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The next piracy panic: Software

Industry Standard

(IDG) -- Bill Gates is watching a court case closely these days, and for once it's not his own. If Napster prevails in appealing the court order effectively shutting it down, and the courts rule that online music swapping is legal, what's to stop users from "sharing" other digital property -- like, say, Windows?

In fact, they already do. Software pirates operate hundreds of "warez" sites where popular applications such as Word and Excel are traded free of charge. Such sites are usually nonprofit. But Gates is determined that the $135 billion-a-year software industry will not be rocked by the "peer-to-peer" phenomenon, as the recording industry has been.

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"Right now, music piracy is very popular on the Internet," says Frank Creighton, the Recording Industry Association of America's senior VP and director of antipiracy. "Clearly, software is right behind us." And now the software industry is teaming with the RIAA to crack down on online copyright infringement.

Microsoft (MSFT) is already arguably the world's biggest piracy victim. According to the Business Software Alliance, more than one-third of all PC software in use is pirated. The fastest-growing means of software theft is online distribution. Microsoft's new antipiracy crackdown, announced in late July, targeted over 7,500 online listings of illegal copies, resulting in 17 copyright-infringement lawsuits. Microsoft lawyers have argued in court that there is no valid technological or legal distinction between digital music and software code. And Gates, unveiling Microsoft's next-generation .NET strategy in June, singled out Napster as a threat to the selling of software.

The RIAA meets weekly with software industry officials to coordinate raids, enforcement strategies and policy goals, according to Creighton. And the association often works directly with the software giant to investigate copyright violations. Microsoft "tends to work together" with the RIAA, says Brad Smith, Microsoft's deputy counsel in charge of copyrights and antipiracy, especially in tracking overseas piracy. "We are absolutely following the Napster case very closely. It could have very broad implications for our entire industry."

For years, software was swapped for free via Internet Relay Chat, an early form of online information exchange. IRC facilitated the pirating of digital content of all kinds -- including music, videos and software. Napster and the warez sites have vastly expanded the universe of potential customers for such illicit material. The response of law enforcement has escalated accordingly. Besides helping the RIAA track down music pirates, Microsoft has successfully pushed for tougher penalties for software swappers. Now, operators of warez sites face charges based on the value of the software exchanged -- which can reach millions of dollars -- rather than any profits they earn -- which are negligible.

Ironically, Napster is represented by the Justice department's lead attorney in the Microsoft antitrust suit, David Boies. Boies argues that Napster technology is essentially like a VCR or photocopy machine -- a tool that may be used to pirate copyrighted material but is not inherently illegal. The entertainment industry didn't exactly welcome VCRs when they first appeared, either, taking Sony (SNE) to the Supreme Court for building machines that facilitated copyright infringement on a massive scale.

Sony won, and now the home-video market is an integral part of the movie business.

The software industry was equally slow to adopt online retailing, which wiped out sales of packaged software virtually overnight. Maybe Bill Gates and company learned from that experience. At least they seem to have learned the lesson of the VCR -- and of Napster.

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