Why Pursue Non-Customers?

One main reason a person seeks intellectual property rights is to forbid others to sell an idea one has secured as his own "property." "I can make more money if no one can compete with me."

In Hong Kong, outside the Rolex store across the street from the Marco Polo Hong Kong Hotel, street vendors sell fake Rolex watches. How can this be? Well, no customer for a real Rolex watch is a customer for a fake Rolex watch. They are two completely different people. Rolex loses nothing when someone buys a fake. Indeed, Rolex gains because there is more free advertising when one wears a fake Rolex.

When Microsoft complains Chinese software pirates cost the company and others $3.9 billion dollars per year because their software goes for as little as $2 in China, the claim is absurd. People earning $30 a month in China will never pay $400 for a copy of Microsoft office. so to say Microsoft loses sales to pirates is just silly.

On the other hand, poor people pirating software do not sell for less than their costs. Therefore, there are people in China making money selling Microsoft software. The fact that these poor people can make money at $2 a copy, and Microsoft cannot, is a compliment to the ingenuity of the poor, and a cautionary tale about the obtuseness of the Microsoft organization.

Certainly the software pirate has none of the sunk costs of software development, but Microsoft is stuck with X sunk costs, so they are at the same place as pirates in China, in China.

There is a way to make money in a pirate-rich environment. Microsoft presently orders a Chinese factory to make (say) a million copies of Office for Microsoft to sell in China. Then Microsoft gets busy tracking down pirates in China at USA taxpayers expense. (Which, as an aside, is really the only reason companies pursue pirates. Take away the subsidies, and the "injured" company loses any interest.) With only a million copies on the market, and those at a high price, the pirates then get busy making money too, out of their factories. The authorized factory could care less about any piracy going on. They have their Microsoft contract, they have made their money. "Pirate on, dude," as they say in China.

A better way is for Microsoft to order a Chinese factory to make (say) a million copies of Office for Microsoft to sell in China. This is all Microsoft will sell. Further, Microsoft agrees that the factory can make as many more copies as it likes to sell to whomever the factory wants at whatever price. The only stipulation is Microsoft gets say 10% of the revenue of all those sales.

The result is Microsoft sells its million copies, just as Rolex sells real Rolexes. Next the Chinese sell even more copies, off which Microsoft makes money it otherwise would never have seen. Also, Microsoft benefits from the initiative and creativity in marketing that the Chinese now have an incentive to demonstrate in selling Microsoft Office, an intiative and creativity the Chinese otherwise would not manifest. Further, there is zero piracy going on in China under this scheme, since the authorized factory has a very big incentive to suppress any piracy, using Chinese methods to do so. Whatever those may be.

Another version of this is say Tommy Hilfiger orders 10,000 jackets from a factory. The factory makes 12,000 to yield 10,000 perfect jackets for Hilfiger. The 2000 defective jackets go out onto the back alleys to be sold at discount.

Result? The cost of those defective jackets do not have to be amortized on the 10,000 good jackets, giving Hilfiger a better price. Those customers buying defective Hilfiger were never Hilfiger customers anyway, they are customers for only defective Hilfiger, and Hilfiger does not sell defective goods. They are non-customers of Hilfiger.

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