Statement by Colleen Pouliot (Adobe) 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.

COLLEEN M. POULIOT
SENIOR VICE PRESIDENT & GENERAL COUNSEL
ADOBE SYSTEMS INCORPORATED

INTERNATIONAL SOFTWARE THEFT:
IMPACT ON THE SOFTWARE INDUSTRY AND THE AMERICAN ECONOMY

April 29, 1999

Introduction

Good morning, Mr. Chairman and members of the Subcommittee. My name is Colleen Pouliot, and I am Senior Vice President and General Counsel of Adobe Systems Incorporated. I also chair the board of the Business Software Alliance (BSA). I am pleased and honored to have the opportunity to testify today both on behalf of Adobe and the BSA. Please allow me at the outset, Mr. Chairman, to express my sincere appreciation for your leadership in holding this hearing, for the fine preparatory work of your staff, and for your gracious invitation to provide testimony.

I would like to begin with a few words about Adobe and the BSA. Founded in 1982, Adobe helped launch the desktop publishing revolution. Today, the company offers a broad range of application software, software development tools, and programming-language products for creating and distributing visually rich communication materials across all media. Adobe's revenue is approaching one billion dollars and the company employs nearly 3,000 people worldwide. Adobe is headquartered in San Jose, California, has a strong presence in Washington State, as well as employees in Massachusetts, Michigan, Texas and ten other states.

Since its founding in 1988, the BSA has been the voice of the world's leading software developers before governments and with consumers worldwide. Its members represent the fastest-growing industry in the world. BSA works in over 65 countries educating computer users about software copyrights; advocating a public policy agenda that fosters innovation and expands trade opportunities; and fighting software piracy. BSA worldwide members include Adobe, Attachmate, Autodesk, Bentley Systems, Corel, Lotus Development, Macromedia, Microsoft, Network Associates, Novell, Symantec and Visio. Additional members of BSA's Policy Council include Apple Computer, Compaq, IBM, Intel, Intuit, and Sybase.

The Software Industry - An American Success Story

The U. S. software industry is one of the great success stories in modern business history. Not only has the industry emerged as one of the fastest-growing segments of the U.S. economy, but it has fueled an information revolution. Today, consumers enjoy unprecedented access to information that is changing the way we live and work. To name just one example, how many of us here had even heard of e-mail ten years ago, and how many of us can imagine getting by without it today?

To illustrate our industry's phenomenal rate of growth, I would like to share a few statistics with you. Between 1980 and 1992, the U.S. domestic economy grew at an average rate of less than 3% a year. During that same period, the U. S. computing and software industry averaged 28% annual growth. From 1990 through 1996, the U.S. economy grew at an average of slightly over 3% a year; the software industry grew at an average annual rate of 12.5% during the same period.

These numbers are impressive--but what do they mean in real terms? In addition to bringing about productivity gains to businesses and unparalleled access to information for consumers, these numbers mean two things: jobs and tax revenues. Lots of them.

Between 1988 and 1994, the U.S. software industry doubled its employment in the United States so that by 1996--the most recent year for which figures are available--620,000 Americans were directly employed by our industry. This number does not even take into account the hundreds of thousands of jobs created by our industry's economic "multiplier" effect--the ripple of job creation sent through the economy when our employees purchase new homes, buy second cars, or send their children to college.

These domestic figures are impressive, but they are just part of the picture. Significantly, the software industry has achieved tremendous success in the international marketplace, and our future is inextricably linked to our success abroad. 70% of world software revenue comes from American products, and exports account for approximately half of the industry's--and also Adobe's--output. As the global market for software continues to grow, international revenue will play an even more important role in our industry's success.

Software Theft: Our Industry's Biggest Trade Barrier

The picture is not all rosy, however. Like many industries, software producers face some significant trade barriers. None is more important--or economically damaging--than software theft. Most of us would never think of shoplifting a box of software from the store, yet many people do not think twice about copying a CD-ROM from a friend or making multiple copies of a program for use in their business. Software piracy of the kind I have just described, so-called "end user" piracy, is theft, and it accounts for the lion's share of our industry's economic losses. And it is not the victimless crime that so many suppose it to be.

