Q&A: Microsoft Battles Consumer Fraud on the Internet

REDMOND, Wash., Aug. 1, 2000 — Microsoft today announced that it has struck a blow against Internet distribution of fraudulent software. In its first worldwide enforcement sweep to protect consumers from Internet fraud, Microsoft — with the help of the Business Software Alliance and enforcement officials on six continents and more than 25 countries worldwide — has taken action against more than 1,300 Internet sites around the world for the alleged distribution of illegal Microsoft software.

In the past eight weeks, Microsoft has removed more than 1,300 illegal postings as a result of the company’s implementation of a special Internet Monitoring Program, including 500 today. To learn more about today’s efforts and what consumers can do to avoid purchasing illegal software, PressPass spoke with Microsoft deputy general counsel Brad Smith, Microsoft associate general counsel Nancy Anderson and Microsoft corporate attorney Tim Cranton, about the company’s efforts.

PressPass: What makes the Internet so attractive to software pirates?

Cranton : Just as legitimate businesses have seen e-commerce as a huge opportunity, criminals also see the Internet as a great way to advertise and distribute illegal software, music and other copyrighted material. In addition to the benefits of using the Internet as a global means of distributing pirated software for very low cost, there is also the anonymous nature of transactions on the Internet. Because of the anonymity on the Internet, consumers don’t have the recourse of follow-up that they might otherwise have — adding insult to the injury of the consumer fraud they’ve already experienced.

PressPass: You mentioned music piracy — is software piracy on the Internet related to Napster?

Smith : Well, the digital piracy problem is brought into sharp focus by the recent Court order to halt the distribution of copyrighted material via Napster. Napster is a technology that has made it very easy for people to steal and distribute copyrighted material. We are using technology to fight back against the theft of copyrighted material.

While music and movie producers have been able to focus legal action on a series of hubs or funneling points like Napster, Scour.com and MP3Board.com, the problem for software publishers is already much more decentralized. Internet sites, ranging from auction sites and Web sites to IRC chats and FTP sites, offer illegal downloads or illegal CD-ROMs and CD-Rs by mail. Widespread intentional linking between these sites only make the problem worse. Emerging technologies like Gnutella, Freenet and others that enable the sharing of movies, music and software without the use of a central hub server continue to raise the issue of intellectual property protection on the Internet to new levels.

PressPass: How is Microsoft fighting consumer fraud on the Internet?

Cranton : We’ve got a three-tiered approach. First, we’re focused on education and awareness to help sensitize consumers to the risks of Internet piracy, especially on auction sites. Second, we have developed a global investigative effort that we’re announcing today to identify and eliminate sites that defraud consumers into buying illegal software. Finally, Microsoft is developing industry solutions that can help consumers, Web sites and industry organizations work together to establish codes of conduct that are essentially
“rules of the road.”
These rules help set expectations and business guidelines for auction sites, Web sites and Internet Service Providers (ISPs) so that consumers have a better understanding of what to expect when they’re shopping online.

PressPass: I understand there is a new tool that enables Microsoft to be more proactive about tracking Internet piracy?

Cranton : We are using an automated search tool that trolls the Internet 24 hours a day, seven days a week, to identify pirate sites or illegal online offerings. The tool enables us to quickly review the sites and determine whether or not illegal activity is occurring. We can identify and address in excess of 500 illegal sites in a single day — while it might take a month to manually shut down that many sites.

PressPass: How long has this tool been in use?

Cranton : We first started using the tool in a test program in November, and fully deployed it around the time that we launched Windows 2000.

PressPass: How many sites have you shut down using this tool?

Cranton : Microsoft has used this and other more traditional Internet search tools to remove more than 7,500 illegal postings for downloads and offers of counterfeit and/or CD-R copies of Microsoft software on Web and auction sites. This tool will enable us to streamline that process to take down even more sites, more efficiently and more accurately.

PressPass: What’s the scope of this tool? How broadly is it being used?

Smith : It’s being used very broadly. The tool monitors and screens sites and postings on Web sites, download sites, newsgroups, chat systems, classified ads and the major file swapping networks. This covers servers around the world. We also are expanding the tool to cover all of the major languages on the Internet. This tool is available to other copyright holders as well. And this technology can be used just as easily for any copyrighted material — its value is not limited to the software industry.

PressPass: What are some specific cases that you have brought?

Cranton : We are working on a number of cases involving illegal downloads and the distribution of counterfeit versions of Windows 2000 and other Microsoft programs. In the United States, we are announcing five lawsuits and two settlements today. One of the cases involves a company called Copy USA. That company uses auction sites to advertise Microsoft programs at incredible prices and invites consumers to contact Copy USA directly if they’re interested in making a purchase. Our investigators have made test purchases from Copy USA and received illegal copies of Windows 2000 on CD-Rs. To date, we’ve shut down nearly 600 auctions posted by Copy USA.

We’ve also successfully negotiated some settlements with Internet software pirates. In these cases they have agreed to cease their infringing behavior, and donate the profits they made to local charities.

Internationally, we have cases on six continents — some of these have been Microsoft actions, some are actions taken by the Business Software Alliance (BSA) on behalf of Microsoft and other software publishers, and some have been referred to local authorities for criminal actions.

PressPass: What is Microsoft doing generally to combat piracy of Windows 2000 software?

