Playfair Analysis

Play Fair Day Analysis
Analysis of competitive disadvantage experienced by licensed manufacturers
in emerging markets with rampant piracy

Jeff Marowits, Principal: jmarowits@keystonestrategy.com

Irshad Allana, Analyst: iallana@keystonestrategy.com

Joseph Quan, Analyst: jquan@keystonestrategy.com

1

About the Keystone Strategy study

To date, piracy research has primarily investigated licensing enforcement drivers, as
well as the rates and impact of rampant piracy in emerging nations (like the BRIC
countries) - specifically as piracy harms firms in developed markets such as the United
States.

Microsoft commissioned Keystone Strategy to study enterprise piracy in a new way –
by focusing on companies within emerging markets taking steps to play by the rules
and reduce piracy.

----

Today, we release the results of Keystone’s first-of-its-kind study, in which we tackle the
following critical issues regarding the future of piracy reduction and growth of innovation in
emerging economies:

1. The perceptions and attitudes (distinct from enforcement) of emerging market companies
taking positive steps to reduce piracy and play by the rules.

2. The financial impact of competitive disadvantage that firms playing by the rules face when
their competitors engage in piracy.

2

Central elements of Keystone’s analysis

Study scope

• For this global study, Keystone looked at software piracy in the manufacturing sector
for 17 different countries in the Asia Pacific, Latin American, and Central and Eastern
European regions.

Understanding perspectives and attitudes

• We reviewed third party research and conducted interviews with companies playing by
the rules, and drilled down on one major company in each of the emerging market
regions to see how firms were utilizing information technology, and how piracy was
affecting them.

Determining impact on companies that play by the rules

• We analyzed data from the Bureau of Labor Statistics, the Business Software
Alliance, the CIA World Factbook, government statistical reports, Microsoft
research, UNIDO, software resellers, and the World Bank to assess the impact of
piracy at the macroeconomic level.

4

Our study focuses on manufacturing firms because they are the drivers of rapid
economic growth in emerging markets

In China, the world’s fastest growing economy, manufacturing accounts for
almost 40 percent of GDP.

60% Manufacturing as percent of economy

50%

40%

30%

20%

10%

0%

Source: Local government websites, CIA World Factbook

5

Through extensive interviews with manufacturers, we were able to map the IT software
deployments of a typical emerging market manufacturer

PC Operating System (Windows 7/XP)
System
Security (McAfee Business)

Content Word/Data Processor (Office)

Data
Database Server (SQL)
Management

Collaboration Server (SharePoint)
Collaboration
Messaging Server (Exchange)

Manufacturing/ General Engineering Design (AutoCAD)
Design Manufacturing Process Design (PTC Pro-Engineer)

ERP- Project/Order Management (Project Pro)
Operations Supply Chain Management (Infor SCM)
Customer Relationship Management (SAP)

6

Perceptions and attitudes of emerging market
manufacturers playing by the rules

7

Key findings from extensive research and interviews with manufacturers in emerging
markets

We studied the perceptions and attitudes of firms that play by the rules to understand the
competitive landscape and their motivations (distinct from enforcement) with respect to IP

We arrived at four primary insights:

1 Protection of intellectual property is necessary for the growth of innovation

IT is a point of competitive advantage and differentiation – these firms are industry
2 leaders in large part because of their use of technology

3 Firms are well-licensed because it’s the ethical decision; pirating software contradicts
their corporate commitment to integrity and honesty

4 Licensed IT in particular has many technical benefits – it gives them the assurance of
partnership with software firms which keeps their operations running at optimal levels

8

Leading international manufacturers that play fair in emerging markets provide a
deeper understanding of perceptions and attitudes regarding intellectual property

China India Colombia Russia
Key
Information

Company:

Appliance and Apparel
Industry Glass containers Steelmaking
tools manufacturing

Revenue $278 Million $275 Million $300 Million $13.6 Billion

Employees 3,100 4,500 3,000 84,000

Source Hoovers, OneSource, company annual reports, comments by HNG and Severstal results of direct interviews by Keystone, Crystal SA (Fabrica) and Great Star data result of third-party research.

