Chasing pirates: Inside Microsoft's war room

As the sun rose over the mountains circling Los Reyes, a town in the Mexican state of Michoacán, one morning in March 2009, a caravan of more than 300 heavily armed law enforcement agents set out on a raid.

All but the lead vehicle turned off their headlights to evade lookouts, called “falcons,” who work for La Familia Michoacana, the brutal Mexican cartel that controls the drug trade. This time, the police weren’t hunting for a secret stash of drugs, guns or money. Instead, they looked to crack down on La Familia’s growing counterfeit software ring.

The police reached the house undetected, barreled in and found rooms crammed with about 50 machines used to copy CDs and make counterfeit versions of software like Microsoft Office and Xbox video games. They arrested three men on the spot, who were later released while the authorities investigate the case. “The entire operation was very complicated and risky,” says a person close to the investigation, who demanded anonymity out of fear for his life.

The raid added to a body of evidence confirming La Familia’s expansion into counterfeit software as a low-risk, high-profit complement to drugs, bribery and kidnapping. The group even stamps the disks it produces with “FMM,” which stands for Familia Morelia Michoacana, right alongside the original brand of various software makers.

The arrival of organized criminal syndicates to the software piracy scene has escalated worries at companies like Microsoft, Symantec and Adobe. Groups in China, South America and Eastern Europe appear to have supply chains and sales networks rivaling those of legitimate businesses, says David Finn, Microsoft’s anti-piracy chief. Sometimes they sell exact copies of products, but often peddle tainted software that opens the door to other electronic crime.

“As long as intellectual property is the lifeblood of this company, we have to go protect it,”  Finn says.

Microsoft has adopted a hard-line stance against counterfeiting. It has set up a sophisticated anti-piracy operation that dwarfs those of other software makers; the staff includes dozens of former government intelligence agents from the United States, Europe and Asia, who use a host of “CSI”-like forensic technology tools for finding and convicting criminals.

But the hunt for pirates carries with it a cost to Microsoft’s reputation.

The company’s profit from Windows and Office remains the envy of the technology industry, and critics contend that Microsoft simply charges too much for them. In countries like India, where Microsoft encourages local police officers to conduct raids, the company can come off as a bully willing to go after its own business partners if they occasionally peddle counterfeit software to people who struggle to afford the real thing.

 Finn argues that consumers and businesses are being coaxed into buying counterfeit products that either don’t work or do serious harm by clearing the way for various types of electronic fraud.

And, crucially, the counterfeit software cuts into Microsoft’s potential profit. A software industry trade group estimated the value of unlicensed software for all companies at $51.4 billion last year.

“It has always been in Microsoft’s interests for software to be available at two different prices — expensive for the people that can afford it and inexpensive for those that can’t,” Moglen says. “At the end of the day, if you’re a monopolist, you have to tolerate a large number of copies you don’t get paid for just to keep everyone hooked.”

Microsoft has demonstrated a rare ability to elicit the cooperation of law enforcement officials to go after software counterfeiters and to secure convictions — not only in India and Mexico, but also in China, Brazil, Colombia, Belize and Russia. Countries like Malaysia, Chile and Peru have set up intellectual-property protection squads that rely on Microsoft’s training and expertise to deal with software cases.

As Moglen sees it, these efforts underscore a certain level of desperation on the part of American companies and the economy of ideas on which they have come to rely. “This is the postindustrial United States,” he says. “We will make other governments around the world go around enforcing rights primarily held by Americans. This is a very important part of American thinking around how the country will make its living in the 21st century.”

Microsoft’s pursuit of software counterfeiters begins in Dublin, at one of the company’s 10 crime labs.

The undercover operative of this group is Peter Anaman, a lawyer who was born in Ghana and educated in England; he taught hand-to-hand combat to soldiers during a stint in the French army and then taught himself how to write software. Anaman has applied his software skills and training to explore a shift in piracy from groups that make CDs to those that offer downloads online.

Through three online personas — two female and one male —  Anaman chats with and sometimes befriends hackers in Russia and Eastern Europe who use stolen credit card numbers to set up hundreds of Web sites and offer products from Microsoft, Adobe and Symantec. “It is part of gathering human intelligence and tracking relationships,”  Anaman says.

Through an artificial intelligence system, Microsoft scans the Web for suspicious, popular links and then sends takedown requests to Web service providers, providing evidence of questionable activity. “The Web sites look professional,” And some of them even offer customer support through call centers in India.

“We used to remove 10,000 links a month,” Anaman says. “Now, we’re removing 800,000 links a month.”

He describes the groups behind these sites as “part of the dark Web,” saying they have links to huge spam, virus and fraud networks. Microsoft’s tests of software on some popular sites have shown that 35 percent of the counterfeit software contained harmful code. Anthony Delaney, who started at Microsoft 25 years ago —  brings up a world map that lets users zoom into a city just as they would if hunting for directions online. But instead of highlighting landmarks and popular stores, the map illuminates Microsoft’s retail partners.

 The area within a 50-mile radius of New York City accounted for more than 200 “actions” last year, including 165 cease-and-desist warning letters to companies suspected of selling pirated software.

College students, grandmothers and others have been found selling cheap, copied versions of software like Windows, Office, Adobe’s Photoshop and Symantec’s security software on eBay and other shopping Web sites.

People unwilling to pay for discounted software, meanwhile, can find free versions of popular products online that offer downloads to all manner of copyrighted material.
Microsoft’s investigators, however, spend much of their time examining how large-scale counterfeiters produce  copies at factories and then distribute their wares around the globe.

 Microsoft has found that operations of this scale tend to include all the trappings of legitimate businesses. Workers spend years building up contacts at software resellers around the globe, offering them discounted versions of software. Then they take the orders and send them off via shipping services, Keating says.

The master copy of a software product that takes great precision to produce. From a single stamper, Arvato can make tens of thousands of copies on large, rapid-fire presses.
Microsoft keeps tight controls over its partners that produce CDs. But counterfeiters get around these measures by stealing stampers and presses, presenting factories with fake paperwork from Microsoft or printing in a factory when it isn’t doing official business — a practice known in the industry as producing “cabbage.”

To make life harder for the counterfeiters, Microsoft plants messages in the security thread that goes into the authenticity stickers, plays tricks with lettering on its boxes and embosses a holographic film into a layer of lacquer on the CDs.

The piracy problems tend to run highest in regions where there is less money to pay for Microsoft’s products. Backers of free software like the Linux operating system take aim at these areas, and Microsoft also faces growing competition from Google, which gives away its Office rival to consumers and sells a business version at prices far below what Microsoft typically receives.

Finn argues that Microsoft’s anti-piracy efforts and training of law enforcement are a benefit to countries that want to build out their tech sectors and show they value intellectual property. Finn says “That’s not just for large companies, but also for small businesses and entire countries. We work with governments that are realizing this is in their best interests.”