CriminalCode amendmentgives musicandsoft-wareindustry cause foroptimism Russia is known as a haven for software and music pirates. Throughout Moscow, there are countless small kiosks and road-side stands openly selling pirated software, music, and movies. They are easy to find, too, particularly near the train stations and metro entrances, under overpasses and bridges. The situation in the provinces is even worse - it is sometimes almost impossible to find legal merchandise at all. Unless one buys from licensed dealers or supermarket chains, even legitimate looking merchandise is frequently poddelka.
Whether Microsoft operating systems, office packages, CAD software, games - almost everything can be had on DVD for around 200 rubles ($7.65) a piece. The smart buyer can get an even better deal if he buys bundles - collections of several programs all on one disk. For music, the situation is no different. Simple pirate copies of legitimate CDs are becoming increasingly displaced by MP3 collections easily containing a hundred tracks or more. The same goes for videos - anything from Soviet classics and Hollywood blockbusters over BBC nature documentaries to Playboy Specials is available.
Alexei Ugrinovich is the CEO of the National Federation of Phonogram Producers (NFPP), an industry association that represents 20 of the largest international and national labels currently doing business in Russia. According to Ugrinovich, 64 percent of all audio disks sold in Russia are pirated. He estimates that around 200 million illegal CDs are sold in Russia every year. At about 100 rubles a piece, this is a market worth almost $765 million - more than twice the legal market value of about $300 million.
One of the most serious threats to the music industry is the Internet, however. "Today, you can find all music free of charge on the Internet", says Ugrinovich. Much of this is done through peer-to-peer transfers, but there are also for-profit websites. The most notorious of these is allofmp3.com. Unlike street vendors, this operator pretends to be a legitimate business. For every track it sells, it pays a fee to a so-called collection society. By doing so, the company claims to have discharged of its obligations towards the copyright holders, as it is the responsibility of the collecting society to pay the royalties. Of course, those collecting societies are simply fronts set up by the operators who are exploiting legal ambiguities.
What frustrates Ugrinovich is that many people seem to believe that the victims of this are 'just' international record labels and their super stars. But while in most Western countries large labels dominate the market, the situation in Russia is reverse: local labels with local repertoire have a market share of 70-75 percent. Consequently, the artists that suffer most are not Avril Lavigne and Justin Timberlake, but popular Russian singers like Dima Bilan or Glyuk'oza.
For software, the situation is hardly better. An IDC study commissioned by the Business Software Alliance (BSA) found that about 83 percent of all software used in 2005 in Russia was illegal, resulting in a total loss of $1.625 billion. And, as in the case with music, the victims are not 'just' international giants like Microsoft, Adobe, and Co. Russian software developers like AABBYY and Kaspersky Lab are also on the pirates' hit list. Worst, it's not only the software manufacturers losing money. According to Georg Herrnleben, BSA director for Central and Eastern Europe, for every employee in the intellectual property industry there are seven employees in affiliated industries, such as distribution and retail. Every legal copy not sold because of pirating is a real loss to the Russian economy as a whole.
When put into numbers, the losses are staggering. Russia's IT industry is one of the fastest growing in the world. In 2006, it generated total revenues of $13.6 billion, and it is expected to grow by more than 45 percent in 2007 alone. If it were possible to reduce piracy rates by 2.5 percent annually, this would add another $15.05 billion in IT revenues by 2009. If the increased revenues of related industries are added to this, the surplus contribution to national GDP by 2009 would be a total of $23.47 billion. It would also create an additional 33,736 IT and related jobs, and increase tax revenues by $832 million.
Russia is not, of course, the only country with a software piracy problem. In Western Europe, Greece can boast a piracy rate of 64 percent, closely followed by Italy's 53 percent and France's 47 percent. Even in the U.S., the country with the lowest piracy rate than anywhere else, the rate is 21 percent. And while Russia's rate is very high, it is not the highest. On the global PC software piracy ranking list, published annually by BSA, Russia is 'only' on place nine, lagging behind the champions Vietnam (90 percent), Zimbabwe (90 percent), Indonesia (87 percent), and China (86 percent).
But why are piracy rates in Russia so high? Commercial music and software piracy has been on the books as a criminal offence for years, with a maximum penalty of up to five years. And according to Jolanta Kaminskaite of Baltic Law Offices, an international legal firm representing major software manufacturers in Russia and some Eastern European countries, "copyright law in Russia is very advanced - much more than in some countries of Eastern Europe, for example."
The devil is, as usual, in the details. Russian law recognizes three different levels of crime - light, medium and heavy. This is a sensible arrangement, since police resources are limited and it would make no sense to pursue petty theft with the same vigor as homicide. But it also can create problems.
"Until recently, piracy was a 'medium' crime," explains Ugrinovich. As a result, the police had limited means of investigating and prosecuting piracy. "NFPP has sent a lot of reports to the authorities that our criminal code is not effective." Administrative measures have been more successful so far - particularly when local authorities took the issue seriously, as for example in Moscow. "The situation in Moscow today is much better than it has been", says Ugrinovich, "five years ago the level of pirated goods at the famous Gorbunov (Gorbushka) market was around 95 percent, but today they are less than 50 percent."
Besides the lack of teeth in the law, there was also a problem with understanding the issues of copyright violation. "Intellectual property is a strange concept", Ugrinovich explains, "you can't see it, you can't touch it, you can't measure it. Few militiamen and prosecutors really understand it." Lacking both the resources and expertise to fight piracy, it was often much easier for a police officer to simply ignore the problem than do something about it.
But now there have been serious changes. Since September 2005, copyright holders of music have the exclusive right for the online distribution, making it more difficult for the so-called collecting societies to act as fronts for the commercial distributors of pirated music. This already was a big boost for the music industry.
But in late March industry piracy has been dealt a fresh blow when Russian lawmakers amended existing laws and gave it the status of a 'heavy' crime. When asked whether this was a big step forward for the industry, Kaminskaite's response is pure enthusiasm: "Our clients see this as a big change! Now that it is a priority crime, prosecutors will pay a lot more attention to the problem." But it will also improve the capacity of the police, including the "application of special equipment", Kaminskaite explains - wiretaps, in plain English.
This development is only the latest and most important step in a series of positive developments over the recent years. "There has been a drastic improvement of the situation since 2004," Kaminskaite continues. For her clients, the members of BSA, the fight against commercial end-users, that is businesses using software illegally for profit, is a priority. And things are looking increasingly good for the BSA: "In 2005, there have been 83 raids against commercial end-users, and five of these resulted in criminal convictions. In 2006, there were 550 raids and 50 criminal verdicts". And BSA has so far won every civil court case against commercial end-users. Most of the time, violators chose to settle out of court.
Kaminskaite's optimism is reflected in the numbers. The piracy rate in 2005 was 4 percent lower than in 2004. BSA attributes this to efforts made by the government and industry. But there is an additional factor: "As the standards of living rises in Russia along with Russia's economic growth", the 2005 Piracy Study reads, "resellers also report that more consumers seem willing to buy legitimate software."
Much remains to be done, of course. Now that piracy is a heavy crime, Kaminskaite hopes that the General Prosecutor's Office will appoint special prosecutors dealing mainly with piracy. This would provide an improved basis for cooperation between government and industry, including better training for police and prosecutors.
But after a bleak decade of skyrocketing music and software piracy that made the Russian market look like a black hole, the software and music industry is feeling optimistic. "Even at the current piracy rate, Russia is a very lucrative market for the software industry", says Herrnleben, "the future is looking good."
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