Electronic distribution: the serial solution.

"As the majority of hobbyists must be aware, most of you steal your software. Hardware must be paid for, but software is something to share. Who cares if the people who worked on it get paid?"

--Bill Gates, "An Open Letter to Hobbyists," 3/3/76

We're not sure if Bill Gates was absolutely the first developer to complain in public about software piracy. But certainly Bill's never been a lonely voice: For the past two decades, the industry has pursued dozens of schemes--from copy protection algorithms to hardware dongles to well-publicized lawsuits--to keep customers honest.

So it's hardly surprising that electronic software distribution has created its own brand new technology of protectionism. "Digital wrappers," "clearinghouses," "encryption keys," "proof of destruction forms," "superdistribution"--we've seen all kinds of unfamiliar jargon and technologies emerge recently in the ESD world, chiefly dedicated to protecting and tracking downloadable software (Soft*letter, 11/15/96).

For the moment, ESD protection doesn't come cheap. The going rate for encapsulating software in a digital wrapper is anywhere from $250 to $1,500 per SKU, plus another 7% to 20% of the selling price in royalties or transaction fees. Everyone expects those costs to drop as soon as ESD volume rises. But there is far less certainty about how transparent the unlocking process will be to the user, who may find that the electronic version of a title imposes significantly stricter rules--about multiple loading, backup copies, and the like--than the same software installed from a disk or CD-ROM.

Clearly, it's going to be tough for publishers to explain differences in licensing rules that are based solely on the accident of a customer's choice of delivery channels. Moreover, software buyers have developed some reasonably firm expectations about software licenses, drawn from their experience with disk-based products. That expectation is a kind of "don't ask, don't tell" agreement: As long as customers show reasonable restraint in making copies, publishers in turn have been willing to ship products that aren't encumbered with awkward copy protection systems.

Typically, the enforcement mechanism for this agreement is nothing more than a simple serial number. When customers register software or call for tech support, they're almost invariably asked to supply a serial number. And if that number also shows up in a different customer's record, it's instantly obvious that someone--the customer or a reseller--has been making illegal copies. The system is far from leak-proof, of course, but it's good enough to make large-scale software piracy a risky business practice.

Which raises a question about why we really need a completely different system for managing electronic transactions. From a technological perspective, attaching a unique serial number to a download is a trivial problem. If there's an electronic reseller involved in the transaction, conventional wholesale distributors can certainly provide an "inventory" of serial numbers, which--unlike digitally wrapped copies--require very little bandwidth to download. The rules of the serialization game are already well understood; publishers and customers have used serial numbers to track software licenses for many, many years. There's no mystery here, and the incremental cost is almost zero.

In fact, we've been talking lately with publishers, ESD tool developers, and online resellers, and we were surprised by how many people are quietly exploring serialization as an alternative to digital wrappers and clearinghouse systems. So far, there seems to be a shortage of simple, off-the-shelf systems for managing the serialization process itself--but we suspect that gap will be filled shortly.

And if serialization turns out to be the dominant solution for tracking electronic licenses, what happens to the companies that are deeply invested in digital wrapping and encryption-based solutions? We suspect there's room for one or two players in markets where the price of the software dictates stricter controls than serialization alone provides. But is there room for a high-growth, high-margin business in these niches? We suspect there isn't.