9

Value of IPR: Intellectual property protection is necessary for innovation growth in
emerging markets

“I see much improvement in piracy in Russia in recent years and I expect it will lead
to more innovation and more software development since both of them are
connected.”
Evgeny Charkin, Chief Information Office at Severstal

“The international community has attached even greater importance to IPR and
innovation. China should never be lax in its IPR protection efforts as it moves towards
a high-tech industry and other knowledge-based industries.”
Dr. Zhipei Jiang, former Chief Justice of the Supreme Peoples’ Court IPR Tribunal

“IPR [intellectual property rights] violations not only hurt businesses in Russia, but
cost the Russian government billions of rubles in uncollected revenues from
counterfeit products evading taxes and duties… IPR violations are barriers to new
investment and impede Russia’s effort to join the WTO.”
Peter Necarsulmer, President of Coalition for Intellectual Property Rights

Source BRIC manufacturer interviews, IT case studies, comments by HNG and Severstal from interviews by Keystone, Crystal SA (Fabrica) and Great Star from third-party research.

10

Value of IT: IT is a point of competitive advantage and differentiation – these firms are
industry leaders in large part because of their use of technology

“Software is critical to our business. Our board believes that it is a key differentiator
of our business and a source of competitive advantage.”

“IT has increased the efficiency of the whole operation, not just the production
process. Things are much clearer when we have access to the information at the right
place at the right time.

In terms of information technology, everything in the business gets faster; all the
production processes and supervisory controls are integrated and automated. And
since glass manufacturing is a continuous process, it is important that the
information is quickly available.”
Bharat Somany, Director at Hindusthan National Glass & Industries Ltd


11

Ethical reasons behind licensed IT: Pirating software contradicts the corporate
commitment of licensed manufacturers to integrity and honesty

“When a company uses information technology illegally in its manufacturing
process, there is without doubt an act of unfair competition, because some costs are
avoided affecting the price of the final product. It is like avoiding payment of social
benefits, evading taxes or not complying with the minimum environmental rules.”
Jose Manuel Gutierrez, Manager of IT at Fabrica (Crystal SA)

“We are a business with a very good reputation and strong ethics - we want to
maintain that reputation. We do not steal.”

“Transparency is something that starts vanishing pretty quickly when you [pirate
software]. Not only do you hide from others, but you end up having things in your
own company that are hidden from you… there is no accountability when you go in
for pirated software.”


12

Technical benefits of legal IT: Licensed IT gives companies the assurance of security
and frequent updates, which keep their operations running at optimal levels

“The way I see it, if you don’t actually buy the software, you have a black box – you
can’t get any support on it and you cannot really build it up to be a solution which you
would benefit from… No software is perfect and does need multiple iterations…That
doesn’t work unless you paid for it and have a proper license for it that gets you instant
access to updates.”

“This [incorporating IT] has been very essential to the improvement of our business
processes.”

“We will establish a long-term partnership with Microsoft to set up an effective
software asset management mechanism. This mechanism will help make our software
license management more dynamic, optimize the allocation of our software assets and
provide better service to the company.”
Great Star Industrial


13

Measuring the Impact

14

Keystone’s study calculates impact and key statistics that influence competitive
disadvantage

Methodology
Step 3: Estimate the
Step 1: Estimate the Step 2: Calculate the Step 4: Assess
number of disadvantage-
total number of portion of licensed competitive
bearing PCs in well-
licensed PCs in PCs that belong to disadvantage at a
licensed manufacturing
manufacturing firms well-licensed firms national level
firms

•
5 Estimate extent of
•1 Determine total number of •
3 Segment “well-licensed” compliance of well- •
7 Calculate annual software
PCs in manufacturing firms as those with licensed firms spend for disadvantage-
above-average bearing PCs
compliance 6 Determine number of
2 Estimate number of licensed PCs at well- •
8 Determine lost ROI
Determine number
licensed PCs in 4 licensed firms suffered by licensed
of licensed PCs in
manufacturing firms compared to those manufacturers
well-licensed firms
pirated at “poorly
licensed” firms

15

Step 1: Estimate the total number of licensed PCs in manufacturing firms

Sources Methodology Example

Total manufacturing
Total manufacturing employees 99M Manufacturing employees
employees from government
statistical reports * *
PC to Employee ratio from PC to Employee ratio 0.17 Ratio
Keystone analysis using
survey data

Number of PCs in 16.6M PCs
manufacturing in manufacturing

Enterprise compliance rate * *
estimated through Keystone Enterprise compliance rate 31% compliance
analysis of BSA piracy data
= =
Total number of licensed PCs in 5.2M licensed PCs
manufacturing

