In Hong Kong, Industry Pirates Go High Tech : American Software Is Copied, Sold Openly in Golden Shopping Arcade

This bustling port’s poor, out-of-the-way Sham Shui Po district is an unlikely site for a tourist attraction. Teeming tenements line fetid streets. A shirtless youth and a wriggling snake star in a grotesque street corner dance.

Yet each day, hundreds of visitors brave the squalor in search of one of Hong Kong’s biggest--and most illicit--bargains. They do not come to see the snake man. They come to see the pirates.

For Sham Shui Po’s Golden Shopping Arcade is the world’s most notorious emporium for pirated--or illegally copied--personal computer software. Larcenous computer enthusiasts from around the world flock here to cart off armloads of the stuff, paying pennies on the dollar for the latest programs.

Lotus 1-2-3, the leading spreadsheet program, can be had for as little as $13--including a bound, professionally printed manual. WordPerfect, the top-selling word processing package, goes for $10. The programs list for $495 in the United States.

“You can get anything there,” says an American expatriate and technology junkie whose latest fix was a $17 copy of Ventura Publisher, a state-of-the-art desktop publishing package. “I feel bad every time I use it,” he confesses, “but at these prices it’s hard to resist.”

Forget about phony Rolex watches and Levi jeans. Counterfeiting has gone high tech, and not just in Hong Kong. U.S. producers who dominate the software industry liken their struggle against pirates to a worldwide guerrilla war, with triumphs in one part of the world often offset by reverses in another.

“They are like mushrooms,” laments Jeremy Butler, vice president for international affairs of Microsoft. “You wipe one out, and 10 more spring up.”

The pirates’ pervasiveness is easy to explain. The barriers to entry are few, and the profits are enormous. Indeed, now that software publishers have largely abandoned electronic copy-protection schemes, anyone with access to a personal computer can make an exact copy of almost any program, right down to the last byte.

The copy-protection mechanisms were dropped because they hampered legitimate users and, in any case, were easily beaten by pirates. As a result, “more than any other industry, the software industry is forced to trust the good faith of our users,” says Michael Blaber, a marketing manager for Lotus Development.

That trust is often violated. In the United States, hundreds of thousands of PC owners routinely swap copies of expensive programs for personal use.

But it is organized commercial piracy that really raises the industry’s bile. And while Taiwan, South Korea and Brazil are well known as safe harbors for pirates, nowhere is the trafficking as blatant as at the Golden Shopping Arcade.

Openly Copy Disks

“It is literally a pirates’ lair,” says Tom Chan, the Hong Kong-born deputy general counsel of software publisher Ashton-Tate. More than a dozen booths and small shops in the shopping arcade vie for software buyers’ attention with well-stocked shelves and knowledgeable salesmen; other booths sell computer hardware, clothing and other goods.

Shopkeepers at the software stores stand at computers and openly copy floppy disks, label them and wrap them up with pirated manuals. The manuals mirror the originals--from the artwork on the cover to the copyright notices and piracy warnings inside.

“A place like this would be shut down in 24 hours in Australia,” says Dr. Terry Coupland,a Sydney physician who has purchased Lotus 1-2-3, Wordstar and half a dozen other programs at the Golden Arcade. “If you buy enough, you can pay for your plane ticket.”

Salesmen at the shops--whose names include Honest Computer Co. and Soft-Books Co.--speak English well enough to explain, and even demonstrate, the intricacies of Lotus 1-2-3 and Flight Simulator. But question them about the legality of their wares and all you get is a blank stare.

“It is outrageous that a place like that is permitted to flourish,” fumes Ken Wasch, executive director of the Software Publishers Assn. in Washington. Wasch estimates that pirates cost the industry about $1 billion a year in lost revenue, although others say the losses are more difficult to quantify.