Software theft comes in almost as many forms as software itself. In addition to end-user piracy, there is "hard disk loading," where manufacturers and retailers of computer hardware illegally load software onto computer hard drives in an effort to boost sales of their hardware products. Another form of software theft is the mass production of counterfeit product, packaging, manuals, and holograms. Most mass-produced counterfeit software is in the form of replicated CD-ROMs, and so we call this problem--which is also a major problem for the sound recording, motion picture, and video games industries--"optical disc piracy." (This form of software theft is particularly prevalent in Asia, Latin America, and Eastern Europe, although exported product also finds its way into the main distribution chain in Europe, the United States, and elsewhere.) And, last but certainly not least, there is a new frontier in software theft: Internet piracy. A tool of unparalleled economic promise, the Internet also threatens to exponentially increase the rate of software theft. The Internet has become an easy place to traffic in illegal software, with myriad "warez" sites offering thousands of illegal software products for download at no cost to the downloader. Adobe Photoshop, one of our flagship products, is particularly popular with the new breed of cyberpirates.

When one adds together all these methods of piracy, just how pervasive is software theft? Alarmingly so. International Planning and Research (IPR) estimates that, of all the software installed onto computers worldwide in 1997, fully 40% was illegal. The market value of this massive amount of stolen software was $11.4 billion--up $200 million from the year before. $11. 4 billion, to give this number some perspective, is almost the size of the entire economic output of some U.S. states(1). Which means, since four out of every ten business software applications is stolen, that our industry is operating at only 60% of its potential. For just about any other business, operating at only 60% of capacity would be unthinkable. Movies that only fill 60% of a theater are quickly relegated to video, and restaurants where 40% of patrons skip out on their checks close their doors.

Thankfully, while the software industry is not yet in danger of going out of business, software piracy has taken an enormous and ever-growing toll on our industry's productivity and output. What have we been able to achieve operating at 60% of our potential, and how much more could we achieve at 100%? These are questions that we are now able to answer thanks to multi-year study conducted by Price Waterhouse Coopers for the Business Software Alliance, which we are releasing publicly today. The study, Contributions of the Packaged Software Industry to the Global Economy, brings together the findings of a series of regional economic impact studies conducted by Price Waterhouse Coopers (or PWC). It demonstrates vividly the huge economic impact of our industry worldwide and shows unequivocally that software theft translates directly into lost jobs, lost wages, reduced tax revenues, and diminished investment in new product development around the world.

The study documents the industry's tremendous growth rate which, by 2005, means that the software industry: will double the employment it generates, to over two million jobs; and more than double the tax payments contributed to governments worldwide, to nearly $60 billion.

But as impressive as these statistics are, they are only half the picture. The other half consists of the enormous job and revenue losses suffered by economies worldwide as a result of software theft. PWC found that, if software theft had been eliminated in the United States and reduced substantially(2) in the rest of the world, the industry would already have:

created over 650,000 additional jobs worldwide -- 130,000 of them in the U.S. alone; doubled the annual rate of job creation, to over 200,000 new jobs each year; and generated nearly $15 billion in additional tax revenues to governments internationally.

These incredible foregone opportunities are, effectively, jobs and tax revenues lost. And who bears these losses? Everyone. Reduced employment and lower government revenues manifest themselves throughout our economy. But rampant software theft has an additional, corrosive impact. Piracy lowers software developers' incentives to create new products because it raises the cost of doing business and, in so doing, makes it less likely that they can recoup their initial investment. After all, the vast majority of software products--which require years of development and great amounts of capital to launch--never see the light of day. The greater the costs of doing business (and hence, the higher the barriers to entry into the industry), the harder it is for developing technology economies worldwide to emerge. In simple terms, the Egyptian who pirates Adobe Photoshop makes it that much harder for Egypt to create an Adobe of its own.

So what can be done to prevent these tremendous losses and harness the incredible economic promise of our industry? As the distinguished Undersecretary of State and Deputy United States Trade Representative have stated this morning, our industry works in very close cooperation with U.S. Government to tackle the massive problem of software theft. We are very grateful for the Administration's substantial work in this regard, as well as your work on this Subcommittee and throughout the Congress. My colleague, Brad Smith of Microsoft, will discuss in further detail the numerous policy initiatives being undertaken and tools being utilized by the Business Software Alliance in close cooperation with U.S. Government. These include:

• ensuring that developing nations meet the January 1, 2000 deadline for upholding their obligations under the WTO's Agreement on Trade-Related Intellectual Property Rights (TRIPS);
• pressing governments around the world--who are among the largest users of software--to legalize their own software use, as the U.S. is doing through the President's Executive Order on software piracy;
• encouraging nations to implement the two new treaties put forth by the World Intellectual Property Organization (WIPO) to battle theft of creative works in the digital age;
• and effectively utilizing the "Special 301" process to ensure that our trading partners tackle theft of U.S. software and other creative works in their own economies.

Successful pursuit of these and other initiatives will help ensure that the U.S. software industry is finally able to harness its full economic potential. After all, Mr. Chairman, 60% is barely passing. We can do much, much better. With your continued help, and that of the Congress and the Administration, we will. Thank you.