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Intuit's lesson for MSFT and Hollywood
When customer antipiracy backlash hit the bottom line, Intuit did the right thing: they dropped it.
May 19, 2003: 11:00 AM EDT
By Eric Hellweg, CNN/Money Contributing Columnist

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SAN FRANCISCO (CNN/Money) - Last week investors sent Intuit stock up about $2.70 (roughly 8 percent) after the company reported solid third-quarter results. But tucked inside the earnings announcement was a policy change that may generate bigger revenues for the company in the future.

All told, the company had a strong quarter. Revenue increased 29 percent, year over year, to $634.7 million. Net income rose to $294 million. All good -- except the company had told analysts to expect revenues between $685 million and $725 million.

To address the difference between the company's initial estimates and actual revenues, Intuit (INTU: Research, Estimates) announced some changes. CEO Steve Bennett said in the earnings statement that Intuit would no longer require its users to use an "activation" feature with its flagship product, TurboTax, the No. 1 tax-preparation software program.

At this point you might be thinking, "Huh? What does an activation feature have to do with almost $100 million in lost revenue?" As it turns out, the activation feature was new to TurboTax 2002, and it required users to unlock the program on one host computer. Instead of being able to install the program on multiple computers (say, both the PC in the den and the laptop at work), customers could load the full-featured version of the software only on a single machine.

When Intuit launched the copy-control program, it predicted that revenue would increase, since customers who had previously purchased only one TurboTax program would have to buy a separate copy for each computer in the house. That assumption was dead wrong. Instead, the move triggered a consumer backlash the likes of which Intuit had never seen.

Customer reviews on (AMZN: Research, Estimates) tell the tale. For the 2001 version of TurboTax (which had no activation feature), the average customer-satisfaction rating was four and a half stars. For the activation-enhanced 2002 edition, the average rating dropped to one and a half stars, and the reviews bore titles such as "scumbags," "disaster," and, perhaps presciently, "the demise of TurboTax."

Also telling was the fact that the 2001 product generated just eight reviews. For the 2002 version, 578 customers were sufficiently enraged to go online and spread the word about how bad their experiences had been.

To its credit, Intuit listened to these complaints and reversed course. "We're taking a mulligan," says Julie Miller, a company spokeswoman. "The customer reaction was unexpected."

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Unfortunately for customers -- and ultimately, investors -- many other companies don't react to negative consumer groundswells as quickly as Intuit did.

Some companies (read: Microsoft (MSFT: Research, Estimates)) and entire industries (read: the entertainment sector) are busily building so-called digital rights management technology into products to stop consumer piracy. But DRM, like a soufflť, is incredibly hard to get right, and many of these companies are designing their DRM strategies to address the extreme upper reaches of the piracy bell curve.

Without a doubt, piracy is a major concern for companies that produce digital goods. And in countries like China, where copied software programs outnumber legitimate ones, stringent antipiracy technology is clearly needed.

But the lesson to be learned from Intuit's experience is that when companies employ antipiracy technology that's intrusive to the vast majority of their law-abiding customers, they risk reducing their markets. Indeed, that's one of the reasons Apple's (AAPL: Research, Estimates) new music service has attracted so much attention: It uses DRM systems that are practically invisible to the user.

Dropping the activation feature from TurboTax was the right move for Intuit, and the company is lucky that the mistake didn't do more damage to its financials. And therein lies a cautionary tale for investors: Keep your ears tuned to customer complaints about overly restrictive DRM policies.

As more companies cast about, trying to find the right balance between protection and customer satisfaction, chances are they'll get it wrong many more times before they get it right.

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