How do software companies know if the serial number entered to use their software is a valid one or one created by a keygen?
Assume the keygen is generating a license number that can be entered into their program. The key will be accepted and gives the user full access to their software. After that, will they know the user is using an illegally licensed copy of their software?
The most common way is to have the program enforce only part of the actual license algorithm. For example, say the license looks like this: UUUU-VVVV-WWWW-XXXX-YYYY-ZZZZ. The license algorithm might require the YYYY-ZZZZ part to have a particular structure. But as far as the program is concerned, any UUUU-VVVV-WWWW-XXXX part is permitted.
However, the manufacturer might choose the serial numbers in a testable way. For example,UUUU might identify the reseller, version, or product ID. VVVV-WWWW might be sequential to issue multiple licenses. But the XXXX part may be based on a secure hash of the UUUU-VVVV-WWWW part.
Since the secure hash is not implemented in the program or tested by it, it can be kept completely secret. All legitimate keys will have the correct secure hash, but keys with an invalid secure hash but a correct YYYY-ZZZZ part will work in the software, but must have been generated by a key generator.
Typically, the program will embed part of its key in things. In this example, likely the UUUU-VVVV-WWWW-XXXX-YYY part. This is enough to tell whose license it is (if it was legitimate) and whether it was generated by a keygen, but not enough to use the license to run the software.
Usually by spying on you. Today many companies expect users to have active Internet connection at all times. Usually software will try to automatically update itself or check for updates and notify user. At that time, it may also send it's serial number or whatever type of identification it uses to the main server and the server will notify the software if the number is made by a known keygen or if it's in use by several other computers and so on. Sometimes software may connect to Internet only to check if it's legit or not.
In some cases software installers themselves may connect to the Internet in order to get the latest patches and serial blacklists. In that case a race starts between groups who believe in (possibly) illegal sharing of software with their neighbors who usually try to make fresh keygens and software developers who usually try to determine how the keygens create the number itself and give their best to add all numbers possibly generated by the keygen to the blacklist.
Sometimes software may include blacklists o serial numbers in patches. Some software developers may try to incite users to have active internet connection or to download patches. For example many games often have patches that will bring various improvements or they may have additional downloadable content that may be accesses only with valid serial number by using in-game downloader.
Some more "serious" software may have additional features that only work with Internet connection. For example Mathematica 8 can use Wolfram|Alpha to do some calculations or to recognize natural language input. Software is usable without those extra features but user doesn't have the full experience.
