I. Introduction

In the past 20 years the software market has grown into one of the foremost markets in the world. With the tremendous demand for software has come the problem of software piracy. The producers of the software wish to keep their software from being used by unlicensed users, those who haven't paid for it. But the physical problem of controlling software once it is in the consumer's hands is that it can be reproduced and distributed at basically no cost or effort. Legally software is protected in some cases by patent but mostly by copyright law. The software producers in general license only one person to use each copy of the software that is sold. But they otherwise retain their rights to control further reproduction and distribution of the software which is provided to them by the law.

Much discussion has ensued as to creating sui generis law for software as it does not fit into the scope of patent or the traditional subject of copyright very well. But regardless of how software is legally protected the software producers ultimately control how the law is applied to their products through the terms of the license. It is then up to each Software producer to analyze the software market and develop a licensing strategy that will achieve their goals. Accordingly the following is an analysis of the overall software market with some particular examples of strategies being implemented as well as some recommendations for alternative strategies.

II. The Software Industry Model

In the world of software the traditional business model has been turned on its head. For all of history their have been primarily three costs involved in every industry which creates machinery : development, production, and distribution of the product. Because of the nature of software as discussed supra it can be both reproduced and distributed (via the Internet) for an insignificant cost thus eliminating two of the three traditional costs.

All other machines produced require material inputs and assembly costs for each unit produced which amount to a significant proportion of the unit sale price. However software is simply made up of digital code which can be easily reproduced at an insignificant cost. Other items in our economy such as information or a patent design have also been easily reproducible but software is different in a very significant way. A patent design might explain how to make a bulldozer but the patent itself is not very good at moving earth. Meanwhile software can be used to crunch numbers, process text or create graphics. The only input software needs is data and human instruction which is analogous to putting fuel in the bulldozer's tank and driving it through the pile of dirt.

What software shares with traditional products is significant development costs. Just as an automobile requires precise and protracted development of a new model software requires a significant effort to develop algorithms and code which execute the desired function with reliability, speed and ease of use. However at this point the similarities end. The next stage of automobile production requires a massive capital investment for purchase of material inputs and high labor costs for assembly of each unit. Software though, once a production version has been developed, only requires that multiple units or copies of the program code be made. Currently reproduction is done in two forms, magnetic media and CD-ROM. The only physical inputs required are very inexpensive magnetic or CD disks onto which the code is copied. The reproduction process can be carried out on a mass production basis for relatively minor cost. Primarily because it is not difficult to copy the code on to the disks but also because special production machines are not required for different programs. Two automobile models may require significantly different production lines and methods but the newest most radical and innovative computer program still consists of the exact same basic bits of information as every other program. No new machines or processes are required to reproduce new versions of software. This near elimination of unit production cost alone is sufficient to warrant an investigation of the new economic model it presents but there is a second element which is changing, distribution costs.

Distribution of software by magnetic disk or CD-ROM presents basically the same model as the distribution of most other consumer goods. Mostly they are distributed to retail storefronts where the items are stocked on shelves where consumers can walk around look at the packaging choose a product and pay for it at the cash register. But this physical distribution is totally unnecessary for software. With the advent of the Internet software can be electronically transmitted directly from the producer to the consumer. This revolutionary medium allows for not only near zero distribution costs but it drastically decreases the already low unit reproduction costs. The average consumer can today link to the Internet for only the cost of a modem (about $100-$150) a one time setup fee for an Internet Service Provider of about $30-$50 and a monthly fee of $20-$30 for unlimited use of the Internet. The Internet then allows the software to be electronically transmitted to the end user's computer. With this capability unit reproduction no longer requires the disks, packaging or mass reproduction process. The only costs in this model are that the producer must provide the software on line via an Internet site and a secure method for payment and the consumer must pay for Internet access. The costs of maintaining a web site and of Internet access should be averaged over all the other uses to which they are put such as advertising, e-mail, information gathering, advertising exposure and downloading software. Based upon this cost function the per unit cost of downloading software goes to almost zero. But as well it takes the distribution cost to almost zero. The traditional retail storefront had the advantages of aggregation of product, physical inspection, sales help or information. However no physical inspection of software is practical the only way to tell the quality of the software is to work with it. Sales people can not provide as much software information as can be provided by the producer and on-line product reviews. Aggregation of product is also effectively done via the Internet. By looking at product reviews, on line directories of product web sites and using search engines all competing products can be inspected and compared at least as effectively as going to a retail store.

