Statement by Brad Smith (Microsoft) to Senate Foreign Relations Committee.
Re: software piracy.
Date: April 29, 1999.
Source: Senate Foreign Relations Committee. This document has been edited for HTML, but not for content.

Brad Smith
General Counsel, International Law and Corporate Affairs
Microsoft Corporation

The Economic Contribution of the Software Industry:
Recommendations to Strengthen Global Standards of Intellectual Property Protection

April 29, 1999

Introduction

Mr. Chairman, members of the Subcommittee, my name is Brad Smith, and I am General Counsel, International at Microsoft Corporation1. I am pleased to testify today on behalf of the Business Software Alliance ("BSA"), together with my colleague Colleen Pouliot of Adobe. Let me begin by thanking you and the members of this Subcommittee for hosting these hearings. BSA and each of its member companies commend you for recognizing the software industry's important contribution to the U.S. economy, as well as the serious threat posed by software piracy.

Over the past 25 years, computer software has fundamentally reshaped every facet of our lives and helped secure this country's economic leadership. As Ms. Pouliot explained, the U.S. software industry employs hundreds of thousands of U.S. workers, and contributes billions of dollars annually in tax revenues to federal and state governments. Of equal significance is the industry's contribution to the U.S. balance of payments. While the U.S. trade deficit reaches new record highs, it is projected that the U.S. software industry will generate a trade surplus of more than $20 billion by the year 2000. The software industry's growing trade surplus means more jobs and more tax revenues for the U.S. economy.

The success of the U.S. software industry is due in large part to this country's historical commitment to strong intellectual property protection. Indeed, it is no coincidence that the United States – the world's leading advocate for intellectual property rights – is also home to the world's largest software industry. The software industry's continued growth and its continued economic contributions are directly dependent on our ability as an industry and a nation to eliminate theft of computer software.

Economic Contribution of U.S. Software Industry

Jobs and Tax Revenues

The software industry is one of the fastest growing sectors of the U.S. economy, each year creating thousands of new jobs and unlimited opportunities for entrepreneurs and small businesses. Between 1990 and 1996, the industry grew at a rate of 12.5 percent, nearly 2 1/2 times faster than the rate of the U.S. economy overall. According to a study by PriceWaterhouseCoopers, the U.S. software industry employed more than 600,000 U.S. workers in 1996, with aggregate wages of $36.4 billion. Significantly, the study found that U.S. software employees were among the highest paid in the country, with average wages of $60,000.

The economic contribution of our industry can also be measured in terms of federal and state tax dollars benefiting a host of national and community programs. In 1996 alone, the software industry contributed over $15 billion in tax revenues to federal and state governments. This tax contribution is expected to reach $25 billion by the year 2005.

Balance of Trade

The U.S. software industry's contribution to the U.S. balance of trade further illustrates the industry's increasing importance to the U.S. economy. According to a preliminary study conducted by Nathan Associates, a Virginia-based economic consulting firm, the U.S. software industry is projected to contribute more than a $20 billion surplus to the total U.S. trade balance by the year 2000. The same study also determined that in 1997--the most recent year for which historical data are available--the U.S. software industry contributed a $13.0 billion surplus to the U.S. trade balance. This 1997 surplus consisted of a $7.15 billion surplus on trade in goods and services and a $5.87 billion surplus on trade in income.

The U.S. software industry's trade surplus (exports minus imports) indicates that the industry's economic activity in the United States far exceeds its economic activity abroad, resulting in more jobs, higher wages, and a better standard of living for U.S. workers. In contrast, the U.S. economy as a whole (excluding U.S. military and government transactions) reported a trade deficit of $36.4 billion in 1997, as an increasing number of major U.S. industries move manufacturing facilities and jobs offshore and as we buy more foreign-produced goods. Without the surplus of the U.S. software industry, the U.S. economy's trade deficit would have been nearly $50 billion in 1997--some 36 percent higher than the actual amount.