Sources: BRIC government statistical reports, BSA Global Software Piracy Study, Keystone Strategy analysis

16

Step 2: Calculate the portion of licensed PCs that belong to well-licensed
manufacturing firms


Well-licensed firms
characterized as those with a
compliance rate higher than the
national average Total number of licensed PCs in 5.2M licensed PCs in
manufacturing manufacturing

* *

Percent of licensed PCs in well- 79% of licensed PCs in well-
Percent of licensed PCs in licensed firms licensed firms
well-licensed firms estimated
from normal distribution = =
adjusted with observations from
internal Microsoft studies Number of licensed PCs in well- 4.1M licensed PCs in well-
licensed firms licensed firms
*Note: Licensed PCs are
distributed among well- and
poorly licensed firms; even poorly
licensed firms license some PCs,
though in smaller quantities
Sources: Microsoft internal data on customer piracy rates, BSA statistics, Keystone Strategy analysis

17

Step 3: Determine the number of disadvantage-bearing PCs in well-licensed
manufacturing firms


* Note: only licensed PCs in
well-licensed firms above the Number of licensed PCs in 4.1M licensed PCs in well-
compliance rate of average poorly well-licensed firms licensed firms
licensed firms contributes to the
disadvantage * *

Extent of compliance above (Percent compliance of well- (54% compliance of well-
average poorly licensed firms is licensed firms licensed firms
obtained by calculating the
– –
difference between the average
well-licensed and poorly licensed Percent of compliance of 12% compliance of poorly
firms’ compliance rate poorly licensed firms) licensed firms)
Average compliance of well- =
=
and poorly licensed firms
1.7M disadvantage-bearing
estimated from internal data for Number of disadvantage- PCs at well-licensed firms
emerging market countries bearing PCs at well-licensed
firms

Sources: Microsoft and Keystone Strategy internal data, BSA Global Software Piracy Study, Keystone Strategy analysis

18

Step 4: Assess competitive disadvantage created on a national level

Number of disadvantage-bearing 1.7M disadvantage-bearing PCs at
PCs at well-licensed firms well-licensed firms
Software costs from * *
Keystone analysis of software
Software cost per PC $2,194 per manufacturing PC
costs and usage rates in
manufacturing firms; prices
from official local resellers

Total software costs for $3.75B software costs for
disadvantage-bearing PCs in disadvantage-bearing PCs in
Enterprise software well-licensed firms well-licensed firms
lifecycle of 5 years used to / /
determine annual competitive
Enterprise software lifecycle 5 year software lifecycle
disadvantage
* *
Return on Invested Capital Potential return on invested capital (1.1164) ROIC
is a conservative average from
financials of emerging = =
markets manufacturers Annual competitive $837M of annual competitive
disadvantage created by piracy disadvantage created by piracy

Sources: Licensed software resellers in BRIC nations, Microsoft support site, IT professional interviews, financial data from emerging market companies

19

Key insights into competitive landscape of Chinese manufacturers playing by the rules

China
Step 3: Estimate the
Step 1: Estimate the Step 2: Calculate the Step 4: Assess
number of disadvantage-
total number of portion of licensed competitive
bearing PCs in well-
licensed PCs in PCs that belong to disadvantage at a
licensed manufacturing
manufacturing firms well-licensed firms national level
firms

• 16.6M PCs in
1 • 79% of licensed PCs
3 •
5 Well-licensed firms, 7 $750M in annual
manufacturing belong to well- on average, are 42% software costs for
licensed firms more compliant than disadvantage-bearing
poorly licensed firms PCs in well-licensed
firms

2 5.2M licensed PCs in 4 4.1M licensed PCs 6 The gap between and • $837M of annual
8
manufacturing firms belong to well- poorly licensed firms is competitive
licensed firms 1.7M licensed PCs disadvantage across
China

Sources: BLS, BSA, CIA World fact book, Government statistical reports, Keystone Strategy analysis, Manufacturer and software seller interviews, Microsoft internal data, UNIDO, World Bank

20

Emerging market financial measures of annual competitive harm to manufacturers
playing by the rules – annual disadvantage = $2.9B globally / $1.6B in BRIC nations

Asia Pacific
$837M $505M

$55M $52M
$27M $15M

China India Thailand Vietnam Indonesia Malaysia

Latin America Central and Eastern Europe
$186M $115M

$76M
$36M $46M $39M
$22M $19M $31M
$18M $8M
Brazil Mexico Peru Chile Colombia
Russia Poland Turkey Ukraine Romania Belarus

