Will cracking down on piracy boost Microsoft's profits?

Last week Microsoft CEO Steve Ballmer told Wall Street analysts that "piracy reduction can be a source of Windows revenue growth."  Can it?

There’s a certain logic to Ballmer’s statement.  Pull the plug on a pirated copy of Windows and that person then goes out and buys a license.  Multiply that by millions and that’s a lot of extra cash in the pot for Microsoft.  In fact, this technique has already worked for some companies.  Here’s an excerpt from a recent post by Brian Krebs of the Washington Post:

Earlier this month while out at the RSA Security conference in San Francisco, I had the opportunity to sit down with Eugene Kaspersky, head of anti-virus research at Kaspersky Lab. He told me a very interesting story about how an anti-piracy effort at Kaspersky netted the company a huge windfall in sales.

The company was seeing millions and millions of computers running pirated copies of its software, most of them in the Asia Pacific region and in Eastern Europe. The problem with multiple users running anti-virus software with the same license key, Kaspersky said, is that it is sometimes unclear which user is the legitimate one. So the company decided to cut off updates to just the top two most-used, pirated Kaspersky Anti-Virus license keys. In so doing, it shut off updates to more than 3.5 million computers. At $50 per license, the company had just cut off $175 million worth of software freeloaders.

Amazingly enough, Kaspersky's move paid off handsomely: many of those freeloaders decided it was time to legitimately purchase the software they'd been stealing.

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But I’m not so sure that the same trick will work with Windows.  First, there’s a huge price difference between an anti-virus program and Windows.  $50 is a long way off the price of a copy of Windows Vista. 

Another problem for Microsoft is that it no longer exists in a world without competition.  Anyone can easily find and download a free operating system.  A pirate who’s not made an investment in Windows can walk away from it as soon as WGA kicks in and make the leap to a different platform.  While I’m sure that there will be a certain percentage of people using pirated copies of Windows who will then choose to pay for it, I think that this would be the exception and not the rule.

What steps would be acceptable for Microsoft to take to protect their intellectual property?