The Hollywood/high-tech tiff seemed to reignite in mid-September during a panel discussion at the International Broadcasting Convention in Amsterdam. Speaking on behalf of Microsoft, Brad Brunell, marketing and business development director of the Windows New Media Platforms division, wondered aloud why Hollywood execs insisted on setting the piracy threshold down to the level of individual users. Instead of fighting consumer enthusiasm, "why not just embrace it?" Brunell said. "Why not just flood the peer-to-peer services with legitimate content?"

Such questions highlight the philosophical differences between an industry that wants a no-leak copyright protection system and an industry that views leaks as a cost of doing business, says Joe Kraus, co-founder of the fair-use advocacy group DigitalConsumer.org (and co-founder of the now defunct portal company Excite.)

"The software industry learned its lesson in the 1980s," says Kraus. "They copy-protected a ton of software only to find that the only people inconvenienced were the legitimate customers who wanted to make backup copies. The real pirates always found a way around the copy protection. [Software publishers] learned the hard way that law enforcement and groups like the Business Software Alliance were better ways to handle the piracy issue."

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Indeed, many software companies have learned to avoid the issue altogether. Whether through free downloads, copyrights that allow for unrestricted copying or a simple unwillingness to equate computer users with thieves and cutthroats, the term "pirate" has lost a bit of its sting in recent years. Legal embarrassments such as a 2001 French court decision against Microsoft, fining the company 3 million francs for illegally incorporating another company's code into the Softimage 3D animation package, have further dulled the term's once-sharp edge.

Finally, there are those who simply view the term as too one-sided, especially in an industry where companies quite often benefit from illegal copying.

The argument for allowing piracy boils down to two words: network effects. Without a critical mass of users, most software products tend to wither and die. Conversely, the more users a software product acquires, particularly a consumer-oriented software product, the more valuable it becomes. This is especially true for operating systems, which require significant third-party support from application developers to stave off obsolescence. In fact, it was Microsoft's overwhelming dominance of the P.C. software marketplace in the mid-1990s that forced many economists to reexamine the issue of software pricing.

Starting with a 1994 paper by Amherst researcher Lisa N. Takeyama, economists and policy researchers began advancing the argument that having a large illegal user base might actually boost vendor profitability. In a 1999 paper titled "A Strategic Approach to Software Protection" economists Oz Shy and Jacques Thisse examined instances in which companies faced with certain duopolistic market settings dropped software protection as a marketing strategy and benefited from the decision.

Osorio's working paper, which has yet to be published, advances the argument into a new realm. Instead of looking at competition between proprietary software vendors, Osorio looks specifically at competition between proprietary and open-source software vendors unhindered by piracy concerns. Not surprisingly, his research takes him to the Chinese marketplace, where recent government investment in software research has resulted in a number of open-source spinoffs, most notably the Beijing-based operating systems vendor Red Flag Linux.

Factoring in the presence of open-source competition, Osorio's offers a "threshold" rate -- 81 percent according to statistical models laid out in the paper -- above which fighting pirates becomes a less optimal strategy than allowing piracy to occur. In other words, in developing markets, companies stand to make more money if they view each new illegal user as one more mouthpiece for the software and one less customer for the competition.

In its headline description of the Microsoft-China MOU, the Register, a UK Web site known for its cheeky coverage of the IT industry, summed up the Osorio argument even more succinctly: "Ballmer to China: 'Steal all the software you want, so long as it's ours.'"

Not everybody buys the "network effects" theory. An August, 2000 paper put out by Singapore researchers Chua Li Tze and Sougata Poddar dismisses most pro-piracy arguments as mere "artifacts" of statistical models that bear little resemblance to actual markets. The paper goes on to argue that even if network effects are given the fullest weight possible, "protection" of copyright "is always optimal."

Despite such counterarguments, the evidence coming in from the marketplace suggests that some companies are erring on the side of larger markets. For example, Apple, which declined a request for comment on Osorio's paper, distanced itself from market rival Microsoft by releasing the latest version of its MacOS, code named Jaguar, without any copy activation mechanisms. Microsoft XP, in contrast, includes a "product activation" feature designed to limit copying and suffered a minor PR embarrassment this spring when versions leaked out onto the Internet anyway.

Osorio, who doubles as a visiting research scientist at the MIT Media Lab, prefers to call his paper a "preliminary result" for the moment. He is currently exposing it to the harsh criticism of the peer-review process to make sure he hasn't missed anything. Still, he says, the feedback has been largely positive.

"I've had talks with people at proprietary software companies," he says. "They say, 'Yeah, you're right on this, but we cannot say that publicly.'"

One person who does speak out publicly in favor of the paper is Carl Howe, a senior analyst who follows the software industry for Forrester Research. Howe describes Microsoft's recent anti-piracy efforts in China as a prolonged exercise of "shooting itself in the foot" and wishes the company would spend less time obsessing over lost revenues and more time obsessing over new customers.

"I think they're actually acting against game theory," says Howe. "They're doing what's not in their interest by cracking down on piracy."

Then again, as the recent MOU indicates, Microsoft executives aren't exactly ignorant when it comes to game theory. As a company, Microsoft has shown an impressive willingness to modify corporate ideology in the face of market momentum. It is also a company willing to give away its products for free -- Internet Explorer anyone? -- for a share of future profits. Added together, it isn't hard to envision a kinder, gentler Microsoft, at least where China is concerned.

Although Microsoft representatives declined to comment on the Osorio paper, a company spokesperson was more than happy to reiterate the company's policy on copyright infringement. Like the Ballmer response in June, the statement included no mention of the word "piracy" -- a term once reserved specifically for just such occasions:

"Microsoft believes it is essential that intellectual property rights be protected and respected in the digital age so that worldwide economic growth and Internet commerce can continue to flourish," said the spokesperson.

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