of Vista. With Service Pack 1, Microsoft is doing away with reduced functionality mode in favor of putting prominent notifications on systems that are not found to be genuine.

Non-genuine systems with SP1 will display a warning at start-up that the system is not properly activated. Users will have the option to "activate now" or "activate later," though the second option won't show up for a time. Users will also have their desktop background changed to white and a prominent notification placed in the lower right hand corner saying that the machine is not genuine.

Still, in a significant change, those with non-genuine or non-activated copies of Vista will still be able to use their systems. Sievert said the change is designed to minimize the impact on customers who might unwittingly have gotten an illegitimate copy of Vista while still discouraging piracy.

"People won't want this experience," he said. "At the same time it will be broadly interpreted as being more fair."

Still, I wonder if the move won't cause Vista piracy rates to trend back up. I would think there are people who will deal with a copy of Vista they don't pay for but that has a big ugly notification on it. With the current Vista, they don't even have that option.

Also with SP1, Microsoft is closing two key loopholes that pirates have used to evade Microsoft's security measures. One involves mimicking the process used by large computer makers to preactivate their Vista machines, while the other extends the grace period that customers have to activate their machine, in some cases extending it for decades. It's not the first time that Microsoft has moved to close holes in its activation process. A year ago, the company changed Vista to disable a hack known as "Frankenbuild" that merged elements of the final Vista with a prerelease version.

The Business Software Alliance is best known for tracking piracy rates and announcing high-profile settlements over improperly licensed programs. But a new study finds that most of its money is not coming from big corporations, but from small businesses.

Associated Press writer Brian Bergstein said his analysis showed that 90 percent of settlement revenue comes from small businesses. Last year the agency, which monitors compliance for companies such as Microsoft and Adobe Systems, took in $13 million in settlement proceeds, according to the AP.

A counterfeit copy of Office 2003, billed incorrectly as an OEM version of the software suite.

(Credit: Microsoft)

Among the other interesting tidbits is a chart showing where the organization's income originates (81 percent stems from settlements, with 13 percent coming from membership dues) and where the money is spent (nearly half went for legal fees, while 16 percent goes to public relations). Also the company has scaled back efforts to offer companies amnesty when they want to come into compliance, while upping the amount offered as rewards to employees who blow the whistle on their employers.

The article questions whether such rewards might encourage a worker in an IT department to report their employer, rather than fix their compliance issue. It also questions the BSA's assertion that it focuses on companies that are flagrantly flouting the software license terms, pointing to a case in Utah where a company had two unlicensed copies of Microsoft software.

One of the interesting issues, I think, is the increase in the technological means built into software, particularly from Microsoft, aimed at thwarting piracy before it occurs.