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.

All this, of course, is more than altruism. In the absence of a developed ‘eco-system’ for its products in China, Microsoft is determined to create one. “The question is how we can help build a software and IT ecosystem,” says Connors. “China is a long way behind in the eco-system. If you look at India, it’s very Silicon Valleyish. China doesn’t have that advantage in IT or software.”

The attraction for a government like China’s, he says, is a multiplier effect that surrounds Windows products. This multiplier is the company’s estimate of the business and earnings generated by all the independent software development, support, customization, and integration that surrounds Windows. Microsoft pegs that multiplier at between 7 and 8 times the amount of the cost of licensing. “That’s tens of thousands of people,” says Connors, “and to the extent that they can continue to make money, they’ll do so.” He adds: “If we do a great job, the multiplier effect is good.” In Microsoft’s argument, the mass purchase of Windows provides a boost to any economy.

Says MacLellan: “There’s a danger that people see us as taking too much of the ecosystem, when in fact we’re trying to do the opposite. I’m going to use the M-word and use it very carefully. I want the ecosystem to monopolize on Microsoft. I want as much of the eco-system built on my platform, so that more people say, ‘I’ve got to be on the Microsoft platform to get access to all of these people.’”sion-making movement as we would have before we established the seven PGs (product groups).”

Whose Addiction?

These words do in fact sound as if Microsoft is trying to create a dependency on its products, a natural enough goal for any business within legal bounds. But critics challenge the assumption of exclusivity. Eco-systems are necessary in software, but they do not, prima facie, rely on Microsoft to develop them.

It may be closer to the truth that Microsoft is in a race to establish the dominant eco-system. Certainly, Linux supporters are many years behind. They may be praying for some form of Miracle Gro to juice the Linux eco-system into full flower before Microsoft’s overwhelms it. Time, some say, is on Microsoft’s side and it could still win in China. Dion Wiggins, vice president and research director with Gartner Group, a technology advisory, points out that Microsoft’s situation in the PRC is not as bad as it looks. In a recent note, “China, Intellectual Property, and the Big Picture,” he argues that China is following the pattern of Western nations in its treatment of intellectual property protection and is slowly evolving a legal infrastructure that will allow foreign companies to press their cases in Chinese courts. Politically, it’s in China’s interest to control piracy now that it is a World Trade Organization member.

Any clampdown would lead to an advantage to Microsoft. “They own the desktop in China, in terms of sheer market saturation,” says Wiggins. “The problem is the conversion from non-paying to paying customers.” The company is not without solutions. Among the most radical but intriguing would be a one-time amnesty for pirate Windows and Office users, allowing current offenders a one-shot deal at a license.

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