Microsoft Cops

By the time the driver of the Ford Transit van realized he was being followed, it was too late. Three unmarked police cars were on his tail, speeding through the business district of Katowice, Poland. Cmdr. Michal Terlega and his team of a dozen cops were closing in. Suddenly a 4x4 carrying a man and woman accelerated toward one of the police cars, trying to force it into the path of an oncoming bus. In a frenzy of squealing tires and shouted expletives, Terlega's team blocked both the van and the four-wheel-drive. The three suspects were ordered out of their vehicles and arrested. "Thank God, there was no shooting," Terlega said later.

Just another wild chase in the gangland jungles of Eastern Europe? Hardly. The van was transporting the mob's favorite new target of opportunity: 1,250 shiny boxes of Polish-language Windows 98 software, labeled microsoft but allegedly made by pirates. Even more intriguing, Microsoft was in on the bust last summer--before the police were. In a campaign that has gone virtually unnoticed, Microsoft is building an unrivaled force of in-house police and prosecutorial muscle to combat a global pirate trade increasingly dominated by organized crime. Approved at the highest levels inside Microsoft, this deployment has boosted the size of its anti-piracy team from a couple of people in 1988 to about 250 today. About half are in marketing and communications, trying to win "mindshare" by convincing people and governments from Chicago to Beijing that stealing software is a real crime. The other half are in the Anti-Piracy Group, recruited mainly in the past two years from the FBI, the U.S. Drug Enforcement Administration (DEA), the U.S. Justice Department and other law-enforcement agencies around the world. "In some ways, we have a worldwide police force and a worldwide U.S. Attorney's Office," says a top Microsoft anti-piracy lawyer in Europe. This corporate battalion is engaged in a widening global war, in effect pitting Microsoft versus mafias and gangsters from Poland to Hong Kong.

Bill Gates saw it coming to this early on. The man who predicted the day when there would be a computer in every home and office also foresaw that software piracy would be a major menace to an industry built on ideas, easily copied to disks. In 1976, he was the 20-year-old head of a one-year-old software company when he banged out an "open letter to hobbyists." "Most of you steal your software," he fumed. He heaped scorn on the attitude that "hardware must be paid for, but software is something to share," and concluded with a plaintive appeal to "anyone who wants to pay up." "That letter really is the origin of the software industry's anti-piracy effort," says Microsoft deputy general counsel Brad Smith, who heads the Anti-Piracy Group. "What we have today is the natural evolution of that effort."

The letter to hobbyists is now a quaint opening chapter in software-piracy lore. Twenty-five years later, Bill Gates is the world's richest man and Microsoft is a $23 billion-a-year giant. Its software runs the operating systems in 91 percent of the world's desktop computers, yet pirates--not IBM or Oracle or Apple--are still its biggest competitors. Microsoft won't say how much money it loses to piracy. But with an 11 percent market share, it is the largest player in the packaged-software industry, which sells $175 billion globally each year. The industry loses by conservative estimates 36 percent of its business to pirates. Microsoft loses more than most, perhaps much more. It is easily the favorite target for pirates, precisely because Gates has been so successful in selling his programs.

Gates soon saw that enforcement would be tougher as his company expanded abroad. In 1988, Microsoft rallied American companies to band together in the Business Software Alliance, and hired former prosecutor Robert Krueger as its chief enforcer. "Back then, everywhere abroad was the Wild West," says Krueger. "We used to joke about one-disk countries: once you sold one disk, there goes the market [to pirate copies]."

Today, the BSA operates enforcement arms in 65 countries, and serves in a way as the industry front for Microsoft. Gate's company provides the greatest share of funding, and many of its agents overseas do double duty for the BSA. "I don't know of any company that has numbers near what Microsoft has," says Tim Trainer, president of the International AntiCounterfeiting Coalition, which represents industries as diverse as music, soap and software. "Microsoft, God bless 'em, simply has more muscle to go after these guys," says Sandy Boulton, director of piracy prevention for Autodesk and a founding leader of BSA. "They're doing the work for the rest of us."

