When Microsoft Chairman Bill Gates got down to business at the start of President Hu Jintao’s tour of the US, he made plain the friendly nature of the "fantastic relationship" between the organizations they head. In phase one of Microsoft-China relations, the software giant invested US$750 million in Chinese products, companies and training programs from 2002. The latest package is larger still, with US$900 million earmarked for Chinese firms in Microsoft’s very own five-year plan.
The US giant agreed to buy US$700 million worth of hardware from China, and to invest US$200 million in software firms through joint ventures. An innovation center will be established in conjunction with the National Development and Reform Commission, with 10,000 Chinese software engineers being trained.
"We applaud China’s effort to strengthen intellectual property rights protection, which will help lay a solid foundation for the sustainable development of China’s information technology industry," Gates cooed in a statement. In 2005, Microsoft software accounted for just 1% of sales in China; the company has made less than US$200 million from the country over the last decade. "We have to be willing to accept things [in China] that we would not accept in the Western world," said Nigel Burton, Microsoft’s general manager for developer and platform evangelism in Greater China. "I try to be more pragmatic here than I would be if I were in France." At the Asian Technology Roundtable Exhibition held in Beijing at the end of April, Burton frankly summed up the state of affairs for his US employer: "We have spent more than we have made."
Needless to say, this shortfall can be blamed on software piracy, which runs at 90% according to US industry lobbying group the Business Software Alliance. Research conducted with International Data Corp ranked China as the third biggest user of illegal software in 2004 after Vietnam and the Ukraine, costing companies an estimated US$3.6 billion. The International Intellectual Property Alliance reckons 88% of business software sold in China is pirated.
"In places like Russia and India the piracy levels are clearly higher than the average worldwide, but still probably lower than in China," Burton said after the roundtable event. "The challenge in China is just one of timing. We are starting off 10 years later than we did in other places? so we just have to work closely with the domestic software industry and work closely with the government."
At the end of March the government ruled that all new PCs must be shipped with licensed operating systems preloaded, and official agencies announced they would only use machines with pre-installed software. "We feel good about anything which represents a commitment to the use of legal software, whether it’s ours or someone else’s," said Burton, who is in charge of the organization responsible for partnerships with software developers in China. "The main thing is trying to check that we can run a business here ? so I think we feel pretty optimistic about that."
Burton is clearly confident the American software giant’s products would be highly competitive in the second largest PC market in the world – with 19 million sold in 2005 – if only the playing field were level. "China is adopting technology with a lot of appetite," he added.
Lenovo is leading the way, declaring it will spend US$1.2 billion in a year on buying and pre-installing the Windows operating system on its PCs for the Chinese market. Just 10% of customers chose machines bundled with genuine software before November last year, but now 70% of Lenovo-branded PCs in China come with Windows XP. Three other Chinese PC makers plan to spend US$400 million on Windows operating system software.
"The requirement that all computers leaving the factory floor have built-in operating systems will be a big help," said Lester Ross, partner-in-charge of the Beijing office of Wilmer Cutler Pickering Hale and Dorr LLP, and general counsel of the American Chamber of Commerce in China. "This should make a substantial difference, and that should take place within a year."
But even if the central government is starting to get its act together, similar implementation at a local level will take a long time. Stamping out the use of pirated software in state-owned enterprises and eventually clamping down in the general marketplace will take much longer. "There’s progress being made ? but not enough is being done," Ross said.
If the government does start to get a grip on pirates, some computer users may look to the open-source operating system Linux – which does not need to be licensed – as an alternative to proprietary systems such as Windows. All of the Linux source code is available for consumers to use and modify as they choose. This free software model, with paid-for support, could filter down from large-scale government procurement to individual consumers.
"They [Microsoft] are not making much money, but they are not losing ground to alternatives like Linux," said Paul DeGroot, an analyst at Directions on Microsoft, an independent organization based in Washington. "To the extent that Microsoft treats China as a special case it could face problems elsewhere – what about India, what about Indonesia? There’s a huge market." DeGroot added that Microsoft had to be careful not to set a precedent in China for other emerging powers, particularly India.
Burton pointed to Thailand, where the software piracy rate has plummeted from about 95% to 30-40% in a decade, as an example of what the future may hold. But as ever, and by the software evangelist’s own admission, the rules are different in the Chinese market. "I suspect that maybe young people everywhere, including the US, have a slightly different point of view than they did 10 years ago – a more liberal point of view," he said.
Stressing that many consumers simply can’t afford to buy a full-price copy of Windows, DeGroot added: "An end to piracy in China is not going to increase Microsoft revenue in China by 1000%. What piracy has done for Microsoft in China is build a community that is familiar with the Microsoft product ? It does seem to me that they have benefited."
With growth in PC sales expected to run at 20-30% over the next year there is obvious potential in the market, though it is still small. "While it’s growing, it’s still not going to make a dramatic contribution to Microsoft’s bottom line," said DeGroot.