Software Piracy: Estimation of Lost Sales and the Impact on Software Diffusion

Abstract

Software piracy by users has been identified as the worst problem facing the software industry today. Software piracy permits the shadow diffusion of a software parallel to its legal diffusion in the marketplace, increasing its user base over time. Because of this software shadow diffusion, a software firm loses potential profits, access to a significant proportion of the software user base, opportunities for cross-selling, and marketing its other products and new generations of the software. However, shadow diffusion may influence the legal diffusion of the software. Software pirates may influence potential software users to adopt the software, and some of these adopters may become buyers. A diffusion modeling approach is suggested to track shadow diffusion and the legal diffusion of a software over time. The approach enables management to estimate (1) the pirated adoptions over time and (2) the percentage of legal adoptions due to the influence of pirates. The modeling approach is applied to study the diffusion of two types of software (spreadsheets and word processors) in the United Kingdom. The results suggest that although six of every seven software users utilized pirated copies, these pirates were responsible for generating more than 80% of new software buyers, thereby significantly influencing the legal diffusion of the software. The implications of these results are discussed.