III. NATURAL MONOPOLY

The cost structure described above resembles what economist's call a natural monopoly. A natural monopoly occurs when it is efficient to have a sole company or monopoly provide a product because the average cost of producing more units decreases over the relevant range of production. Examples of natural monopolies include electricity, water supply and historically telephone service. The decreasing average cost presents a technical barrier to entry into the market by a competing product. New entrants into the market will have to produce at lower levels of output and accordingly at a higher average cost than the older companies. Two factors usually characterize natural monopolies, the products are commodities and there is a large infrastructure cost required to provide the product. It is primarily the very large infrastructure cost compared to the rather minor cost of providing another kilowatt of electricity or another gallon of water which allows the average cost to decrease as more is produced because the infrastructure cost is spread out over more units. Antitrust laws in the United States have long discouraged the existence of business monopolies but they are tolerant of natural monopolies as these monopolies are usually individually regulated by the government. In a natural monopoly it is inefficient for their to be more than one producer since for a given level of demand, one water system is less expensive to build than are two duplicate systems. The primary economic problem with monopolies is that they create distortions in the market which result in a "dead weight loss" to society. The theoretical method of minimizing the dead weight loss is to provide a two tier pricing system. A governmental regulatory body would set a high price for certain users while setting a lower price for those who would only be willing to pay less. Of course the software market is not a natural monopoly and should not be regulated by government in such a manner. But it does exhibit many characteristics of a natural monopoly which should guide a companies software licensing strategy.

The technical barrier to entry into the software market is not developing or delivering a product. Although it can be costly to develop new software adequate capital can be raised for an economically viable program and this is a roughly equivalent cost faced by all companies. The technical barrier in this new economic model is the cost incurred by the consumer of learning how to operate new software. The reason for purchasing a computer program is that it might provide you the consumer with greater productivity. Whether it allows you to create and manipulate graphics, develop multimedia presentations, manage a database of information or communicate via the Internet, the hope is that the software will provide a benefit at least as great as its cost. But computer programs require extensive effort on the consumer's behalf to learn how to operate, to discover their capabilities, to figure out how to apply them to your needs, and integrate them with your overall strategy or environment. Once discovered it still takes much time to develop speed and familiarity of operation. This represents a great investment of time and energy by the consumer which often outweighs the purchase cost by a significant margin. For example a professional or executive who spends several hours learning a program instead of doing productive work will have much more invested in a program than just the original purchase price. And it takes much more than just a few hours to learn a program such as Photoshop. "Every time I use Photoshop I learn something new" said Scott (last name unknown), a professional graphic artist.

The other common aspect of a natural monopoly is that the product or service is a commodity. In other words the goods or services are not very differentiated from one another and are highly substitutable. Software within any particular market segment will basically be substitutes as far as what can be achieved with a program. Word and WordPerfect will both allow you to type a letter, Pagemaker and XPress will both superbly lay out a page. The recent decision by the Supreme Court in Lotus v. Borland will continue to lead to software commodification. In Lotus the Court failed to overturn a decision that the menu command hierarchy of Lotus 1-2-3, a spreadsheet program, was an uncopyrightable "method of operation". Lotus 1-2-3 was the industry standard spreadsheet at the time Borland entered the market with their more sophisticated spreadsheet Quattro Pro. Realizing that the users of 1-2-3 who had spent much time and effort becoming proficient with its operation would be hesitant to purchase a new program that provided a similar function but was operated differently Borland provided a "Lotus Emulation Interface" with their software. This interface allowed Quattro users to operate the program via a menu command system that was extremely similar to that of Lotus 1-2-3. Thus consumers could communicate with Quattro "as if they were using a more sophisticated version of Lotus 1-2-3". This strategy was designed to minimize the cost incurred by those who had already invested effort in learning 1-2-3 thus allowing Quattro to enter a market dominated by another program. With the Courts decision the door is open for other companies to follow a similar strategy. Not only will new entrants into a market such as Borland be able to minimize the learning costs of using their software but established companies in a competitive segment will also have an advantage. These companies can provide an interface for their product which emulates their competitors. Users of competing software can then more easily integrate into an environment using competing products. Lotus v. Borland, 49 F.3d 807

