I'm building a new PC for my home office, and I'm going to run Office 2003 on it, so I went to our site to price the software suite. Office 2003 Standard Edition is what I need, and it looks like it can be had for $279.

But wait, there's less: I can get the Student and Teacher Edition for only $122. That's a pretty good deal, and as far as I can tell it's the same exact code. Not only will it save me $150 or so, the license agreement allows me to install the program on three machines at the same time. Which edition do you think I'm going to buy? (By the way, Corel will have a similar version of its forthcoming suite, WordPerfect Office 12.)

Because my wife is a teacher, I can buy the Student and Teacher Edition with a clear conscience. But it's still screwy economics, and I'd probably buy the cheaper version even if my lovely bride were a Supreme Court justice.

Microsoft, as it turns out, is not alone in having a tiered pricing structure for its software. Other software companies do the same thing. In fact, there's a distribution company, Digital River, that sells software on behalf of its customers (including Symantec and Autodesk) at prices that vary depending on not just who's buying the product but where they live and how much software piracy exists in their country.

People in some countries can afford to pay more for software than people in others.

Your papers, please
This country-based licensing system is called Software Passport, and it reflects a simple economic reality: People in some countries can afford to pay more for software than people in others, even though the cost of providing each individual copy of the software itself is the same regardless of who's buying it. That cost, of course, is extremely low: the price of the bandwidth for a download, or of a CD and a box for a retail version. So on a per-unit accounting, a software company can still make a profit on a highly discounted product if it can sell enough items and keep its distribution costs low.

Digital River CEO Joel Ronning explained the pricing variation to me this way: "If a user in China is making $3,000 a year, you don't want to price your software the same as if the average user is making $30,000 a year."

He went on to explain that high price of software is why piracy runs rampant in countries such as China. People there can't afford to pay U.S.-level prices, so there's a strong economic incentive for sellers to create pirated versions and for users to buy them.

Ronning wants to reduce the disparity between legit and pirated software and to turn "crooks to consumers."

What the Software Passport initiative does is monitor the economic conditions in a region, then adjust prices accordingly. Software companies must like this; they know they aren't going to sell many suites at $279 if that's 10 percent of a customer's yearly income. The $30 those companies can get is money they otherwise would never see; from the vendors' perspective, it's better them than the pirates. Ronning wants to reduce the disparity between legit and pirated software and to turn "crooks to consumers," he says.

Ronning says his licensing system, when embedded into a program, can even adjust your pricing when you move. For example, if you buy software in China for $30, then move to the United States, the software will know--after it's connected frequently enough to an American ISP--that you've probably changed residence. It will then dun you for the delta in license fees. Don't pay up, and the software will stop working. (On the flip side, however, if you move from the States to China, the software doesn't offer to refund the license-fee difference--a pity.)

Digital River also helps at least one of its customers sell student-market editions of products by using a method far more reliable than Microsoft's nudge-and-a-wink license agreement: In one non-U.S. country (Ronning didn't tell me which), you can't buy the cheaper edition unless you're cross-checked against a national student registry.

Software: just like drugs
This whole pricing disparity issue is similar to what drug companies face. They can't really expect people in less wealthy countries to pony up U.S. prices for new drugs. However, while a single pill (like a single download) may cost next to nothing to produce, those companies will argue that the development fees for their product need to be recovered somehow. Drug and software makers often say the same thing: The first unit off the line costs a billion dollars to make, and the second one a penny.

This is why offshoring is such a big deal in the software industry. If you can't get away with charging U.S. prices for global products, it can be argued that it doesn't make sense to pay U.S. development costs.

While the software business becomes more global, the availability of tools that help software companies sell their products at cut-rate, market-appropriate prices could actually enable companies to keep U.S. software fees down. The extra income for the software companies--revenues that would otherwise be lost outright to piracy--can help them recoup development costs more quickly. Then they'll be able to lower their prices for those of us who are both cursed and blessed to live in an economy where we can afford to spend 10 times more for software than people elsewhere.