According to the Nathan study, the software industry's 1997 trade surplus reflects an historic trend of increasing export activity. Between 1990 and 1997, the U.S. software industry's trade surplus grew at an average rate of 17.9 percent per year, while its gross receipts at U.S. establishments grew at an average rate of 14.7 percent per year. These statistics signify that consecutive increases in annual software sales have generated even greater annual contributions to the U.S. trade balance. In other words, as our industry's sales have grown, an increasing proportion of those sales have been made to foreign buyers.

Unfortunately, the trend for the U.S. trade deficit as a whole is not so favorable. In just eight years from 1990 to 1997, the U.S. trade deficit more than doubled from $17.8 billion to the $36.4 billion level. And recent reports indicate that the U.S. deficit will reach another record high this year. This trend makes the software industry's trade surplus an increasingly vital factor in stabilizing our balance of payments.

However, the U.S. software industry will be able to achieve this vital trade surplus only so long as it remains fully competitive in export markets. Our industry's competitiveness in foreign markets is becoming more and more dependent on the U.S. government easing restrictions on the export of software that contains strong encryption technology. Without a reasonable compromise on this issue, outdated export restrictions will increasingly cripple our industry's ability to supply secure, American-made systems to foreign companies and will permit competitors abroad to displace U.S. software products. The result, of course, will be reduced foreign sales by U.S. software publishers, a reduced industry trade surplus, and an even greater U.S. trade deficit.

BSA recently learned that the Senate Commerce Committee will consider helpful legislation to address the policy governing the export of strong American-made encryption products (S. 798). BSA looks forward to working with the Senate to develop a sensible export control policy.

Economic Impact of Piracy on the Software Industry

Despite the significant contribution it currently is making to the U.S. economy, the software industry has yet to realize its full economic potential because of global piracy. Although most countries have taken some steps to curb piracy, many still lack the legal protections, remedies, resources, and political will needed to achieve significant reductions in software theft. The result is an average global piracy rate of 40 percent, as compared to a U.S. rate of 27 percent in the United States; and in many parts of the world today the piracy rate remains in excess of 60 percent. In terms of lost revenues, software theft robs the U.S. software industry of billions of dollars each year ($11.4 billion in 1997 alone).

However, the economic impact of software piracy extends far beyond the confines of the software industry. According to PriceWaterhouseCoopers study, software theft in 1996 cost the U.S. economy 130,000 jobs and an additional $1 billion in tax revenues. If the United States were to eliminate software piracy by the year 2005, our economy would gain (on top of projected growth) an additional 216,000 jobs, $8.8 billion in wages, and $1.6 billion in tax revenues.

Moreover, because a large percentage of software piracy takes place outside the United States, piracy directly affects the software industry's ability to export product and contribute to the U.S. trade balance. Indeed, there is little question that if piracy were reduced abroad as well as domestically, the U.S. software industry's trade surplus would increase further, and the U.S. economy would benefit directly.

The U.S. software industry will achieve its full economic potential if, and only if, the United States and other countries ensure that intellectual property rights are adequately protected and enforced. It is no accident that the United States boasts the world's leading software industry and the largest pool of information technology experts. The U.S. software industry has flourished because of this country's long tradition of strong intellectual property rights.

Current and past U.S. administrations have worked tirelessly to instill these same values throughout the world. The U.S. government is unquestionably the world's leading advocate for strong international copyright standards. As such, it has played a decisive role in promoting the protection of computer software throughout the world.

The U.S. government was perhaps the first to recognize that strong, uniform standards of intellectual property protection are a fundamental condition of free trade. As a result, Section 301 of the 1988 Omnibus Trade and Competitiveness Act authorizes the Office of the U.S. Trade Representative ("USTR") to identify and investigate governments that fail to protect the rights of U.S. intellectual property owners. More recently, the U.S. government's participation in the 1994 GATT negotiations led to the adoption of the Trade Related Intellectual Property agreement (the "WTO TRIPs Agreement"), which for the first time gave "teeth" to international standards of copyright protection. USTR and the dispute resolution procedures of the WTO TRIPs Agreement have already succeeded in forcing several recalcitrant governments to provide effective protection and enforcement of intellectual property rights.