22

Breakdown of total BRIC manufacturing employment and competitive harm -
aggregate software lifecycle competitive disadvantage = $8.2B in BRIC countries

Percent of total BRIC manufacturing Competitive disadvantage breakdown
employment in each country (5 year software lifecycle)
165 Million total BRIC manufacturing employees $8.2 Billion in aggregate competitive
disadvantage

Brazil, Russia $4185M
4% 5% $2527M
$1500M

$1250M

$1000M $929M
India, $750M
31% $575M
China,
60% $500M

$250M

$M
China India Brazil Russia


23

Keystone Strategy’s findings from its study of competitive effects on manufacturers in
playing by the rules in emerging markets with rampant piracy

Microsoft commissioned Keystone Strategy to study enterprise piracy in a new way –
by focusing on the impact of widespread piracy on those companies within emerging
markets that are taking steps to play by the rules and reduce piracy.

----

Through interviews and third party research, Keystone’s study highlights important
implications from the perceptions and attitudes of manufacturing firms regarding IP:

1. Protection of intellectual property is necessary for the growth of innovation

2. IT is a point of competitive advantage and differentiation – these firms are industry leaders
in large part because of their use of technology

3. Manufacturers are compliant because it’s the ethical decision; pirating software contradicts
their corporate commitment to integrity and honesty

4. Licensed IT in particular has many technical benefits– it gives them the assurance of
security and frequent updates which keep their operations running at optimal levels

26

Financial impact of competitive harm to manufacturers playing by the rules by region –
aggregate competitive disadvantage = $2.9B annually and $14.4B over software lifecycle

Asia Pacific

Annual disadvantage: $1,975M

Software lifecycle $9.9B
disadvantage (5 years)

Latin America Central and Eastern Europe

Annual disadvantage $546M Annual disadvantage: $356M

Software lifecycle $2.7B Software lifecycle $1.8B
disadvantage (5 years) disadvantage (5 years)


27

About Keystone Strategy

28

Keystone works closely with academic experts to deliver high-impact, data driven
solutions to global companies and government institutions

Focus Industries Operations
Strategy and policy built around Focus on industries driven by science In recent months, Keystone engaged
industry leading experts and and technology with clients in the
experienced consultants Americas, Europe, Middle East and
Asia

Experts Clients Offices
Leading affiliates at top institutions Innovative global Boston, San Francisco, Chicago, Abu
including companies, governments, and Dhabi, New York, Seattle and Milan
Harvard, MIT, Stanford, Wharton and government institutions
Berkeley

29

Keystone is a global consulting firm with deep expertise in manufacturing supply
chains and software piracy in emerging markets

Manufacturing Expertise
Worked with several clients to develop an expertise in global manufacturing and supply chains

Intellectual Property Protection
Analytical reports have served as evidentiary support in several anti-trust and damage recovery cases

Software Piracy
Developed comprehensive understanding of software usage and piracy in emerging market manufacturing environments

Anti-Piracy Outreach and Enforcement
Supported anti-piracy legislation in the U.S. and created strategies for targeted anti-piracy campaigns globally

30

Appendix:
Country-by-country analysis of emerging
markets

31

Appendix: Individual Country breakdown (ordered by region and impact)

BRIC China, India, Brazil, Russia

Asia Pacific Thailand, Vietnam, Indonesia, Malaysia

Latin America Mexico, Peru, Chile, Colombia

Central & Eastern
Europe
Poland, Turkey, Ukraine, Romania, Belarus

32

Key impact statistics illustrate piracy’s significant, unfair impact on Chinese

The substantial, financial unfair advantage of software pirates over firms playing by the
rules can be used for many purposes, including hiring thousands of employees.