Eventually each company will provide emulation for their competitors software, neutralizing the competitive advantage it offers. Over time though as users are able to directly compare the interface styles the more useful elements of each will become apparent. It can then be expected that designers will slowly merge the superior qualities of each interface into one industry standard. At this point software will survive based on superior technical features and name recognition.

This view of what may occur would seem to eliminate the technical barrier to entry presented by the consumer cost in learning a software's operation. However, several aspects of this prediction need to be addressed. First, Lotus was not expressly affirmed by the Supreme Court. A 4 to 4 decision with one abstention was the vote of record. This was a no decision by the Supreme Court which in effect let the Federal Court decision stand. It is then likely that similar cases might be brought and a somewhat different outcome may occur. The particularly ripe grounds for such a case is the language in Lotus which likens the menu commands to physical buttons which must be pushed to operate the program. Based upon this the Federal court found the menu to be an uncopyrightable method of operation. However the court noted that "While Lotus could probably have designed a user interface for which the command terms were mere labels, it did not do so here". Lotus v. Borland, 49 F.3d 817 This leaves a door open for design of copyrightable interfaces which are "mere labels", thus preserving the learning cost barrier to entry.

Second, in the short term the companies who provide the emulation first can achieve a competitive advantage until their competition also provides emulation. Third, new features will often require new command structures. Fourth, and most importantly for this analysis, the consumers' cost of learning will always exist in regard to the new user learning the software for the first time. Based upon this premise the key element in successfully marketing a program will be to have your software be the first that a consumer learns. In this way a product will generate superior name recognition and product loyalty in the consumer. Although it is likely that most software will continue to have some features or processes that are either unique due to patent (or sui generis) protection, unique proprietary knowledge or software design the general trend will be toward user interoperability.

IV. THE MARKET MODEL FOR TODAY'S PRODUCTIVITY SOFTWARE PRODUCERS

Full featured productivity software (programs which allow you to create something such as a graphic image, presentation, letter or spreadsheet) have settled at various equilibrium prices ranging from about $200 for word processors and spreadsheets to about $600 to $1000 for programs such as Adobe's Photoshop and Illustrator (a page layout program). However in each of these categories there is usually one primary program (such as Photoshop which has no real competition) or at the most two widely used programs such as Adobe Illustrator and its competition Macromedia Free Hand.

As discussed above the technical barrier to entry into these markets is not technology. Although each of these programs does operate by processes that may be protected by patent, copyright or trade secret there is no reason to believe that comparable or even superior capabilities could not be developed by a competitor. Especially given the level of knowledge which is known in the industry and the mobile nature of software engineering employment. Talented individuals often move from one company to another and there are always extremely talented individuals coming out of college who could be set about developing competing products. The barrier to entry is the installed base of your competitor and persuading consumers to learn your software, either now or in the future.

There are basically four scenarios that a software company might face: 1. Being first to enter a new market segment with a product. 2. Having significant market share but face strong competition. 3. Being a new entrant in a marketplace dominated by one or more existing companies. 4. Being the dominant player and providing the industry standard software.

In the first scenario a company is the first to market with a new technology. The best example of this is Netscape. With the development of the World Wide Web there was suddenly a demand for a functional program to utilize it. A college student who had invented an excellent "Web browser" program called Mosaic was quickly supported by venture capitalists and Netscape was born. Given the basic aspects of the market they faced (other Web browsers could be developed rather quickly by competitors and that they could be distributed at little or no cost as described above) Netscape chose a radical licensing strategy, for a mainstream major product. They basically adopted the shareware model of software distribution. The software is provided to users for free use over a 90 day test period. At the end of the 90 days a user is obligated to pay the $49.00 license fee for continued use.

