Wall Street Journal
By Loretta Chao
September 1, 2009
Hong Lei and his partners were the biggest pirates of Microsoft Corp. software in China, but since his arrest last December, the 30-year-old creator of a popular Chinese clone of Windows called Tomato Garden Window XP has become something of an Internet hero.
The phenomenon underscores the challenges faced by Microsoft and other technology companies as they battle rampant piracy in China, despite official efforts to crack down.
Users of Mr. Hong’s software have launched fan sites, including one where they swap stories about how they “grew up” using his software, recognized by a cartoon icon of a smiling tomato wearing sunglasses. A survey of 184,000 people on Chinese Internet portal Sina.com, asking about the detentions, found that 80% of respondents supported Tomato Garden and only 4.4% supported Microsoft. Online forums are full of Mr. Hong’s supporters.
“People regard Hong Lei as a talent, a national hero,” said Fengming Liu, vice president for Microsoft in Greater China. “This is part of the problem.”
Last week, after a court in the eastern city of Suzhou sentenced Mr. Hong and three others to 2 to 3-1/2 years in prison for copyright infringement, the banner at the top of Mr. Hong’s Web site read: “Hong Lei is judged. Tomato is finished.” On Monday, court officials said the four would be transferred to a prison to start serving their sentences on Tuesday.
Mr. Hong was more than a simple distributor of bootleg software. He and his partners built a sophisticated business distributing copies of an altered version of Windows XP that made what the court estimated at more than a million U.S. dollars in advertising revenue. And he developed a loyal base of customers, many of whom saw him as a standard-bearer for Chinese innovation and were proud of the way he stole a march on Microsoft.
Many users of pirated software outside China share the view that there is nothing wrong with using pirated IT products. But experts say the sentiment plays out differently here. “In China you have the additional layer of nationalism — Chinese hackers sticking it to a big American corporation is a story with which many Chinese netizens are bound to sympathize,” said Eric Priest, an assistant professor at the University of Oregon School of Law who researches copyrights and the Chinese entertainment industry.
Microsoft products are offered in a variety of illegal ways in China, from pre-installations using stolen license keys at computer stores to sophisticated advertising-supported operations like that of Mr. Hong. As of the second quarter, China made up 18% of global personal-computer shipments, according to research firm IDC — but new licenses for Windows from China make up only about 2% of Microsoft’s global sales each year, according to people familiar with the situation.
According to the court’s judgment, reviewed by The Wall Street Journal, prosecutors said Mr. Hong was the creator of Tomato Garden and oversaw Tomatolei.com, the Web site where users could download the software free and chat with each other. In China, a licensed copy of Windows Vista is 499 yuan, or about $73.
Chinese users say that Tomato Garden looks and operates like Windows, except with different colors, and can be activated without a serial number, which is required in licensed copies.
Unlike many software pirates in China, who simply sell unauthorized copies on CD-ROMs or who pre-install the software onto computers for a significant markdown, Mr. Hong and his partner Sun Xianzhong allegedly sold advertising to a number of companies including Baidu Inc., China’s leading Internet search company, and e-commerce company Alibaba Group, of which Yahoo Inc. owns a 39% stake.
It turned out to be a lucrative business model. Baidu, for example, paid 936,000 yuan, and Alibaba paid 1.6 million yuan to the company, prosecutors said. Based on estimates of how much money the software was able to generate, the court fined Messrs. Hong and Sun, two others and their company about 11 million yuan.
A Baidu spokesman said the company has “not had this relationship [with Tomato Garden] since last year.” “Baidu takes IP matters very seriously,” he said.
An Alibaba spokesman said the payment refers to an advertising deal made by Yahoo China, which is owned and operated by the group, because the company was assured by the vendor that its products were authorized. “We do respect intellectual property rights. In this case we are a victim in that respect as well,” the spokesman said.
According to the judgment, Mr. Hong’s lawyer, Mao Qinyong argued that prosecutors overestimated the number of downloads of Tomato Garden, and that advertising revenue earned from the operation shouldn’t be viewed as income from the distribution of pirated software. When reached for comment, Mr. Mao declined to elaborate. Mr. Sun’s lawyer, Yu Goufu, said Mr. Sun hasn’t requested an appeal.
The case against Tomato Garden could be the beginning of stronger crackdowns by the government on piracy. An official at China’s National Copyright Administration said that Tomato Garden was chosen as a key case for the administration’s campaign against online piracy last year after they received complaints from Microsoft that the operation was going on. The official declined to say what the focus of this year’s campaign is, and wouldn’t comment further.
A July report by China’s state-run News Agency said the administration has shut down more than 800 illegal Web sites so far through its campaigns, but none have been as big as this one. Microsoft and the Business Software Alliance, a Washington-based industry group, praised the government’s handling of Tomato Garden as a milestone in China’s efforts to crack down on piracy.
The Tomato Garden case “so far is the largest for Microsoft,” said Mr. Liu, the Microsoft vice president, in an interview. The fine, which will be paid to authorities, “is a lot to pay for a Chinese company,” he said.
Despite being a legal victory, the public arrest and prosecution of Mr. Hong has turned him into a martyr of sorts, potentially turning more Chinese users against Microsoft. “He must be a genius,” said Lu Yuchao, a 25-year-old user of Tomato Garden in Shanghai, who bought a copy of the software for 10 yuan, or about $1.50, when his computer crashed. “It’s just so convenient…I’ve been using it and it works very well.”
Xiao Xiaomeng, a university student who has used Tomato Garden for years, said he thinks Mr. Hong is “a great guy,” and said he wouldn’t buy a legitimate copy of Windows unless Microsoft drops the price to 30 yuan.
Another user in Jiangxi, who declined to give his name, wrote on a message board that the “spirit of Tomato Garden” would help China create its own operating system some day.
Industry groups say piracy is a worse problem in China than in other markets. Some say this is partially because end-users, including some large commercial users, face virtually no penalty for using pirated software.
To combat this, Microsoft has tried a number of strategies, including suing perpetrators in civil courts; investing in an antipiracy cartoon that aired on state-broadcaster China Central Television this year; and even cutting prices in a promotion to encourage consumers to use legitimate versions of its software.
In China, home and student versions of Microsoft Office currently cost less than $30. The software starts at about $100 in the U.S. Still, experts say that cutting prices historically hasn’t helped rights owners compete with free, pirated content in China.
“The problem is, Chinese users are now accustomed to pirated software and see little value in paying for legitimate copies of Windows at any price,” Mr. Priest, the Oregon professor, says. “In that case, Microsoft might well be better off charging a premium to the relatively small number of customers.”
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