Indonesia | Economics

Friday, October 06, 2006

Is software piracy bad for Indonesia?

Here are two quotes that might give some insights into the trade-offs of intellectual property rights (IPR) policies. First, from the Jakarta Post:
"Using pirated software means depriving emerging software entrepreneurs of their right to grow and develop their businesses," said Microsoft Indonesia director Irwan Tirtariyadi at a piracy discussion in Jakarta on Tuesday.

Irwan argued that purchasing pirated software instead of more expensive genuine programs only helped to decrease opportunities for other software companies to compete in the market, particularly Indonesian developers.

"Basically, piracy decapitates competition. Hence, nobody will profit from it," Irwan said.

Another, from the Economist on the factor that has limited productivity increases in some rich countries:
Why does [Information Technology (IT)] matter so much? The greatest impact of advances in IT, notes Mr Nicoletti, has come since the mid-1990s. Countries with policies preventing their diffusion lost out. And because IT can boost productivity in many industries, its effects (or the absence of them) were felt across the economy. “Policies that prevent the spreading out of this technology”, he says, “are damaging precisely because of its general application.”

Strict enforcement of anti-(software)-piracy law is exactly the kind of policies that prevent the diffusion of IT to the greatest number of people, especially young people, in Indonesia. The claim of Irwan, the Microsoft man, that "nobody will profit" from piracy is simply wrong.

It doesn't mean that piracy will, in equilibrium, always be good for Indonesia. So, we need to think about its costs and benefits.

Here are some of its costs: The potential growth of local software producers. I think this is only partly true: Large scale software industries will surely fail to grow without a strong local IPR protection for softwares. But small and medium ones will survive, mainly by receiving outsourced work from countries with a mature software industry.

The benefits? First, productivity for the overall local services industry from the use of pirated software. The loss of this productivity from strong anti-piracy enforcements will be costly, mainly for small-to-medium local services enterprises and, at least in the short term, the cost will be huge.

The second benefit is to Indonesia's human capital. Enforcement of anti-piracy policies will reduce the extent to which schools and universities can introduce IT to their curriculum (or, at least, reduce the number of software available to use), and the extent to which parents can provide their children with brain-stimulating software -- limiting the kind of diffusion described in the Economist article. I think this will inflict a large medium-to-long-term cost to the Indonesian economy.

The bottom line? Without empirical evidence, it's hard to say. But were I to decide, I'd keep those Mangga Dua and Ambassador-Mall vendors alive...

8 Comments:

  • seriously, to start an IPR discussion by quoting Microsoft Indonesia is a total non-starter.

    the whole copyright thing needs a rethinking, even they know this. existing system benefit the status quo - recent technology is rendering them obsolete. still one of the most effective way to hold on to this obsolete structure, is by pressuring poorer countries to conform to the currently existing law - even as these very laws are going thru massive redraw and rethinking in the US/much of Europe.

    and well, MSFT Indonesia just don't hold much for credibility in this discussion.

    By Blogger treespotter, at 10/07/2006 01:36:00 pm  

  • TS,
    Undoubtedly so. But despite its lack of credibility, MSFT has the loudest voice (I got the link to this article from an ADB e-newsletter that supposedly collects 'development news and analysis'). This is problematic since I have yet to see anyone publicly defend the position that software piracy may be good for Indonesians.

    By Blogger Arya, at 10/07/2006 05:38:00 pm  

  • I wrote about this a few years ago during a certain fiasco by Gus Dur's presidential decree, both in JP and AWSJ, but there were a LOT of other much better voice. most popular was the previous CEO of MSFT Indonesia, Mr. Richard Kartawidjaya who was fired and replaced over this very thing. the replacement then put shitload of money into the AG and the police and MSFT starts taking a much stronger position after.

    it's a subject worth recycling these days, only i'm not anywhere near qualified enough to write the economics of it. you guys should do it.

    By Blogger treespotter, at 10/11/2006 07:25:00 am  

  • Arya and Treespotter,

    I was just reading book by Kevin Kelly, editor of Wired Magazine: "New Rules for the New Economy," and there's one rule that really hit me: "follow the free."

    Basically he's saying that the bulk of profits reaped by businesses in the new "connected world" is not from direct sale of its main product. After all these years, Yahoo and Google are still available to use at no cost. The real competition is not to "sell" it, but to get as many people as possible to use it.

    When most people use one system, then the system has the most advantage: it can generate ads (like Google), sell "advanced" features for premium rates (like Advanced Yahoo Mail), and sell technical service (like Linux).

    So Microsoft has very little to lose and a whole lot to gain by actually giving it's basic softwares (windows and office) for free. They should thank the pirates!

    By Blogger Muli, at 10/12/2006 07:53:00 am  

  • T/S,
    You're right, we economists should start raising a hackle or two. Personally, I still need to get my IPR economics and evidence right.

    Muli,
    That's probably less true in a country where internet penetration is still low.

    Also, certainly not true for a firm that is so dominant that its only way forward is by expanding the market base, not its share.

    By Blogger Arya, at 10/12/2006 05:33:00 pm  

  • Arya,
    Check out this article on Harvard Business School's Working Knowledge: Microsoft vs. Open Source: Who Will Win?

    Some quotes:
    "... the value of an operating system depends critically on the number of users"
    "... in the absence of cost asymmetries and as long as Windows has a first-mover advantage (a larger installed base at time zero), Linux never displaces Windows of its leadership position."

    However:
    "We find that because OSS implies lower profits for Microsoft, the larger the cost differences are between Linux and Windows, the less able Microsoft is to guarantee the survival of Windows."

    And:
    "We analyze the effect of having forward-looking buyers and the presence of piracy, and conclude that both benefit Microsoft."

    AND:
    "We found that in countries where piracy is highest, Linux has the lowest penetration rate. The model shows that Microsoft can use piracy as an effective tool to price discriminate, and that piracy may even result in higher profits to Microsoft!"

    By Blogger Muli, at 10/18/2006 01:03:00 pm  

  • Muli,
    Thanks for the pointer.

    If this is true (and I bet, those people at Microsoft -- though not necessarily MSFT Indonesia -- have read this), is it possible that it is Microsoft who encourages the selective enforcement of IPR (only focusing on capturing the more-able customers instead of the distributors) in order to maximise its profits?

    Very interesting...

    By Blogger Arya, at 10/18/2006 05:44:00 pm  

  • Arya, I think that's exactly what's happening.

    The bigger corporations who use pirated softwares are raid, but Microsoft is giving out free hardware, software, and software trainings in the form of Community Training and Learning Centres to the poor. They've established 40 CTLCs so far (in collaboration with local NGOs/CBOs), and more are to come.

    By Anonymous muli, at 10/29/2006 07:13:00 pm  

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