The United States has demonstrated its commitment to intellectual property protection by practicing at home what it preaches throughout the international trade community. To cite two recent and particularly significant examples: Our government was among the first to implement the 1996 WIPO Copyright Treaty, which ensures protection of copyrighted works in the digital era. Similarly, our government recently issued an Executive Order on Computer Software Piracy, which requires all federal agencies and recipients of federal funds to comply with software copyright and licensing restrictions. Each of these steps sets an important example for other governments throughout the world.

Recommendations to Strengthen Intellectual Property Protection

BSA is working closely with this Administration and Congress to ensure that the international community demonstrates a similar commitment to strong intellectual property protection. In that regard, BSA has urged the U.S. government to pursue the following policy initiatives –

Ensuring that developing countries implement WTO TRIPs by the January 1, 2000 deadline and more generally that all WTO member countries provide effective protection of intellectual property rights as required by TRIPs;

Encouraging nations to ratify and implement the WIPO Copyright Treaty; and

Urging all nations to adopt government legalization policies.

Implementation of WTO TRIPs

In order to remedy defects in foreign enforcement regimes, the U.S. government should continue to push developing countries to implement WTO TRIPs by the January 1, 2000 deadline. While developed countries were required to implement their TRIPs commitments no later than January 1, 1996, the substantial majority of WTO members – developing countries and countries in market transition comprising some 80 percent of WTO's membership -- were given a five-year transition period, until January 1, 2000 to do so.

The TRIPs Agreement is the first major international treaty to recognize that intellectual property rights are meaningful only if accompanied by adequate enforcement procedures and remedies. TRIPs accordingly establishes core elements that must comprise every WTO member's IPR enforcement regime, including the production of documentary evidence, compensatory damages, civil ex parte search orders and criminal penalties.

However, TRIPs does more than articulate the basic procedural and remedial standards for IPR enforcement. It requires that IPR enforcement regimes meet specific "results-oriented" performance standards. Specifically, each member's enforcement regime must "permit effective action against infringement" and "constitute a deterrent to further infringements." Moreover, enforcement procedures cannot be "unnecessarily complicated or costly," or "entail unreasonable time limits or unwarranted delays."

In short, the TRIPs agreement requires all member countries to provide a fair and effective arsenal of enforcement tools and remedies, combined with the resources and commitment needed to combat infringement. Lax enforcement and ineffective remedies (e.g., low fines and damages, slow and complex judicial procedures) are the main reasons foreign piracy rates are so high. Even in developing countries, pirates, including reputable businesses, typically know that software theft is a copyright violation, but continue to break the law because the risk of punishment is negligible. Within this environment, implementation of WTO TRIPs is a critical step towards reducing the rate of software theft in developing countries.

More generally, it is essential that the U.S. government ensure that TRIPs is vigorously and properly implemented by all member countries over the long term. TRIPs does not simply establish abstract legal standards for the protection of intellectual property rights; as indicated, it requires member countries to have effective remedies and penalties to protect those rights in practice. This means that the U.S. government has a vital role to play in monitoring and assessing how member countries go about applying their laws protecting intellectual property rights, and in ensuring that member countries devote adequate resources to this task. Indeed, member countries’ effective application and enforcement of their laws protecting intellectual property rights — the core of TRIPs obligations — are a matter of critical importance not merely to the U.S. software industry but to all U.S. industries that are dependant on the recognition and protection of their intellectual property rights around the world.

BSA urges that, when necessary, the U.S. Government continue to instigate WTO dispute-resolution proceedings against countries that fail to fulfill their TRIPs obligations. For example, recent WTO proceedings against Sweden, Denmark, Ireland and Greece for TRIPs violations are very important steps in securing much-needed reform by individual member countries.

Finally, as you know, WTO will launch a new round of global trade negotiations — the so-called Millennium Round — at the Ministerial Conference in Seattle later this year. It will be important for the U.S. government to consider carefully the Millennium Round’s implications for the further strengthening of member country recognition and enforcement of intellectual property rights as now prescribed in TRIPs, as well as other issues that will determine whether the Internet will continue to be available for the unimpeded conduct of electronic commerce on an international basis.

