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.

MacLellan sees the seven P&L structure as a boost to his efforts in China. “We have to realize that we have 97 percent piracy and whatever we do we’re not going to get economic returns – not in the short term,” he says. “The seven P&L structure allows us to communicate with our shareholders more clearly about the bets we’re making,” he says. In other words, the strategy for X-Box—Microsoft’s game console—in China is not joined at the hip to the strategies for the other units, and the goals of investments within a given group can be argued on their own merits.

MacLellan is a Scot amid his second stint at Microsoft. He says a prime reason for his return was the lure of Asia and making Microsoft work here. “There’s no higher priority than getting Asia right,” he says. Despite his background in finance, he has the zeal of an expert salesman, though he hardly talks the party line. “We’re taking this phenomenal 800 pound concept,” he says, “and we’re trying to fit it in a region where this 800 pound concept may not fit.” He adds: “Of course, if you’ve been here for five minutes you see that it doesn’t. And we’re having to adapt.”

That adjustment involves getting China in a different way, understanding the dynamics between the central and local governments, how businesses struggle, what China needs. “We in the West seem to regard the direction of China with a McCarthyite view,” he says, “as if there’s a unified, ominous intent behind official decisions.” MacLellan is an engaging conversationalist, a tall man whose size makes a stronger impression because he’s an animated, passionate speaker. “But this isn’t the case,” he continues. “We have to have the patience to let them figure some of this stuff out, and to understand the bravery of some of their decisions.”

He adds, “It’s a phenomenal engine that these guys are trying to manage, and trying to understand. They’re looking for the levers.”

The same could be said about Microsoft in its encounter in China. Things started badly when Microsoft opened an office in Taiwan in 1989 and began shipping its Windows products into the PRC. A Taiwanese programmer had inserted patriotic statements into the software, which were revealed later and offended the Chinese government. Then, as the magnitude of the piracy problem developed, Microsoft launched a series of lawsuits, which alienated public opinion. Bill Gates also told Fortune magazine in 1998 that eventually Chinese users would become ‘addicted’ to computers and become paying customers. The phrase is used by Pogo Linux, an open-source software company based, like Microsoft, in Redmond, Washington, in its Chinese marketing materials. “Chinese executives don’t miss the parallel with the Opium Wars and China’s victimization at the hands of the colonial powers,” says Tim Lee, president of Pogo Linux.

But then Microsoft reversed its tracks. Its US$750 million investment in the PRC over three years (beginning in June 2002) is an extraordinary bid to help China build a market for software development—and help put Microsoft in better standing with the government. The deal allows China’s state planners a say in where Microsoft donates millions of dollars worth of technology training. It calls for Microsoft to buy hardware for its X-Box consoles from Chinese partners, and the government gets to pick the partners. The money is being used to set up four joint-research labs at Chinese universities and to pay teachers at universities elsewhere in China.

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