Digital Piracy, Software Bundling and Cloud-based Software Service: An Economic Analysis

Description

This project proposes a theoretical analysis of the on-going developments in online commerce, with a specific focus on the software industry. Traditionally, software has been highly susceptible to digital piracy and the software industry has suffered billions of dollars in damage as a result. The latest change here is to the trend toward the offering of software as a form of service – the software as a service model (SaaS). Unlike the traditional software model, however, digital piracy can be controlled to this form of cloud-based setting. However, to deliver such a service requires the software vendors to invest heavily in the IT architecture that will be used to provide such services.The features provided in software products and services can either be vastly different or very similar. This opens up the opportunity to leverage the product/service mix through bundling. In fact, the current trend is for some vendors to continue to sell the traditional software while at the same time offering the same software as a service. This practice may suggest that rather than one form of software product dominating the industry, as is commonly believed, a combination of the software product and service could potentially co-exist. However, this development is relatively recent and many software vendors are contemplating what would be the best approach to addressing the issue. Hence, there is a need to understand how software vendors should offer their products and services in a market affected by digital piracy and network externalities.In this project, we seek to gain an understanding of the software vendor’s strategy when it comes to selling a software product and/or service when faced with digital piracy. Here, the software vendor must set both the software price and the piracy protection level. The consumer, in turn, will have the option to choose between the legal software product/service and the pirated software product or a combination of the different products and services. Network externalities and product compatibility issues can arise, which span the differences in firm requirements, and in the various versions of legal and pirated software. Our models allow us to gain more insight into how the growing convergence of the traditional software product with an IT-enabled SaaS would impact the market landscape, especially when digital piracy is a consideration. The results obtained from this project contribute to the existing knowledge base, which deals with the changing online business landscape.