The second scenario is well described by the illustration software market segment. This segment is dominated by Adobe Illustrator and Macromedia FreeHand, both cost about $600. "These two programs have been one upping each other for years...both have similar features."

The third scenario is represented by a number of programs ranging from Windows to Adobe Photoshop where there is basically one industry standard program. Further discussion of these four scenarios is generally provided in the subsequent sections.

The standard industry practice is to provide a single user license with the purchase of computer software. The consumer is licensed to "install the Software in a single location on a hard disk or other storage device of up to the number of computers indicated by this agreement" (Adobe Inc. End User License agreement) Microsoft puts it a little more succinctly "This License Agreement permits you to use one copy of the enclosed Microsoft software program on a single computer". (Microsoft License Agreement) Each company requires that the use of the software on more than one computer requires additional licenses for each computer. Since software is copyrighted the use of it on a computer for which you do not have a license is not only a breach of contract but constitutes an illegal copying which is a violation of federal copyright law.

Unauthorized copying and distribution of copyrighted software is commonly called "Software Piracy" a major problem in the software industry. Software piracy encompasses three types of activities. Commercial piracy where software is duplicated and sold illegally, use of software on more than the licensed number of computers within an institution is Corporate piracy and the copying of a friend's software or copying software at work for use at home which may be called Softlifting. Commercial and Corporate limitations on use of software is an efficient strategy. Enforcement against commercial pirates is quite necessary in order to preserve sales for the legal owner of the software. Commercial pirates also must subject themselves to some visibility in order to sell there product so there is a reasonable chance of discovering them. As well they may have assets which can be seized to compensate for lost sales of the legal owner. Corporate limitations on use should also remain as they are. However the restrictions on softlifting are in some cases not a profit maximizing strategy for the software producer. The case for this will be discussed in the next section.

V. SOFTWARE LICENSING STRATEGIES THAT EXPLOIT THE NATURAL MONOPOLY COST STRUCTURE

The preceding sections have laid a basic groundwork of the software economic model. A successful software licensing strategy should take into account the industry's similarity of cost structure to that of a natural monopoly and license accordingly. Based upon the contours of this model the following software licensing strategies should be adopted.

Software in the professional graphics category are those applications such as Adobe Photoshop, Macromedia Director, Quark XPress, etc. which currently are in the retail price range of $500-$1000. These programs follow the typical end user licensing strategy as described supra. However a superior strategy would be to license these applications for free home and non business use.

The cost of these software applications is far more than the average home consumer is willing to pay and it is between these home users that softlifting occurs. In the opinion of the Software Publishers Association and the Business Software Alliance each instance of unlicensed software copying robs the software owner of a sale. But it is not at all reasonable to believe that all home consumers would be willing to pay for each software application for which they have an unlicensed copy. Especially considering that it is likely that a very high percentage of softlifting occurs between youths or young adults without the financial means to afford a five hundred dollar software application. Thus the distribution of software between home consumer non business users does not represent a loss of market share or revenues for the 'damaged' software company because these softlifters are not willing to pay the full price of the software and would not otherwise purchase it. To the contrary it creates revenue and market share for the owner of the software. If a company wishes to create an industry standard and to maximize profits such distribution should not only be licensed but encouraged.

Because of their price ($500-$1000) the productivity programs mentioned in this paper are business buyers. Although some home users may be willing to purchase these programs for non business home use this paper assumes that these are but a small fraction of the sales in this product segment. Businesses however have the cash flow and profit potential as well as tax depreciation possibilities that make these products worth purchasing. There would then be a small loss in sales by allowing free home use but these will be more than offset by the increased sales to business users.

