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.

“I would like to use your software, but how can I invest in it when I now have cheaper options available?” asked a CFO of a healthcare chain based in Singapore at an executive breakfast where Connors was speaking that morning. The CFO added: “What can I tell my shareholders?”

Connors responded that the total cost of ownership of Microsoft Windows and Office products—which account for 80 percent of its revenue—is in fact less than that of cheaper, open-source software, because Microsoft can offer the entire weight of the ‘eco-system’ that supports its products. This eco-system can be described as the support, customization, integration services, and software that evolve around the Windows product. Connors cited studies that have endorsed this view from Forrester Research and Merrill Lynch (see “Two Views on Total Cost of Ownership”).

But while Connors’ arguments hold true in the Western world, they don’t stand up so well in emerging markets. That’s because Microsoft has a one-size-fits-all pricing policy for the world. And while it offers discounts in various sectors—such as to governments and universities—it remains inflexible on the cost of its software. Critics say that the total cost of ownership argument does not apply in markets like China, where labor costs are cheap and the real cost of Microsoft products is extraordinarily high. It’s partly for this reason that Microsoft has such serious piracy issues in Asia.

Research gives an idea just how much Microsoft products cost in the region. A group based at the University of Maastricht in Holland called Free/Libre/Open Source Software (FLOSS) released a study last year that showed the cost to businesses of a basic ‘toolkit’ of Windows XP and Office XP in 173 countries using purchasing power parity rather than market exchange rates. For data on the countries, the FLOSS study drew upon World Bank figures published in 2001 using a figure of US$560 for the Windows and Office toolset if it was purchased in the US, based on contemporary pricing from Amazon.com. The FLOSS study said the same package would cost a Chinese business US$21,678, equivalent to more than seven months of the nation’s per capita GDP. In India the cost came to US$42,725, or 14 months of per capita GDP. In Cambodia, the price tag reached US$71,184, or 24 months of per capita GDP. Says Rishab Ayer Ghosh, program leader for FLOSS: “In developing countries, even after software price discounts, the price tag for proprietary software is enormous in purchasing power terms.” Ghosh argues that lower labor costs and higher licensing fees tilt the debate about the total cost of ownership between open-source and proprietary software in favor of open source in most developing countries.

In this context, Linux presents Asian governments with a low-cost opportunity to develop a competitive market for software, causing downward pressure on price. Security-minded governments like China’s see a benefit in developing a home-grown software industry independent of the proprietary code of the largest American software company. Moreover, a lively Linux market, if it developed in China, would provide a solution to the nation’s software piracy problem. Illegal users could naturally gravitate to the lower-cost Linux software rather than buy Windows at seven months per capita GDP.

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