Netflix has come to Romania and the discussion about piracy has reopened. Do Romanians still download movies from torrents? Or do they pay a few euros to access it legally? The general trend of opinion leans towards the first option. We'll see.
But when we talk about pirated software, we're talking about an essential tool for businesses. An expensive, necessary and pirateable tool, be it an OS, CRM, ERP, etc. How much do you earn if you copy it from somewhere? I did a detailed calculation to find out the exact amount. Warning, this is a long article and we know that there are two types of people in the world: those without ADHD and those who... hey, look at Frankenstein!
We appreciate all readers equally, so if you don't have the patience, find the conclusion of the analysis at the end of the article. For those in the first category it begins…
calculation
We will use the virtual currency Kodcoin and a license that costs 100 Kodcoin with full payment, to simplify the calculations. And we begin to list chronologically all the costs associated with using a software, as follows:
- Initial costs.
- Purchase price. From the 100 Kodcoin we subtract the deductible costs, i.e. 16% profit tax, and we are left with 84 Kodcoin. From the amount identified as net profit, we subtract 16% dividend distribution costs and we are left with 70.56 Kodcoin. So we have an acquisition cost zero in the case of piracy (we assume we no longer buy CDs from the University) and the cost of licensing reaches 70.56 Kodcoin.
- IMPLEMENTATION OF, which includes:
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- Analysis, project management and consulting. Usually they are outsourced to partners, vendors, manufacturers. They are specialists in the respective product. Based on the experience and best practices used, they fantastically reduce the implementation time and associated risks. The more complex the solution, the higher the associated risks. Thus, the savings due to the use of external partners increase and are greater. The average gross margin in the industry for such a process is 20%, so we can assume a savings (a negative cost) greater than 20%, let's say, at least 30%. In addition, a specialized partner reduces the cost of unnecessary acquisitions by ~35% for complex solutions and by approximately 10% for simple ones (choice of OS type/version, basic productivity applications). In conclusion, we have an implementation cost of 20% (20 Kodcoin that we no longer pay separately), savings of 30% due to best practices delivered by the partner, and savings of ~15% from reducing unnecessary purchases. A total savings of 25 Kodcoin. The cost of licensing comes to 45.56 Kodcoin.
- Actual implementation. Using the same argument, we have a 10% price reduction (the difference between 30% savings by outsourcing to a partner and 20% cost). Example: using a standard OS image from a vendor/partner according to the organization's needs for a fleet of PCs, instead of installing the system individually on each PC. The cost of licensing reaches 35.56 Kodcoin.
- Operational costs:
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- Support. From the perspective of software manufacturers, the average cost of providing support is higher than development costs, and their amount is 30 percentage points. Without access to support for non-recurring incidents and the easy delivery of updates, companies that pirate lose access to the official support channel, provided through partners, distributors or directly by the manufacturer. When the company turns to licensing and support, half of the manufacturer's costs translate into savings for the end customer of the product, so we have another 15 percentage points gained, that is, 15 Kodcoin. The cost of licensing reaches 20.56 Kodcoin.
- Coperational opportunities. These arise directly from the lack of direct access to the support channel and can have a very minor to extremely serious impact on the company's activity, depending on when they occur.
Hold on, there's another calculation to come.
Source
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- Example: A marketing and advertising agency participates in a three-way pitch for a €100,000 contract. The theoretical chance of winning the account is 30%, i.e. €30,000 and a gross margin of 20%, resulting in a theoretical profit of €6,000. But the sales process can be directly impacted by a cause of piracy. Such as when the salesperson cannot use the operating system during the pitch because the manufacturer has blocked the logon process in case of non-activation of the copy. The pitch can therefore be lost due to the non-investment of €150 for licensing the operating system. This is just one example, but in everyday activity a lot of such events can occur.
- Another calculation variant is based on average hourly rate of productive personnel. If piracy reduces the availability of the IT system by 5 percentage points due to lack of support (estimating conservatively), we can calculate a cost of 100 hours per year (on average, an employee works 2000 hours per year). If his hourly rate is 20 euros, the cost of unavailability is 2000 euros. We estimate, extremely conservatively, a potential cost of 15% percentage points for all opportunity costs. The cost of licensing reaches 5.56 Kodcoin.
- Training costs initial or ongoing. Most manufacturers provide, as part of their licenses or licensing programs, subsidized courses, seminars or training packages. If we estimate their value at just 5 percentage points, we again reduce the theoretical cost of licensing, without taking into account the productivity benefits, which can be much higher. The cost of licensing reaches 0.56 Kodcoin.
Conclusion:
The cost difference between licensing and piracy is almost zero.
The calculation shows that licensing brings with it some advantages that pirated software does not have. If you use purchased software you can get analysis, project management, implementation, partner experience, time saved, support, training, etc. Bought separately, all of these cost a lot of money. Then, licensing offers security in use, which protects users from potential business losses (calculated above).
Financially, there is no reason to practice piracy, except for a rigorous and automated process that brings economies of scale. This type of process is specific to large companies, in which case the potential costs are very inelastic, such as the risk of a civil or criminal fine. Although it is a small risk, when it occurs it causes a much higher cost than perpetual licensing. It is inefficient to put the future of an organization at risk for very small percentage amounts, compared to the total costs.
To clarify once again: we are not talking about ethics or legality, but only about the costs of choosing between licensing and piracy. And it is no wonder that the largest organizations in the world choose licensing: their costs are thus lower than the alternative. Even if we are talking about programs open source, most corporations choose paid programs for consulting, training, and support which obviously lead to a higher ROI.
It seems surprising to arrive at a cost of piracy equal to that of licensing. But the explanation is ultimately simple: the market and competition work. The price demanded by producers is the one accepted by the market and is based on real costs and average margins. Piracy is not cheaper than licensing, but it can be more expensive.