The case for free use by home users of high end productivity software is based upon the primary barrier to entry in the software market, the cost of learning how to operate the software that is incurred by the consumer. These high end productivity programs are complex and complicated to operate. It requires much time and practice to understand not only how to use each available function but how to use them together to turn out a useful product. Individuals at home, particularly children, will have the opportunity to use and "play" with the software thus learning how to operate it. Those who have the interest to learn the software will be predisposed towards use of the application. For example a person with interests in graphic design will be more likely to work with and learn graphic design programs. These individuals are the professional graphic designers of tomorrow. As they move into the commercial graphic design world they will take their skills and preference for the application they used at home to the job with them. They will then create more commercial demand for the application. But those taking their skills into the work force may not be dedicated graphic artists or other such professionals. Many users will be professionals with primarily other duties but with need to create presentations, graphics for web pages, etc. These users in their capacity as business professionals will take their skills and brand awareness with a particular application learned at home into the business market place and likewise create demand.

This case can be demonstrated by the experience of Gary McKinsey of Grimbleby Coleman, Certified Public Accountants, Inc. of Modesto, California. Previously when he was a sole proprietor and in the early days of personal computing the company needed to buy a word processor application, his administrative assistant told him that she knew how to operate Word Perfect. So this was the program which he had the company purchase. He made his decision based upon the foreseeable cost savings of not having to pay for his assistant to spend time slowly learning a new program (as well as the fact that she could help teach him how to run the program) and the recommendation by her that it was a quality product. By purchasing software his assistant was familiar with the boost in productivity offered by the software occurred quickly and with minimal learning cost.

It should not be inferred that the administrative assistant learned WordPerfect on an unauthorized home copy of the software but this example shows how software purchase decisions are made in today's business world. Companies usually look for the easiest cheapest solution when a need arises and computer applications are no different. When a manager or owner decides to get new software they will often ask the employees who will be using it what software they recommend. If the employees know how to operate a certain software product they will recommend it and a sale will be made. This exposure can be maximized by licensing an application for free home use. The more people who know how to operate an application, the more recommendations it will receive in the company offices and the more sales will be made.

Another strategy option which is being undertaken is the product differentiation between full featured professional grade applications and basic feature non professional versions of the application. The basic versions are licensed at a much lower price and are presumably aimed at the home market. An example of this strategy is PhotoDeluxe by Adobe which is priced at about fifty dollars however most of its distribution is accomplished through bundling as free software with scanners. Ostensibly this is a low cost version of Photoshop but it is not clear how its user skills or brand awareness will translate. PhotoDeluxe has an interface aimed at ease of use for its basic functions which seem to provide versions of the most commonly used Photoshop features. So users can get a feel for what they can do with graphics but not how the true Photoshop interface works. It may be somewhat difficult for a PhotoDeluxe user to obtain the same let alone enhanced results with Photo shop. The difference in the interfaces is not between professional and amateur users but between sophisticated and non sophisticated computer users. What is missing with this strategy is that the home market is segmented between those who want ultimate simplicity to produce graphical family letters and web sites and those who are interested in exploring the outer limits of graphic manipulation. It seems likely that it is this latter segment that represents most of the potential home consumers who might learn Photoshop and then take their skills and brand awareness into the business place.

The PhotoDeluxe strategy is compatible with free non business use of Photoshop. If the primary revenue aspect of PhotoDeluxe is the licensing fees paid by the scanner manufacturers then this market would be preserved for Adobe. Scanners could continue to be made more attractive by bundling PhotoDeluxe. PhotoDeluxe can also be sold at its current price with its ease of use and special features aimed at non sophisticated users stressed as the aspects which make it special and worth paying for. Meanwhile those interested in more advanced non business graphical work could acquire Photoshop for free. It is worth pointing out that PhotoDeluxe is not merely a watered down version of Photoshop with various functions disabled. It is an independent application aimed at a specific market segment as is apparent in the PhotoDeluxe brochure (see footnote 18).

