The software protection strategy of software developer and the inherent risk to end user in using pirated software are two major factors that affect a user’s decision on whether to purchase or pirate a software product. This paper analyzes the optimal protection strategy for software developer in horizontally and vertically differentiated markets. We find that the implementation cost of software protection constitutes the primary factor for software developers to determine their software protection strategies. However, in a vertically differentiated market, the lower quality product should always adopt a non-protection strategy, regardless of the protection implementation cost. In other cases, protection would only be optimal if the protection implementation cost to the software developer is relatively small. These findings are consistent with anecdotal evidence.