Its increasingly dirty work. Pat Mueller, a former DEA agent who is now a Microsoft investigator in Los Angeles, says the pirate trade is developing the way the drug trade did. "We're now seeing production of pirated products in Latin America, then transportation by land through Mexico and into the southwest United States," says Mueller. A year and half ago he and a partner where staking out a Denny's restaurant in L.A, when two cars pulled into the parking lot and popped their trunks. The drivers started moving pirated software from one car to the other, a scene that reminded him of drug dealers in Detroit, circa 1985.

The turning point for Microsoft came a week before Christmas 1998. At company headquarters in Redmond, Washington, Brad Smith told a meeting of senior executives that worldwide seizures of counterfeit Microsoft products were up sixfold in less than a year, to $600 million in the previous six months. An old hand at the anti-piracy game, Smith warned that the "strong upsurge" in counterfeiting suggested "an increasingly sophisticated organized criminal enterprise operating on a global basis, which was targeting our products."

Microsoft had to fight back. Smith proposed among other things to "expand our anti-counterfeiting team to add new personnel with sophisticated international investigative and forensic expertise." The new strategy was approved by the executive team, headed by Steve Ballmer, who is now Microsoft's chief executive. As a result, says Smith, "we have more than tripled the number of investigators and lawyers we have devoted to addressing the counterfeiting problem."

Superpower though it may be, Microsoft has to tread carefully when its enforcement agents operate on sovereign soil. As a rule, Microsoft's anti-piracy teams provide logistical, investigative and legal support--but are not shoving battering rams through doors or hauling counterfeiters out of their plants. However, they are at times present during raids and at risk of exposure. When a renowned Bulgarian software pirate was slain gangland style in Sofia in January, a number of Microsoft people who before had been talking openly to NEWSWEEK suddenly asked that they not be quoted by name. "We are hearing about a lot of death threats against those fighting piracy, particularly in Eastern Europe," says Trainer. "That's why these companies take efforts to conceal the identity of their people in the field."

Microsoft's toughest battleground is in Eastern Europe, where pirates control 70 percent of the market, more than in any other region of the world. From Bucharest to Kiev to Moscow, piracy has roots in the old Soviet policy of keeping pace with Western computer technology by copying it. Now, software piracy is just one more black market. Marek Cerniak, a tanklike Polish cop-turned-private eye who does investigations for Microsoft, says pirates and mobsters are made for each other: "Software pirates have the brains. Organized crime has the muscle."

And the know-how to produce in bulk, underground or in cyberspace. Two years ago Microsoft secretly deployed a new search engine that patrols the Internet round the clock, searching for key words and other clues to pirated software. In public announcements since then, including one due out this week, Microsoft claims this search engine has dug up evidence leading to action against counterfeiters in 22 countries, including raids and busts of alleged pirate enterprises from Argentina to Thailand and legal "takedown" notices sent to 88,000 Web and auction sites over the past two years. In response, rich gangsters are investing even more to raise the quality of their counterfeits. One recently approached Megaus, a legitimate Warsaw CD plant, offering one executive a small fortune to replicate a complex Microsoft hologram on a "stamper," a nickel disk that is used to manufacture software CDs. "A man said to me, 'I'll give you $100,000'," the executive recalled. "I said, 'No way'."

In some cases, police in Eastern Europe are eager for help. NEWSWEEK accompanied Romanian police in February when they raided the headquarters of Racar, a bus manufacturer. Local BSA representatives had to lend the underequipped police detectives a couple of cars. The police got lost en route to Racar, but once there, they were sufficiently intimidating to turn the Racar IT manager, Toma Dumitrescu, into a chain-smoking nervous wreck. The police found two large offices filled with desktop PCs loaded with allegedly unlicensed Microsoft software. Despite his obvious discomfort, the courtly Dumitrescu had the presence of mind to deny any wrongdoing--and kiss the hand of a young female BSA lawyer who accompanied the police.

