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Did you know Microsoft had a freemium business model? Neither did I, until their new CEO Satya Nadella sat down with CNBC’s Jon Fortt on Monday. From the transcript here:

Nadella: So we do not want to have you only start using us when you have a business license or subscription. We want to have you use us when you just want to save any file or any document, any artifact of yours. And then have a natural way for us to monetize as you use more of it in the commercial context.

Fortt: Kind of the freemium model, which a lot of startups in Silicon Valley latched onto. But Microsoft has always been fond of getting paid for the software it spent so much time and money developing.

Nadella: Well, we’ve always had freemium. Sometimes our freemium was called piracy.

Wait, what? Did the CEO of Microsoft just admit that piracy was an integral part of their business model?

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Of course it is! Software piracy is impossible to stop, and Microsoft has done what any smart business would do – turn a piracy problem into a revenue opportunity. That is why they don’t call it viral marketing. The difference between viral marketing and freemium (for a primer on freemium, go here) is the difference between hope and strategy. With viral marketing you hope that it turns into revenue but really have no idea. With a freemium business model you have a strategy to convert free users into paying customers.

Microsoft’s conversion strategy, Windows Genuine Advantage (WGA), allows them to detect illegal use and use messaging to convert unpaid users into paying customers, and it’s very successful.

What is piracy to you: a problem or an opportunity? Are you using hope or strategy to drive new license revenue?

Take it from Microsoft – if you have to live with pirated use, at least be smart about monetizing the problem.