Let the Pirates Patch? An Economic Analysis of Network Software Security Patch Restrictions

Piracy has long been an important concern for the software industry. The relative ease of reproducing and distributing software, as with any digital good, combined with the high value that many software products command makes software a prime target for piracy and unlicensed use. Today, an estimated every third copy of Microsoft’s widely used Windows operating system is unlicensed (Fried 2005), and the ratio of pirated software reaches up to 90% of total usage in certain countries (BSA-IDC 2005). The estimated total cost of software piracy and counterfeiting in the U.S. alone is about $7 Billion per year, and the annual global cost of piracy exceeds $30 Billion (Rooney 2005). Further, in the contemporary global technology environment characterized by broad Internet connectivity and frequent threats on network security, the impact of software piracy on vendors is not simply limited to lost revenues from unrealized sales. Rather, unprecedented new issues and challenges such as security interdependence among interconnected systems and the related incentive problems in a network environment arise and pose new complications brought about by software piracy.