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.

The idea here would be to convert these millions into instant, paying customers—with the dividend of appearing to endorse China’s IT development. Another route, of course, would be a concession on price steep enough to attract pirated software users to make the switch. This would fly against the current thinking in Redmond, and is unlikely given the company’s current stance. But there have been precedents in other industries. Apple offered downloads of music from the internet as an alternative to illegal downloads on MP3 players, but did so within a price range that music lovers could afford. It found that many customers were willing to go legal.

And besides, says Wiggins, a cheaper, localized Chinese version of Windows wouldn’t be a threat to Microsoft worldwide. “The export market demand for Chinese language versions has to be limited,” he says. “What real use does a Chinese, Thai, or Lao version of Windows have in Germany?”

Microsoft, to be sure, is not unaware of the pricing issue in developing markets. The programs launched by Thailand and Malaysia to sell low cost computers to citizens with Linux operating systems have prompted it to offer a Windows XP Starter Edition – a stripped down version of Windows – to customers in those two countries at a lower cost. The company followed up with an announcement that it would offer the starter version throughout Asia. Analysts like Wiggins doubt whether the starter version will be cheap enough to combat the rampant piracy.

Still, it’s a start. Eventually, Microsoft will have to face the pricing issue in the developing world head-on. For now, it has the luxury of time on its side. No one knows how long this will last.

“They’ve been growing and doing fine without China,” says Hilal. He adds: “It’s a problem if they can’t make money in China, but what the magnitude is, is difficult to say.”

Does Microsoft need China? Maybe not. At least not now. Does it want to win there? You bet. And its future could well depend on securing that victory.

Two Views on Total Cost of Ownership

Microsoft has long argued that licensing fees from software represent only 5 percent of the total costs of an IT system, and that broad range of costs must be factored into any realistic assessment. Lately, a body of research has been generated that supports Microsoft’s contention that Windows is the better bargain Ð at least in the developed world, and for now.

There are various methodologies for viewing the total budgeted and unbudgeted costs over the lifespan of an IT system. These are divided into direct costs and indirect costs, with the direct, or budgeted, costs breaking down into hardware and software, IT operations, and administration. Indirect, or unbudgeted costs, are categorized as user operations and computer downtime.

Several studies this year – among them by tech group IDC and Forrester Research, both based in the US – have shown that total costs of operations favor Windows over Linux. The IDC study, for example, showed Windows had a cost advantage over five years of between 11 and 12 percent for four out of five typical server workloads. Linux proved to be cheaper in one category only: simple web serving. Those who favor Linux point out that some of the studies, such as the Forrester research, was funded by Microsoft, although no one has questioned the independence of Forrester’s approach. A portion of Microsoft’s website, Microsoft.com, is given over to the findings of these reports.

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