September 12, 2003

'Grey market' software may be the wave of the future

- By Robin 'Roblimo' Miller -
The term "grey market" has traditionally referred to consumer electronics, cars, and other devices brought into a country through channels their manufacturers have not authorized, usually at much lower prices than those products would cost if purchased through "official" wholesalers and retailers. Today grey market drugs are being brought into the U.S. from Canada and other countries where they sell for less than they do here. And before long, if current software pricing trends continue, you're going to see unauthorized commercial software imports and reimports -- and big savings for commercial software users in developed countries.

Back when I was in the limo business, I was a member of several industry-specific email lists and online forums. One day, in one of them, a limousine operator in The Netherlands asked if any of his U.S. colleagues could help him buy parts for several Lincoln Town Cars he owned. It seemed that a rebuilt alternator for a Lincoln that cost $75 or $80 in the U.S. went for $300 or more in The Netherlands. So this guy was willing to pay someone in the U.S. a reasonable fee to buy Lincoln parts at U.S. prices and ship them directly to him. He found someone to help him, too, not for cash but as a service exchange, because Mercedes and Rolls Royce parts prices in the U.S. typically cost three or four times as much here as in Europe, and a small but significant number of U.S. limo operators own either Rolls or Mercedes cars.

This is a typical example of a grass-roots grey market at work. There are also plenty of people who casually bring late-model, used European luxury cars into the U.S. and (after refitting them to meet U.S. pollution and safety standards) sell them for far less than franchised dealers charge for the same car. Again, this is a two-way trade, since there is also a strong market in Europe for many U.S. cars that are expensive and/or rare on the east side of the Atlantic even though they are cheap and/or popular on the west side of that ocean.

There are also many small, independent companies that bring factory-original Japanese and Korean car parts and accessories into the U.S. and sell them for less than the exact same parts cost at franchised car dealers.

Combine low-cost shipping with the Internet, and suddenly it's hard to sell cars or parts for one price in one part of the world, and for another price somewhere else. As soon as the price difference is high enough for entrepreneurs to profit from bypassing the "official" distribution system, alternatives to it inevitably spring up.

Not only the car business is affected. Cameras, stereos, and other consumer electronics are also readily available through grey market channels, often from distributors large and strong enough to overcome potential warranty problems by shipping defective units back to their point of origin before turning them in for warranty repair or replacement.

Regionalizing software prices

It's sad to use Microsoft as "the" example of an evil software empire as often as we do, but it's the world's largest and most influential software company, and as such it must take its corporate lumps. Microsoft has long adhered to a "one price fits all" policy. If the retail price of one of its products is $500 in the U.S., that product will be sold at the local equivalent of $500 U.S. in countries where $500 is a month's or even a year's wage for most workers.

Naturally, in low-wage countries most commercial software is purchased through unauthorized channels for little more than the cost of the distribution media, but a recent emphasis on international "software piracy" enforcement by commercial software companies has made use of informally obtained programs less attractive. Citizens (and governments) in many countries are responding by switching to free or open source operating systems and applications that aren't bound by licensing and distribution restrictions. In an effort to maintain their market share while trying to keep users from sharing copies of software with each other, Microsoft is now experimenting with reduced prices in countries where their products have previously been too expensive for most users to obtain through legitimate channels.

According to this InfoWorld story, "...the price of Windows XP Professional Edition in Taiwan was cut by 23.7 percent while the price of Office XP was cut by up to 16.9 percent. The greatest price reductions came for Windows XP Professional Academic Edition (54.5 percent), Office XP Academic Edition (50.1 percent) and Word (42 percent). Specific dollar figures for the price cuts, which became effective on March 15, were not released."

But, that article says, the best deal currently available on Microsoft software is in Thailand, where "Microsoft -- in response to a Linux threat -- recently reduced pricing to $40 for an Office and Windows package it offered as part of a government initiative..."