Implementation of WIPO Copyright Treaty

In December 1996 the international community adopted the WIPO Copyright Treaty in order to ensure protection of copyrighted works in the digital age. Among other things, the WIPO Treaty (1) makes clear that a copyrighted work can be placed on an interactive network only with the consent of the relevant rightholder; (2) makes clear that the Berne Convention’s reproduction right applies to electronic uses of works; (3) protects all forms of expression of computer programs; and (4) prohibits “hacking” of technical protections that have been applied to works.

The WIPO Copyright Treaty was a critical step towards recognizing the rights of copyright owners in the digital era and combating the theft of copyrighted works over the Internet. Internet piracy poses unique and daunting challenges to U.S. software publishers. Internet pirates, like David LaMacchia, have demonstrated to the world how easily thousands of illegal software copies can be distributed through a single web site. The Internet today is literally glutted with auction and software web sites that offer potentially millions of copies of software to consumers throughout the world. Based on ongoing investigations, BSA and Microsoft strongly suspect that the vast majority of this software is either counterfeit or unlicensed. Of course, the consumer is led to believe that the software is genuine and only learns of the fraud when the product proves defective.

In order to fight Internet piracy, the U.S. government was among the first countries to implement the WIPO Copyright Treaty through enactment of the 1998 Digital Millennium Copyright Act ("DMCA"). The U.S. government should strongly urge other governments to follow suit – to ratify this important treaty and enact whatever legislation is needed to protect the rights of copyrighted works over the Internet. Prompt ratification of this treaty is necessary to encourage global distribution of copyrighted works over electronic networks; prevent Internet fraud; and give copyright owners a strong legal basis, world-wide, to fight Internet piracy.

Government Legalization Policy

Government agencies and public institutions are typically among the largest users of computer software. As such, government leaders have an obligation to establish legalization policies and procedures that both prevent software piracy within the public sector and set an example for the private sector to follow. At a minimum, a government legalization policy should require government agencies and recipients of government funds to (i) comply with software copyright and licensing requirements; (ii) establish systems and controls to manage software use; (iii) ensure that adequate funds are budgeted for software procurement; and (iv) require all recipients of government funds to comply with software copyright and licensing requirements in connection with government-funded projects and government grants.

The U.S. Government has recently stepped up its efforts to promote government legalization – first by implementing its own "clean house" policy, and second by urging foreign governments to do the same. As noted, on September 30, 1998, President Clinton signed an Executive Order on Computer Software Piracy, which for the first time clearly articulates legal software use and procurement requirements for federal agencies and recipients of federal funds.

The White House has directed USTR to press foreign governments to adopt similar government legalization policies. These efforts bore important fruit earlier this month when the State Council of the People’s Republic of China — China’s highest executive authority — issued a Decree mandating legal software use by all ministries, commissions and agencies of the Chinese Government. Effective implementation of this Decree is of course critical, but we view issuance of the Decree as a hopeful sign that the Chinese Government is intent on ensuring that its internal software use is legal and properly managed.

BSA commends the U.S. government for the efforts that led to the issuance of the Chinese Decree, and urges that the U.S. government continue to seek similar action by other foreign governments. The Chinese Decree underscores the considerable opportunities that exist to promote U.S. interests through government legalization programs. BSA has been working closely with USTR to pursue these opportunities and to persuade foreign governments to adopt adequate legalization policies. To that end, BSA recently published an international “Government Guide for Software Management,” which is designed to help foreign governments adopt and implement legalization and management programs. We ask that Congress support these efforts to promote proper procurement and use of software among governments throughout the world, including in contacts with your counterparts in other governments’ legislative bodies.

Mr. Chairman, if each of our global trading partners were to take these important steps – to implement WTO TRIPs fully and effectively, ratify the WIPO Copyright Treaty, and adopt an effective government legalization policy – the U.S. software industry would have the tools needed to fight global piracy and reach its full economic potential. BSA and the U.S. software industry are anxious to work with you and your Subcommittee to achieve each of these steps. The American economy and American families will be the ultimate beneficiaries.

Thank you.