“Not everything that is illegally copied is a lost sale,” notes Microsoft’s Butler. “Many people collect software as a hobby and wouldn’t have bought it at regular prices.” Still, Microsoft’s best estimate is that piracy costs the company about 15% of its total revenue--or about $50 million this year.

Tipped in Advance

Industry officials blame Hong Kong’s infamous Triad organized crime syndicate for promoting the illicit trade, morally blind consumers for supporting it--and ineffectual law enforcement for failing to stop it.

While police and customs officials have staged occasional raids on the Golden Shopping Arcade, “after each raid the pirates only grow stronger,” complains Ashton-Tate’s Chan.

“They are very organized,” Chan says. “They have their own distribution system. They have access to printing presses.”

And, some believe, they have friends--or paid informants--within the government. One recent raiding party was stymied when it arrived to find the offending establishment shuttered. The pirates had been tipped in advance.

Officials fret that the pirates are growing bolder, opening retail outlets near Hong Kong’s Central district and shipping goods to mail-order customers in Europe, Australia and the United States. (While U.S. law bars imports of pirated software and manuals, small packages often get through.)

Hong Kong officials insist that they are trying to crack down on the illicit trade but are not getting the cooperation they need from U.S. manufacturers.

“Copyright enforcement is a very complex matter,” says John K. W. Chan, head of the Customs and Excise Department’s Trading Standards Investigations Bureau. “In some cases, we have offered our assistance to software companies and gotten no response from them. Some are not willing to fly over to testify in court.”

Winning legal actions is also difficult, Chan says. “We need proof that the complainant owns the copyrights. We need proof that the pirated software is identical, and that requires big piles of hard copy for a court to compare.”

Plan to Toughen Law

Despite the obstacles, in the past five years the department has seized more than 30,000 pirated manuals and 21,000 floppy disks, he says. In two cases, printers of pirated manuals were sentenced to prison for four and nine months, respectively.

Moreover, he adds, Hong Kong is amending its copyright law “to make it more clear to people that the copying of computer software is an offense.”

U.S. software manufacturers say they doubt Hong Kong’s commitment to eradicating piracy. Besides, “it is useless to go after the retailers,” says Ashton-Tate’s Chan, who is not related to the Hong Kong official.

“The salesmen will gladly go to jail for a fee. You’ve got to go after the printers and the wholesalers, the people who are driving the Mercedes,” he adds.

Chan chairs a new coalition of software manufacturers who plan an organized effort against pirates. “We hope to incorporate and hire a staff dedicated exclusively to fighting piracy,” he says.

Besides legal enforcement, the group hopes to persuade consumers that they are taking big risks by using pirated products. “You may delude yourself into thinking you’ve saved $485 on the purchase of 1-2-3, but how can you be sure all the files were copied properly?” asks Blaber of Lotus.

“Who can you call for telephone support if something goes wrong? Where do you go for updates? Can you really trust your valuable data to a product of dubious manufacture?”

In short, he is invoking what is known in the trade as the “FUD factor.” FUD is an acronym for Fear, Uncertainty and Doubt. (The term was first applied to IBM, which is said to spread around FUD to keep insecure customers from defecting to its rivals.)

Strong Industry Cited

Publishers also employ moral suasion, appealing to the computer users’ sense of fair play. “I find that when we talk about the millions of dollars and the number of man-years it takes to develop our products, people go away with a different view,” says Microsoft’s Butler.

Still, users of pirated software often rationalize their larceny by pointing to the software industry’s robust health. PC software sales are growing at a rate of more than 30% a year, and the industry’s most prominent spokesman is a brash, 31-year-old near-billionaire, Microsoft Chairman Bill Gates.

Finally, software companies appeal to the users’ self-interest. “By using pirated software, people are stealing tomorrow’s technological advances by taking away our incentive for creating new software,” says Ashton-Tate’s Chan.

Perhaps. But judging from the crowds clutching bulging shopping bags at the Golden Shopping Arcade, the industry’s message is not getting through.