Breaking regionalization barriers

We've seen no word yet on whether that Thailand-only price is only for Thai language versions or whether the $40 WinXP/Office combo is available in English as well. If it's available in English for that price there, I would happily pay $60 or even $80 to a clever Thai entrepreneur for that package, just to have Windows XP and Microsoft Office around for compatibility testing purposes.

I'm sure many other residents of high-cost countries would be happy to pay a similar price for these products, especially if they can activate the software -- and later obtain official Microsoft bug fixes, patches, and updates -- through a proxy server in Thailand so Microsoft won't know the Thai-priced products are being used elsewhere.

One of the fastest-growing business areas here Florida is supplying senior citizens with low-cost, U.S.-produced prescription drugs reimported from Canada. Drug companies are fighting back by trying to control exports to Canada, but so far they only seem to have made life a little harder for a few of the smaller cross-border drug vendors. The business of drug reimportation is still growing like mad.

Even if the U.S. drug companies manage to make it a little harder for senior citizens and workers without prescription drug insurance to buy from Canadian pharmacies through the mail or over the Internet, there is always Mexico, where thousands of U.S. residents go every year to stock up on pharmaceuticals that sell there for a fraction of their U.S. prices, and often don't require a prescription, which saves on doctor bills, too.

Mexico and Canada are the closest countries to the U.S., but airplanes and ships come here from all over the world, full of everything from people to industrial machinery. Our customs system is famously porous. Very few shipping containers are ever opened and inspected. New, tighter regulations designed to keep terrorists from shipping dangerous substances into the country won't detect things like anti-AIDS or high blood pressure medicine, nor will dogs trained to sniff out heroin, cocaine, or marijuana. Closer searches of returning tourists won't work, either. Imagine the headlines when a 72-year-old grandmother is arrested for smuggling anti-cancer drugs into the U.S. from Mexico because she can't afford to buy them here. Then imagine the millions of emails, calls and faxes U.S. elected officials will get from enraged AARP members.

The AARP is already on record as favoring drug reimportation.

Now imagine thousands of senior citizens being denied the right to buy low-cost software through Thailand (or wherever) so they can receive those all-important grandkid pictures by email. Another cause! And one thing American politicians learn early on is that older people vote more heavily than younger ones, and that retired people have lots of time to engage in lobbying and electioneering, so making old people mad is not a wise career move.

Once Microsoft and other commercial software producers try to sell their products at different prices in different countries, they are going to face the same problems drug companies are now having with regional price enforcement. In the end, they are going to be forced to cut prices in high-cost countries in order to prevent smuggling.

How do you prevent software smuggling?

Answer: You don't, by any practical means. Who is going to boot up each CD every traveler carries on an international flight? Who is going to monitor every cross-border download? Even countries like Iran, Saudi Arabia, and the People's Republic of China that have tried to control their citizens' Internet use haven't had much luck doing it, and countries with a more relaxed attitude toward information exchange are going to have even less success at keeping out "bad" software. The DMCA and DRM are weapons Ashcroft, Microsoft, and other anti-freedom activists will certainly try to wield in an attempt to keep Americans from downloading, but their "unapproved" files, but their attempts are doomed from the start. There are simply too many ways to move information from one computer to another to control even a small fraction of the flow, and too many people willing to grab a discount on digital items they feel are overpriced to keep the public from finding ways to bypass regulations they will almost certainly decide are unfair if the government tries to enforce them heavily.

Besides, Microsoft and other software vendors are (hopefully) smart enough to avoid the sales-killing backlash now being experienced by RIAA member companies, which seem to see a new drop in revenue every time they make another attempt to stop file trading by taking their customers to court (even though they never admit this is one of the reasons they are losing business).

It's easy to forget that the Internet and the World Wide Web are truly world-wide, and that it is no longer feasible to isolate digital information geographically in any meaningful sense. The communications advances that have made it possible for companies in high-cost countries to hire workers in low-cost countries at local wages also make it easy for people in high-cost countries to buy software sold in low-cost countries at local prices, no matter how angry software vendors get when customers use the Internet's world-wide nature to bypass their authorized distribution channels.

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