Monday, July 19, 2004

Microsoft in China 

Will Microsoft change China or will China change the way Microsoft does business? That is the question. I have watched with great interest MS's repeated attempts to crack the world's second largest software market. MS has been pouring money into various projects in China -- $750 million to train software and hardware developers, $10 million to wire local schools, developing computer courses at 36 universities etc etc. All in the hope that the Chinese consumer will get hooked to MS products and to ward off the real threat of China going the Linux way. As Steve Ballmer said in a moment of candour, China is the one country/economy that can threaten established global computer standards.

Throw India into that mix and it does seem like MS will need to do something quick to establish a foothold in the two largest emerging economies. During my stay in India, I saw many, many more commercials in the newspapers for both laptops and desktops with Linux on-board than I have ever seen in the United States. In addition, most of India's home computer market is grey in colour and pirated software is the order of the day. Under the circumstances, what is Microsoft to do? Newsweek throws some light.

Microsoft doesn't break down its China numbers, but Beijing tech analyst Huang Yong estimates that the company is in fact losing money in China on yearly revenue of $200 million to $300 million (out of $35 billion worldwide).

For Microsoft, the problem with doing business in China comes down mainly to one thing: piracy. Touts line the street outside a new $80 million Microsoft research center in Beijing, steering customers through alleys to run-down apartments where bootleg copies of Microsoft Office and Word are peddled for about $1, at least $199 less than the global retail price. Ninety percent of Microsoft products used in China are pirated, and for years the company battled back with its signature mix of bullying and intimidation. But in China the government has been sympathetic to the pirates, openly hostile to the Microsoft monopoly and officially embraced Linux, the free rival to Windows. Cheap software has been critical to China's economic boom, and Beijing saw no upside to forcing citizens with an average annual income of $1,000 to spend much of it on Windows.

The new Microsoft China strategy attempts to create a constituency for full-price software, starting with the political and business elite. This means improving customer support for big Chinese companies, helping Beijing develop a domestic software industry trained on and tied to Microsoft products, sharing more technology than it normally would and easing up on buyers of pirated software (but not on pirates).

To me, the central problem seems fairly straight-forward -- MS is trying to sell $200 software in a country where the per-capita annual income is about $1,000 (they refuse to bring prices down). Look guys, software is a high fixed-cost, low-marginal cost business. So, price discrimination seems like the only trick that will work in China and India, if you want to have a realistic chance of fighting off the pirates and Linux. I dont know what an ideal price point in China would be, but I can guarantee that at $200+, most sane people (in India and China) are not going to bite, especially since real alternatives exist. The Windows OS for $10 perhaps? Office for another $10?