(Source: Universal Studios)
Massive electronics retailer Comet devoted a factory to unauthorized Windows XP and Vista Recovery discs

Microsoft Corp. (MSFT) on Wednesday struck a top UK electronics retailer with a stunning accusation.  In a press release it accuses the consumer electronics chain, Comet Group PLC, of being a "Tony Montana" of the software piracy world -- devoting an entire factory to and profiting handsomely off of its sale of illicit goods.

I. Is the UK's Second Biggest Electronics Retailer a Pirate Mastermind?

David Finn, associate general counsel, Worldwide Anti-Piracy and Anti-Counterfeiting at Microsoft comments, "As detailed in the complaint filed today, Comet produced and sold thousands of counterfeit Windows CDs to unsuspecting customers in the United Kingdom.  Comet’s actions were unfair to customers. We expect better from retailers of Microsoft products — and our customers deserve better, too."

The world's top operating system maker alleges that Comet actively sold personal computers bundled with unlicensed Windows XP and Windows Vista Recovery discs, which it printed at a factory in Hampshire, making them appear like the real deal.  Reportedly over 94,000 pirated copies were sold to consumers.

In its press releases Microsoft concludes by encouraging customers to "snitch" on suspicious retailer activity:

With an emphasis on education, engineering and enforcement, Microsoft seeks to protect its customers from counterfeiting and piracy — and ensure people get what they pay for. If customers ever question the legitimacy of their software, be it a shrink-wrapped product or recovery media, they are advised to visit to learn more and, if they have any doubt, report the suspicious software to Microsoft.

Microsoft Reading, Berkshire
Microsoft is based out of Reading, Berkshire in the UK [Image Source: Ghacks]

Microsoft currently employs approximately 2,000 people at its offices in Reading, London, Manchester, Endinburgh, and Cambridge.  The Reading location is home to Microsoft's UK base of accusations.

II. Comet Accuses Microsoft of Abusing Customers

While Microsoft paints comet as an "evil pirate", Comet sees things quite differently.

It boldly accuses Microsoft of abusing its customers and possibly breaking consumer laws.  In a short statement it writes:

Comet has sought and received legal advice from leading counsel to support its view that the production of recovery discs did not infringe Microsoft’s intellectual property.

Comet firmly believes that it acted in the very best interests of its customers.  It believes its customers had  been adversely affected by the decision to stop supplying recovery discs with each new Microsoft Operating System based computer.

The firm says it will "vigorously defend" itself before the UK's High Court -- a court somewhat akin to the lower U.S. federal circuit courts.

Supporters of Comet complain that Microsoft used to provide recovery discs for most of its laptops and desktops, but today pressures retailers to install recovery partitions instead and ship without a recovery disc.  In fact, Microsoft has cut off the supply of recovery discs for older operating systems.

Critics of this move point to the hard drive space wasted by the recovery partition and complain that the user could be forced to repurchase the operating system in the case of a full blown hard drive failure.

Windows XP
Comet is openly defying Microsoft claiming that it has the right to produce recovery discs that resemble those produced by Microsoft in the past, as Microsoft no longer supplies them to its customers. [Microsoft]

Microsoft, however, has argued that recovery discs are redundant and often lost.  Its perspective basically appears to be that that it doesn't want to have the discs and that as no law currently forces it to have them in the UK, that retailers should not be allowed to distribute illicit pirated copies of the discs.

While Microsoft may be technically correct from a legal perspective -- Comet has no right to reproduce its product without permission and masqerade it as a Microsoft distributed product -- its stance against recovery discs and decision to liken the printing to piracy is somewhat questionable.

After all, any user can and should make recovery discs to prevent having to repurchase their OS in the event of a catastrophic system failure.  But do so takes time, effort, and a bit of knowledge, so often users don't make recovery discs.

Microsoft isn't arguing that it's illegal for customers to make recovery discs.  It actually promotes that.  But it's fight against OEMs or brick and mortar retailers like comet going out and mass producing recovery discs as a consumer courtesy.

This is a curious move, given that the discs can't install Windows without an existing installation to repair and even if you could somehow trick the installer into running the process, you would still need a serial key, make the prospect of piracy unlikely.

It's more curious in that U.S. retailers have sold Windows XP/Vista recovery disks without reprimand, although its possible these large players ahd some sort of financial understanding with Microsoft.

III. Former Parent Says Comet Has "No Value" Anymore

Regardless of how badly Microsoft manages to mangle it in the UK federal court; the accusations are a stinging blow to Comet.  The UK retailer has a proud history, founded in 1933 as a battery retailer.

The company went through a period of dynamic growth in the 1990s, reaching a peak in 2005.  Since then, it has seen its profits slide.  

Part of the problem is that the company -- which has 250 stores in the UK -- has struggled to differentiate itself from rival retailer Currys who has 368 stores in the UK.  Comet attempted a rebranding in 2005, which cost it £20M (~$31M USD).

Things did not turn around and the situation is looking increasingly dire for Comet.  Profits are down to a mere fifth of what they were in 2004 and the corporation -- which always looked out for its employees -- has accrued a crippling amount of pension obligations.  Its pension plan is currently £39M (~$31M USD) -- or about four years of profits -- in the hole. 

French electronics giant Kesa Electricals plc. (LON:KESA) -- Comet's current parent company -- is rushing to try to dispose of the unit.  Reportedly it accepted a bid of £2 ($3.12 USD) (you didn't misread that) by OpCapita LLP, a private equity firm.