A company that is first to develop software for a new market segment should distribute their product free for home/non-business use. When a company is first to market, especially if they are an unknown, they must not only gain general brand recognition but actually develop brand allegiance. This must be done quickly before other companies can develop competing products. Netscape realized this and made their Navigator web browser available over the Internet. This was a very good implementation of the strategy advocated by this paper. When the web was first becoming known to the public and hyped by the media Netscape through their product into the instant demand and fanfare of this new phenomenon. If they had charged several hundred dollars for the product then their establishment as the industry standard web browser would not have occurred. Few consumers would have purchased it and competition would have entered the market before they could capitalize on being the first web browser. However, they in fact did not offer their browser for free, the actual price is about $50 but the consumer can download it and pay later. This is basically the shareware model which is used by many companies. Shareware software companies encourage you to pass along their software for free but if you use it for more than a couple weeks you are obligated to register and pay for it. However, Netscape is now failing to take the next necessary step.

Once a company has established themselves as the industry standard with nearly all the market share they must strategically protect their position. Microsoft has entered the web browser market and they are offering their product actually for free. They are proceeding exactly as they should to try and overthrow an industry standard! Microsoft's inroads have been slow though because most everyone on the Web at this point has been using Navigator and realize that they can continue to download Navigator without paying. Yes, the hard reality is that Netscape seldom collects for all those downloaded Navigators. But the official price is still $49 and this is repeatedly mentioned in the press as being the principle difference between the two products. Consumers who are new to the Internet will likely be swayed by this and get Explorer instead of Navigator thus giving Microsoft an inroad into Netscape's market share. Given the reality that they seldom collect for the Navigator downloads Netscape should immediately begin offering the software for free and diffuse Microsoft's primary advantage at this point.

Netscape must maintain consumer preference for Navigator. Consumer use of Navigator for Web browsing itself is not the profit center for Netscape but instead a means to access into other markets. Most basically it gives them the product recognition that opens doors to providing corporate intranets (networks within corporations) and server software, which are not given away for free. This scenario also presents the recurring theme of this analysis. When the profit center for an application is primarily in the business realm it is most important to penetrate the market through free distribution to home users.

As mentioned above most of the professional grade productivity software market segments are dominated by one or two products. Segments with two competitors splitting the market are particularly ripe for embracing the licensing strategy proposed here. These products maintain a delicate equilibrium due to product loyalty and competitive technical developments in their programs. The products tend to be quite similar but with a few characteristic elements which appeal to different users. However as is often the case the program used by an individual is the first one they successfully learned and created with. Users tend to develop fierce brand loyalty with the software they understand best. If one of the companies were to begin licensing their software for home/non-business use their software would be acquired by individuals who would otherwise never pay for the software. As they 'played' with the program at home and created items of personal interest ranging from newsletters to web pages they would become familiar with the software and in many cases would develop a strong brand allegiance. Of those predisposed to learn and use a type of program for personal use a significant portion would also be inclined to at some point develop a commercial demand for the software. At this point a sale of the program which was distributed freely will be made. Thus that company can begin to increase their market share versus their competitor.

Market segments dominated by one company are subject to successful entry by a new product using a strategy of free distribution to home/non business users. Similar to the argument above, a new entrant can license their software for free home use while pricing the product competitively for business use. Again, users at home who would not otherwise acquire the software will learn to use it and it will gain product recognition. This in turn will lead to purchase of the program when a home user has commercial demand for the program.

VI. SUMMARY

The software industry can be analyzed as having the characteristics and traits of a natural monopoly. The cost of unit reproduction and distribution has gone to nearly zero. The significant remaining cost for each producer is the cost of product development. Thus the more units of software produced and sold leads to a decrease in the average cost of each unit. This decreasing average cost function gives rise to tendencies toward monopoly. Product differentiation can offset some of these tendencies but computer software in a given category will all typically be capable of similar output. The result is that one program is highly substitutable for another, the software becomes commodity like. However, one aspect of each program leads to differentiation, its ease of use. Consumer incur a great cost in time and effort learning how to operate a program. Once a program is learned the consumer will not wish to incur those costs again for another program which does basically the same thing. This cost incurred by the consumer becomes the driving force in the software market.

The ultimate profit maximizing strategy is price discrimination according to individual level of demand. If a company could sell its product to each purchaser for the maximum that consumer would pay (assuming the price is above cost) the maximum profit would be returned. But this is not at all practical as each consumer regardless of actual demand would attempt to pay the least price possible. However it is practical in some cases to create a few tiers of pricing if the consumers in each tier can be separated. With software such separation is for the most part possible through licensing.