Smith : Generally, Microsoft is pursuing three broad initiatives to deter piracy of Windows 2000. The first is the substantial strengthening of the anti-counterfeiting features in the product. These are designed to make it more difficult for counterfeiters to create illegal copies of the product and defraud consumers. The second initiative is a broad set of new enforcement measures. The company is working closely with law enforcement agencies around the world to stop counterfeiters and others from making illegal copies and putting them into channels of distribution such as the Internet, new personal computers or separately on CD-ROMs. We’ve also begun a new education campaign because our best defense against counterfeiting is an educated consumer.

The company has devoted substantial resources to providing both software resellers and the general public with more information so that they’ll know to look for certain security features when they purchase a copy of Windows 2000.

PressPass: How bad is the piracy problem?

Anderson : In the U.S., the Business Software Alliance estimates that 25 percent of the software products in use are illegal — that’s one in four products on the market. And we’ve got the lowest piracy rate in the world. This causes tremendous financial losses, not only to the industry but also to governments in the form of lost tax revenue. It also affects local economies which experience lost jobs both for software publishers and for the substantial third party industry that supports the software industry. In the U.S., in 1998, 109,000 jobs were lost — jobs that would have otherwise existed but for the illegal use of software. Federal and state governments lost just under $1 billion in tax revenue in 1998.

PressPass: What is the international situation like?

Smith : Worldwide, the piracy rate is at 36 percent, which is a decrease of two percent in the past year. However, there continues to be a huge range of rates, from more than 90% in some of the least developed nations to the 25 percent rate in the U.S. Of course, the industry as a whole continues to grow — there are more PCs being sold each year — which means that the economic implications of a constant piracy rate are growing.

PressPass: How do you explain the worldwide decrease?

Smith : Every year we see some incremental progress. A number of governments have passed new laws or made new commitments to enforce those laws. We’ve seen governments throughout Latin America and Asia, for example, come to appreciate the economic losses that they suffer because of the software piracy problem. Similarly, the U.S. and the European Union are making new commitments to fighting counterfeiting. They see that this is a problem affecting not only the company that creates the software, but also the people who unknowingly buy the software. It also has broader social implications because groups that are involved in counterfeiting software often are involved in other forms of criminal activity.

PressPass: Why is Microsoft combating software piracy so aggressively?

Smith : We really do it for three reasons. First, it’s important to our company. Intellectual property rights are the lifeblood of any software company, including our own.

Second, we recognize that it’s important for the computing industry as a whole. Since the personal computer was first developed, leading software companies have worked on behalf of the industry to reduce software piracy levels. Third, we combat piracy because it’s important to our customers. The last thing we want is for our customers to pay good money for bad product.

PressPass: How would consumers know if they purchased fraudulent software?

Cranton : We advise consumers to get to know who they’re dealing with on the Internet. Trusted vendors will identify themselves and are willing to give a physical address in case follow-up is needed. They will also be willing to explain warranty and other information. If a seller is not willing to provide adequate explanations, the consumer should be extremely cautious before making a payment.

Smith : I would advise consumers to follow the basic rule that if a price seems too good to be true, it probably is. For example, if people see a copy of a software product on sale at a retail store for a particular price, and then it is offered over the Internet for half of that price, they should be suspicious.

PressPass: If it’s a good copy, what is wrong with using it?

Smith : Counterfeiters don’t care about quality control. An individual CD contains millions of bits of data. Unless all of that data is replicated with perfect accuracy, there’s a good chance that the software program won’t run properly. Legitimate CD manufacturers have very stringent quality control standards to ensure that they replicate that data accurately. Counterfeiters do not. Even if an illegal CD works okay, it’s against the law to use it. Software is protected by copyright laws, as are musical works, films and books.

PressPass: What’s wrong with using software you copy from a friend?

Smith : Often, people think if they copy software, no one’s going to get hurt. That is not true. It takes a lot of time and energy and money to create a software product and when a product is copied, the people who made it are not going to be paid for it. It also hurts the ability of the industry to invest more in research and development and bring even better products to market in the future.

Anderson : Think of it this way — if you’re not willing to go down to a software reseller on the corner and steal the package of software from the store, you shouldn’t be willing to steal in any other way.

PressPass: How do you go about investigating claims of counterfeit software?

Cranton : Our team of in-house investigators works with outside investigators worldwide. We collect leads through hotlines that we maintain around the world. The U.S. number is 1-800 RU-LEGIT. We also solicit information through our Web site, http://www.microsoft.com/piracy/. Our investigators collect evidence by test purchasing potentially fraudulent products and working with consumers who believe that they’ve been defrauded. Ultimately, we work with law enforcement to bring criminal or civil charges against software pirates.

PressPass: How does Microsoft use the monetary settlements from restitution for damages?

Smith : We donate half of what we recover to charities around the world. We use the other half to help pay for the anti-piracy program. We focus on charities that expand access to technology for people who otherwise might not have it. We also focus on programs that provide people with the skills they need in order to use technology.

PressPass: What should consumers do when they think they have bought counterfeit software?

Anderson : Customers or resellers with questions about the legitimacy of Microsoft software should contact the Microsoft anti-piracy hot line, toll free, at (800) RU-LEGIT or send email to piracy@microsoft.com. In addition, a list of authorized distributors is available at http:// www.microsoft.com/oem/ . Finally, consumers can get more information about software piracy by calling the Business Software Alliance anti-piracy hot line at (888) NO-PIRACY or by sending email to software@bsa.org.

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