Does Microsoft Need China?

The tech giant is on the rebound, but its future may lie in how it decides to adapt its pricing model to the developing world.

But in the long run, China could pose dangers to Microsoft. If Linux flourishes there, it could spawn formidable low-cost rivals to the American company. “The real value of open source to a country like China,” says Kevin MacIsaac, an analyst with the MetaGroup in Sydney, “is developing a public infrastructure for a software industry. It’s a reasonable and cost-efficient way for China to compete globally.”

Others in Asia see the potential. Japan and South Korea joined China in April on a project to jointly develop a new operating system based on Linux as an alternative to Microsoft’s Windows. Thailand and Malaysia have instigated programs to offer low-cost PCs to citizens with Linux operating systems (see “The Butterfly Effect on Global Pricing?”). They’re being helped along by Microsoft competitors such as Sun Microsystems, which has signed a deal with the Chinese government to supply its Linux desktop operating system and office program to as many as a million PCs there. Future electronics products shipped from China—such as mobile phones and DVD players—could be developed free from dependence on the Windows operating system.

For now, however, Microsoft is in a sweet-enough spot. Demand for its products in the US and other mature markets is strong enough to offset piracy problems in China and elsewhere in the developing world. A restructuring in 2003 has kick-started a cost containment program spearheaded by Connors. The company switched from reporting based on geography to seven discrete product groups, appointing seven CFOs to run them as separate businesses. The company’s anti-trust battles have also eased. Most recently, a US appeals court approved Microsoft’s 2001 antitrust settlement with the Justice Department, effectively closing a six-year battle. While an antitrust battle is ongoing in Europe, the company put aside its long-running fracas with Sun Microsystems earlier this year, with a US$2 billion settlement.

Interviewed in May, Connors presents the company’s global future with measured optimism. “We have a good presence in a very small part of the business market today on the desktop,” he says, “and a very small share of the overall budgets, as well as a small share of the consumer market in terms of things that are going to be digitized. And we have a very small share of the market in terms of small- to mid-sized business apps.” He adds: “We think that overall markets will grow at some rate better than world GDP. If we can grow the business better than world GDP, and the business we’re in is growing faster than world GDP—that’s a good place to be.”

It all depends, he says, on what happens to price. “As long as volumes grow and prices remain relatively firm or even soften a bit,” says Connors, “we can have a great business from the revenue perspective, and we can also have a good business from a cash generation or a value generation perspective.”

All Eyes on Price

Put another way, Microsoft is relying on current pricing and a goodly portion of the world’s tech growth to sustain its 31 percent net profit margins. But an increasing portion of global tech growth will come from Asia’s burgeoning economies. And it’s precisely in Asia—with China in the lead—that pressure to alter the uniform pricing structure for its software is the strongest in the world.

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