$837 Million
=
217,000 employees

# of licensed PCs Software Lifecycle Annual
Manufacturing
Area in firms playing by Disadvantage Competitive
employees
the rules (5 Year) Disadvantage

China 99.0M 4.1M $4185M $837M

BRIC 164.8M 8.2M $8216M $1643M

Asia Pacific 194.7M 9.6M $9873M $1975M


33

Key impact statistics illustrate piracy’s significant, unfair impact on Indian


$505 Million
=
215,000 employees for a year

Manufacturing
employees

India 50.5M 2.7M $2527M $505M

BRIC 164.8M 8.2M $8216M $1643M



34

Key impact statistics illustrate piracy’s significant, unfair impact on Brazilian


$186 Million
=

Manufacturing
employees

Brazil 7.2M 0.9M $929M $186M

BRIC 164.8M 8.2M $8216M $1643M

Latin America 19.8M 2.5M $2729M $546M


35

Key impact statistics illustrate piracy’s significant, unfair impact on Russian


$115 Million
=

Manufacturing
employees

Russia 8.1M 0.5M $575M $115M

BRIC 164.8M 8.2M $8216M $1643M

Central &
25.7M 1.7M $1778M $356M
Eastern Europe


36

Key impact statistics illustrate piracy’s significant, unfair impact on Thai


$55 Million
=

Manufacturing
employees

Thailand 5.2M 0.3M $273M $55M

BRIC 164.8M 8.2M $8216M $1643M



37

Key impact statistics illustrate piracy’s significant, unfair impact on Vietnamese


$52 Million
=

Manufacturing
employees

Vietnam 7.0M 0.3M $259M $52M

BRIC 164.8M 8.2M $8216M $1643M



38

Key impact statistics illustrate piracy’s significant, unfair impact on Indonesian


$27 Million
=

Manufacturing
employees

Indonesia 4.4M 0.2M $135M $27M

BRIC 164.8M 8.2M $8216M $1643M



39

Key impact statistics illustrate piracy’s significant, unfair impact on Malaysian


$15 Million
=

Manufacturing
employees

Malaysia 1.0M 0.1M $76M $15M

BRIC 164.8M 8.2M $8216M $1643M



40

Key impact statistics illustrate piracy’s significant, unfair impact on Mexican


$76 Million
=

Manufacturing
employees

Mexico 3.2M 0.4M $382M $76M

BRIC 164.8M 8.2M $8216M $1643M



41

Key impact statistics illustrate piracy’s significant, unfair impact on Peruvian


$36 Million
=

Manufacturing
employees

Peru 1.6M 0.2M $178M $36M

BRIC 164.8M 8.2M $8216M $1643M



42

Key impact statistics illustrate piracy’s significant, unfair impact on Chilean


$22 Million
=

Manufacturing
employees

Chile 0.9M 0.1M $110M $22M

BRIC 164.8M 8.2M $8216M $1643M



43

Key impact statistics illustrate piracy’s significant, unfair impact on Colombian


$19 Million
=

Manufacturing
employees

Colombia 0.6M 0.1M $95M $19M

BRIC 164.8M 8.2M $8216M $1643M



44

Key impact statistics illustrate piracy’s significant, unfair impact on Polish


$46 Million
=

Manufacturing
employees

Poland 2.4M 0.2M $229M $46M

BRIC 164.8M 8.2M $8216M $1643M

Central &
25.7M 1.7M $1778M $356M
Eastern Europe


45

Key impact statistics illustrate piracy’s significant, unfair impact on Turkish


$39 Million
=

Manufacturing
employees

Turkey 2.4M 0.2M $196M $39M

BRIC 164.8M 8.2M $8216M $1643M

Central &
25.7M 1.7M $1778M $356M
Eastern Europe


46

Key impact statistics illustrate piracy’s significant, unfair impact on Ukrainian


$31 Million
=

Manufacturing
employees

Ukraine 3.9M 0.2M $156M $31M

BRIC 164.8M 8.2M $8216M $1643M

Central &
25.7M 1.7M $1778M $356M
Eastern Europe


47

Key impact statistics illustrate piracy’s significant, unfair impact on Romanian


$18 Million
=

Manufacturing
employees

Romania 1.1M 0.1M $90M $18M

BRIC 164.8M 8.2M $8216M $1643M

Central &
25.7M 1.7M $1778M $356M
Eastern Europe


48

Key impact statistics illustrate piracy’s significant, unfair impact on Belarusian


$8 Million
=

Manufacturing
employees

Belarus 1.2M 0.05M $42M $8M

BRIC 164.8M 8.2M $8216M $1643M

Central &
25.7M 1.7M $1778M $356M
Eastern Europe


49

Playfair Analysis

Recomendados

Recomendados

Mais conteúdo relacionado

Semelhante a Playfair Analysis

Semelhante a Playfair Analysis (20)

Último

Último (20)

Playfair Analysis