Comet store
Comet's struggles were highlight by its sale for £2. [Image Source: TJ Roadmarking]

Kesa agreed to retain responsibility of the pension fund and pay an additional £50M as an investment to settle the debt obligation and complete the sale.  It's clear that Kesa isn't thrilled about this money pit -- company chairman David Newlands states to The Guardian, "The £50m is categorised as an investment. We had to pay £50m to get the business away. We will write it off as having no value." 

OpCapita has agreed to spend £30M (~$47M USD) of its reserves and raise another £40M (~$62M USD) in financing to revitalize the laggard brand.

It is unclear who Microsoft expects to get money out of -- Kesa or OpCapita.  But what is clear is that new litigation could threaten the fragile deal and the long term survival prospects of Comet as a retailer.

IV. Microsoft Cracks Down on Piracy as it Faces Threat of "Free" Rival OSs

Microsoft has long shown mixed sentiments about software piracy.  Back at a 2007 Morgan Stanley Technology conference in San Francisco, Microsoft business group president Jeff Raikes infamously remarked, "If they're going to pirate somebody, we want it to be us rather than somebody else."

On the other hand Microsoft has also used a variety of tactics to try to combat piracy from discounts, to digital rights management, to lawsuits against illegitimate resellers Microsoft has tried to hack away at theft of its products at all parts of the piracy "food chain".

The operating system maker, who claims over a billion personal computers are using its software has been forced to soften its stance in nations like Romania and China where piracy is the government condoned status quo.  The Chinese government has been particularly vocal in its criticism of Microsoft's international anti-piracy efforts, complaining its software is "too expensive".

Microsoft takes a harder line stance in countries like the U.S. and UK, where intellectual property laws are firmer.

The OS maker, who also is a top player in the console gaming industry, the world's top browser maker, and the world's top productivity suite maker, is at somewhat of a crossroads in terms of the operating system market's general direction.

While PCs are still the primary computing device of choice for most people, Microsoft is seeing PC usage time cannibalized by smartphone usage -- a market where it has struggled.  As smartphones and tablets replace mobile devices it faces rivals with new business models -- like Apple, Inc. (AAPL) and Google Inc. (GOOG) who offer operating system upgrades free of charge to consumers.

Windows Phone v. Android
Windows Phone has struggled versus as Android, even as Android races to match Microsoft's OS deployment numbers, once thought to be untouchable. [Image Source: ZDNet]

If Microsoft cannot conquer this new market, it hopes to at least profit off the good fortune of its rivals, via intellectual property threats.  

Microsoft reportedly is currently pulling in more money courtesy of Android than it's making off of its own mobile offerings.  Microsoft has a long-standing licensing agreement with Apple, but their royalty structure has not been revealed.  Microsoft's approach of threats-and-fees seems to be thus far working better than Apple's attempts to ban Android outright.  Most Android manufacturers have bowed to Microsoft's licensing demands. [1][2][3]

V. Microsoft Looks to Repair UK Public Image After Sexual Harassment Scandal

One thing that may work against Microsoft should the case go before a jury is the company's languishing reputation in the UK.

The UK unit is working to rebuild its public image in the wake of a highly public lawsuit alleging abuse by a senior manager.  The suit claims that at a 2009 Microsoft global party held in Atlanta, Georgia engaged the UK's number two Microsoft executive -- Simon Negus -- kissed an unwilling female employee and making sexual advances on other female partygoers.

Microsoft terminated Mr. Negus after a £10M (~$16M USD) sexual harassment lawsuit broke, and sued him, attempting to recollect his hiring bonus.  With little to lose, Mr. Negus has taken to the courts painting a sordid tale of what he claims was sweeping impropriety at the party.  He comments "drunkenness and outrageous misbehaviour were rife", and adds that Microsoft fueled the chaos with booze, stating, "The alcohol made freely available in unlimited quantities included neat vodka which could be drunk from an ice fountain, and a very strong German liquor called Jagermeister."

Mr. Negus has reportedly implicated high ranking Microsoft executives in the U.S. of sexual harassment and misconduct.  While the identities of these executives are unknown due to the court proceedings being closed, sources hint that most of them are still working at Microsoft's Redmond, Wash. global headquarters.

While Mr. Negus's claims certain warrant a bit of skepticism given his disgraceful exit, numerous witness statements have corroborated his claims to some extent.  Testimony in the case reveals another senior level manager -- Steve Dunn -- also was actively sexually harassing female employees, even entering the women's bathroom "ridiculously drunk" midway through the party.  Mr. Dunn was a top Microsoft UK executive between 2006 and 2008.

At least some of the UK employees at the party, though, behaved chivalrously.  Two employees reportedly confronted Mr. Dunn over his persistent harassment of Emma Cloney, 42, Microsoft’s 'global alliance manager'.  The pair -- Jonathan Barrett, the financial services business chief at Microsoft UK, and Mark Dodds, director of the UK headquarter's 'special team unit' -- testify that they protected Ms. Cloney as she left the party, making sure the Mr. Dunn didn't lay his hands on her.

Microsoft scandal
Simon Negus (left), formerly second in command of Microsoft's UK operations is being sued by his former employer for sexual misconduct at a 2009 party against Zobia Chughtai (middle, left) and Martina Redmond (middle, right).  Mr. Negus has implicated high ranking Microsoft managers in the scandal.  Reported one manager --Steven Dunn sexually harassed Microsoft's head of global alliances, Emma Cloney (right).
[Image Source: BusinessWire, left; DailyMail, others]

The court that will be hearing the Comet case is the same civil High Court that's been hearing the sexual harassment proceedings, Microsoft's lawsuit against Mr. Negus, and Mr. Negus's countersuit against his former employer.

Sources: Microsoft, Comet, Guardian [sale of Comet], DailyMail [sexual harassment lawsuit]

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