The role that Microsoft played in the Katowice bust is representative of how its agents operate worldwide. Last July a Polish customs official telephoned Microsoft's Warsaw office to report a suspicious shipment. A Microsoft product-identification specialist went to Warsaw's international airport and established that the software was counterfeit. Customs officials set up a "sting" operation, arranging for the delivery to be made under the eyes of Microsoft agents and police. Enter Cerniak, Microsoft private eye, who alerted his contacts at the Katowice police, including Commander Terlega.

The attraction for crooks is pretty basic: piracy profits are huge. Police accuse the Katowice ring of buying high-quality Microsoft ripoffs from Hong Kong for $1.80 a box, to be sold at local retail stores for more than $100. "These three young people got suddenly very rich," Terlega said. The risks are also low: a NEWSWEEK survey of Poland, Russia and Ukraine found that only one convicted software pirate got more than a fine or a suspended sentence last year, and that was a repeat offender in Poland who got a year in prison.

Why would Polish customs call in Microsoft agents on a local case? The answer says a lot about the mechanics of trade and power. For decades Bill Gates and his software partners have been telling governments, the European Union and the World Trade Organization that protecting intellectual-property rights is critical to the future of the "information economy." That argument is winning. The WTO and the EU are demanding tougher action against pirates as a condition of membership, which is why Russia is considering anti-piracy laws, and the Czech Republic, Hungary and Poland have all joined the battle. Microsoft is working hard to brand slackers as, in effect, pirate states. "How can you be credible in the digital economy if you can't comply with copyright laws?" asks Jean-Philippe Courtois, Microsoft president for Europe, the Middle East and Africa.

Yet Microsoft's moral appeals carry limited weight with customers in the rough-edged economies of Eastern Europe. The software giant doesn't get much sympathy in a nation like Romania, where the ticket price of its programs is more than the monthly wage of $100. "It's very difficult to win a war when the population supports your enemy," says Lev Simkin, an attorney in the Moscow office of Latham & Watkins, Microsoft's local counsel in Russia.

Then there's what a Microsoft executive calls the "big, bad Microsoft defense." In this view, the company supposedly looked the other way while pirates made Microsoft the standard operating system, and now it is demanding that customers pay up to use it. Igor Sosnovsky, a Latham & Watkins paralegal, says many Russians tell him that "if you want an IT-literate society, then you've got to cut your prices or you're going to have to let them steal it." No way, says Peter Davies, who in 1990 became Microsoft's first lawyer based outside the United States (and who now works for Apple in Paris). He dismisses the popular argument that "Information wants to be free" as a "distraction from the sheer criminality of stealing something that somebody else has made."

Piracy rates are high but falling worldwide, because software companies, governments and multinational organizations are relentlessly attacking the pirates (chart). They are also falling for cultural reasons: as the digital economy takes root, the sort of piracy that once seemed harmless begins to lose, however slowly, its public acceptance. Today 39 percent of the software sold in France is counterfeit, down by half since 1990, when Davies can remember walking into the back office of a French bank, where software was stacked for copying next to a computer labeled bruno le pirate.

But that's the end of the good news. Piracy rates may be edging downward, but the losses incurred by software makers are rising. Worldwide, police seizures of counterfeit Microsoft software rose from $200 million in 1998 to $1.7 billion last year. The involvement of organized crime makes matter even worse. As Bill Gates's vision of a PC on every desk is realized in more and more countries, the demand for software, legal and illegal, will continue to soar.

Piracy isn't just for hobbyists anymore, and the pirates will continue to frustrate Microsoft. One evening two autumns ago, Microsoft took over the National Theater in Bucharest to launch Office 2000 Professional, which went on sale that day in Romanian stores for $300 to $400. As the crowd of decked-out Romanians watched a big-screen video sales pitch by Gates, hawkers on the street in front of the theater were already selling counterfeits of Office 2000 for $2 to $3. The pirates drove Gates crazy in 1976, and they still do.

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