Saturday, September 4, 2010

Will software piracy threaten the growth of ICT in Africa?

In an article recently published by "Jeune Afrique" (here is the link for those of you reading French), they describe how in Tunisia you can buy pirated software in public stores.  The article then mentions about 30 other similar shops in Tunis full of people buying pirated software. In those stores, a software that is priced at thousands of dollars is sold for five to ten dollars. Across the region, up to 80% of software is counterfeit. Actually the biggest piracy is that of music/movies CDs and DVDs sold in more than 35,000 locations across the country.

In this post, I'd like to focus on the software piracy. And this post is not particularly targeted at Tunisia as this happens in all the countries in the region and in other emerging markets like China.

So the good news is that those stores are full of people, confirming that the ICT (and digital media) market is growing in the region. The bad news is that those people buy pirated content and don't pay the full price, or at least that is the thinking in the developed countries.

The reaction of developed countries to this situation is to require that those countries put in place the laws to protect Intellectual Property (IP) and threatening the users buying pirated versions. In fact Tunisia recently adopted such a law but that did not change the situation. These stores are publicly accessible and the law does not seem to be applied.
So most Independent Software Vendors (ISVs), i.e. the companies that develop those software and sell it for hundreds or thousands of dollars don't see that revenue to which they are legally entitled.
For those ISVs that want to take the opportunity to increase their revenue by penetrating the growing ICT market in Africa, there is no question that piracy get them thinking twice before making that investment.

Everything I said so far is the superficial analysis of the situation. It typically results from developed countries trying to apply in Africa what they do at home without understanding the local situation. Actually, part of the answer is provided by a customer of one of those stores interviewed in the article: "I know that they are pirated, but I can not afford programs such as AutoCAD or InDesign, they are too expensive. I would have to invest about EUR 4000 for software to be able to work. It is not within my means, but here I have it for 5 euros. Somehow, I find it normal to choose the pirated versions, because the publishers are filling their pockets on the backs of consumers and, with such prices, they create a selection by money".

Most ISVs in developed countries do not understand how to do business "at the bottom of the pyramid". In his book "The Fortune at the Bottom of the Pyramid", C.K. Prahalad makes a great case on how to serve the world's poorest people AND make a profit. "The rich use cash to inventory convenience. They can afford, for example, to buy large bottle of shampoo to avoid multiple trips to the store. The poor have unpredictable income streams. Many subsist on daily wages and have to use cash conservatively. They tend to make purchases only when they have cash and buy only what they need for that day."

The first thing to do to address the piracy problem is to adapt the pricing to the region. Clearly selling software at $4,000 is not affordable for most people in the region. "This requires to start with a radically new understanding of the price-performance relationship compared to that currently employed in developed markets. This is not about lowering prices. It is about altering the price-performance". An example is Microsoft's Windows XP Starter Edition offered in developing countries. It is a low-cost version of Windows, but users can run only three programs or have three windows opened at once. Performance and price are adapted to local need. ISVs then may fear that those low cost products be sold in developing countries competing with the "same" product sold there at a higher price. That risk is reduced by different performance, the Windows XP starter edition running only three programs at once would probably not satisfy the more sophisticated needs of users in developed countries.

Another way to address the pricing problem are free open source software (OSS). Linux is a free open source operating system, and actually, the best Linux version in the market is Ubuntu developed by an ISV originating from South Africa. The challenge for OSS is that they have very little visibility in emerging markets. Consumers in those markets are very influenced by recognizable brands. The reason is that they have no access to other information about products than brand advertisement. It is very unlikely that free OSS can spend the money to establish their brand and compete against the mega marketing power of Microsoft. This will change over time when access to Internet will increase (see my posting of August 31, 2010)

The second thing that can, and in my opinion SHOULD be done by ISVs to counter piracy is to adapt their software to local needs: local languages, local currency, local culture, desired local "look-and-feel.",etc. This is called "localization" of the software. Again  Microsoft announced the Local Language Program, a global initiative to partner with governments to localize Windows in regional languages. Localized software in local languages and sold at a lower cost in emerging market are even more unlikely to be sold in Europe or US. But more importantly, localized software will deliver more value and be more attractive to local buyers.

But probably the best protection against piracy is still to come and will be provided by cloud computing. Cloud computing is a new consumption and delivery model for IT. SMEs can buy access to IT resources from cloud providers on a pay-by-usage basis. End-users no longer need expertise in, or control of the technology infrastructure "in the cloud."   

For SMEs, the traditional paradigm for procuring IT was to buy their own software and hardware. Now the SME only needs a good Internet connection to remotely access the IT infrastructure that is located in the cloud provider’s data center.  The cloud provider can offer access to IT services for a lower cost than an on-premise IT infrastructure. This low cost is achieved by the cloud provider’s ability to share IT infrastructure among a large number of consumers, by utilizing efficient IT service management. 

ISVs use clouds to deliver software applications through Internet. This is known as Software as a Service (SaaS). User then use PCs (even a cheap Netbook with an Internet browser will do it) and mobile phones to access the SaaS of their choice. A familiar example of SaaS is Gmail. Gmail is an email application running in the Google cloud data center and can be accessed through the Internet, using a simple web browser. Other examples of SaaS used by SMEs are Salesforce.com, SugarCRM.com, and zoho.com. 

When delivered as a SaaS, software cannot be copied and pirated anymore as it resides in a remote secured data center and it is not available on CDs or DVDs. In addition ISVs are guaranteed to collect the revenue for the usage of their software by offering access to their SaaS through monthly subscription, typically less than $10/ month/ user. This price would surely better please the customer interviewed in the article. 

ISVs may ask themselves how will I get my investment back with such a low price? First the low price will attract significantly more buyers than the high price. In the telco industry in India, handsets prices used to be in the $300-$1,000 range and not surprisingly, the market was limited. Until one telco offered 100 free minutes for a mobile, multimedia phone with an up-front payment of $10 and monthly payments of $9.25. The company received 1 million applications in 10 days!
Actually ISVs don't see a penny from the 5 dollars currently paid to the pirate shops. A monthly subscription per user of 10 dollars/month over the lifetime of the usage of the software will ultimately exceed the onetime charge of thousands of dollars in the traditional model. If the user does not pay her subscription fees, the ISV can interrupt access to the SaaS by removing the user name from the authorization database.

So in conclusion, I don't think that software piracy will impact the growth of ICT in Africa. It is the responsibility of the ISVs themselves to address the problem, not through threatening the users pirating their software, but rather by offering them software adapted to their needs both in terms of functions and price.
Finally the new SaaS delivery model should protect ISVs from piracy and guarantee their revenue.

1 comment:

madhuri said...

Great stuff you have here and nice post. Whatever is being written here is certainly a big help.
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