By licensing software for free non business use two tiers can be created, non business users and business users. Although some would obtain the software under the guise of non business use and proceed to use it in their business it can be expected that the ratio of illegal business users will not significantly change from what it is today. Illegal use of software requires two factors access and lack of moral inhibition about using software illegally. Today most computer users have easy access to many different software applications, whether from copies licensed to a business where either they or their friends work or over the Internet. Though free home use will increase a users exposure to more copies of an application it only takes access to one copy to allow for an illegal copy to be made and most have that access today. Given this access it follows that those who lack moral inhibition against using illegal copies of software do so today too whatever extent they wish. Those who are willing to use illegal software in their business can do so easily today and will continue to do so in the future.

Business's will continue to have incentives to purchase licenses for the software. An immediate incentive is customer support. With programs growing in complexity companies find great value in having the support of the software company using the product. As is common today this support is only available to licensed users. Another incentive is enforcement and copyright penalties. Companies who use illegal copies of software are subject to greater expected losses. There are several reasons why businesses are more exposed to penalties than private individuals. Companies may have disgruntled employees who might 'whistle blow' and report the company's misuse. Companies are also more visible both as to their operation and their output which could lead to detection of illicit use. Perhaps most significantly companies have the financial resources that make enforcement against them financially worthwhile. By licensing free non business use of software the software industry would make de jure what is de facto today. The industry is the prime investigator and policer of software users and they focus mainly upon business users because the cost of detecting corporate misuse is much lower than that of the home user and the reward for finding an illegal corporate user is so much higher. Enforcement would be focused on much more of a peer to peer basis, business to business.

A software company who sells their software above the range of most consumers (i.e. @ $500 and more) should license their products for free non-business use and distribution if they wish to gain market share. Again, the actual market for these products is business not the home consumer. Business consumers can derive profit from the purchase of the program which provides the incentive to buy at the higher price. They can also decrease the cost of the software via tax deductions. It is these elements which establish business as the true consumers of the product at today's prices.

If one company undertakes this strategy it can be expected that their competitors might follow suit thus eliminating the competitive advantage. However the first company to do so will make the greatest inroads as consumer interest is likely to be highest when the first of a given class of software is made available. As many individuals obtain it and begin to learn it they will not be so interested in the next company to follow the strategy. Particularly poignant for the first with this strategy is that those predisposed to use a given type of software will be the most enthusiastic to get their free copy. These are the individuals who are most likely to develop commercial demand for the product because they will choose a career path in the field for which the software is used. Thus a short term competitive advantage will turn into increased market share in the future.

The other benefit to the environment of all companies adopting the free home use strategy is that it will grow the overall market demand. Users who understand not only how to operate a program but how to use its output will develop new uses for that output in the commercial world. These new uses will create greater demand for the overall market segment which should benefit all participants.

Returning to the realm of illegal software use their are two items to be put into the analysis. First, currently 'softlifting ' is common in the computer world. In large part because it is so difficult to detect and prevent. The economic argument against fighting softlifting is simple and is implicit in the above outlined theory. While the cost of preventing softlifting which primarily occurs between non business users is exceedingly high their is no benefit reaped by the company that does prevent it. Since most of these users would not have purchased the product because of the price, little revenue is preserved by preventing it. And as the theory of this paper points out they are likely diminishing their market share in the long run.

VII. CONCLUSION

The short history of the High Technology industry has shown that innovative and often radical business strategies are crucial to success. A broad observation of the software business environment presents possibilities for yet more innovative licensing strategies for companies to pursue. A specific analysis reveals that the elimination of illegal home use of productivity software is not economically reasonable. In fact if this use were to be embraced the potential for increased profits exists. This would represent a radical departure for some companies who currently license their products based upon traditional business model strategies. But those who do not adapt their routes to the topography of this new frontier may find others getting to their destination first.

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Copyright © Jay McKinsey 1997