Chasing Pirates: Inside Microsoft’s War Room

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In its anti-piracy lab in Dublin, Microsoft uses microscopes and other equipment to detect counterfeits of its products.

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All but the lead vehicle turned off their headlights to evade lookouts, called “falcons,” who work for La Familia Michoacana, the brutal Mexican cartel that controls the drug trade. This time, the police weren’t hunting for a secret stash of drugs, guns or money. Instead, they looked to crack down on La Familia’s growing counterfeit software ring.

The police reached the house undetected, barreled in and found rooms crammed with about 50 machines used to copy CDs and make counterfeit versions of software like Microsoft Office and Xbox video games. They arrested three men on the spot, who were later released while the authorities investigate the case. “The entire operation was very complicated and risky,” says a person close to the investigation, who demanded anonymity out of fear for his life.

The raid added to a body of evidence confirming La Familia’s expansion into counterfeit software as a low-risk, high-profit complement to drugs, bribery and kidnapping. The group even stamps the disks it produces with “FMM,” which stands for Familia Morelia Michoacana, right alongside the original brand of various software makers.

The cartel distributes the software through thousands of kiosks, markets and stores in the region and demands that sales workers meet weekly quotas, this person says, describing the operation as a “form of extortion” on locals.

The arrival of organized criminal syndicates to the software piracy scene has escalated worries at companies like Microsoft, Symantec and Adobe. Groups in China, South America and Eastern Europe appear to have supply chains and sales networks rivaling those of legitimate businesses, says David Finn, Microsoft’s anti-piracy chief. Sometimes they sell exact copies of products, but often peddle tainted software that opens the door to other electronic crime.

“As long as intellectual property is the lifeblood of this company, we have to go protect it,” Mr. Finn says.

Microsoft has adopted a hard-line stance against counterfeiting. It has set up a sophisticated anti-piracy operation that dwarfs those of other software makers; the staff includes dozens of former government intelligence agents from the United States, Europe and Asia, who use a host of “CSI”-like forensic technology tools for finding and convicting criminals.

But the hunt for pirates carries with it a cost to Microsoft’s reputation.

The company’s profit from Windows and Office remains the envy of the technology industry, and critics contend that Microsoft simply charges too much for them. In countries like India, where Microsoft encourages local police officers to conduct raids, the company can come off as a bully willing to go after its own business partners if they occasionally peddle counterfeit software to people who struggle to afford the real thing.

“It is better for the Indian government to focus on educating its children rather than making sure royalties go back to Microsoft,” says Eben Moglen, a law professor at Columbia Law School and a leading advocate of free software.

Mr. Finn argues that Microsoft has no choice but to be aggressive in its fight, saying its immense network of resellers and partners can’t make a living in areas flush with counterfeit software. He says consumers and businesses are being coaxed into buying counterfeit products that either don’t work or do serious harm by clearing the way for various types of electronic fraud.

And, crucially, the counterfeit software cuts into Microsoft’s potential profit. A software industry trade group estimated the value of unlicensed software for all companies at $51.4 billion last year.

The most vociferous critics of Microsoft and the overall proprietary software industry describe the anti-piracy crusade as a sophisticated dog-and-pony show. They say the software makers tolerate a certain level of piracy because they would rather have people use their products — even if counterfeit — than pick up lower-cost alternatives. At the same time, the critics say, the software companies conduct periodic raids to remind customers and partners that playing by the rules makes sense.

“It has always been in Microsoft’s interests for software to be available at two different prices — expensive for the people that can afford it and inexpensive for those that can’t,” Mr. Moglen says. “At the end of the day, if you’re a monopolist, you have to tolerate a large number of copies you don’t get paid for just to keep everyone hooked.”

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[url]http://www.nytimes.com/2010/11/07/technology/07piracy.html?_r=2&pagewanted=1[/url]