The last two days have been tough for software giant Microsoft in China. Tuesday it lost a lawsuit to a Chinese firm who claimed Microsoft illegally deployed several Chinese fonts in four versions of its Windows operating system sold here. Wednesday the court followed through with its judgment and ordered Microsoft to stop selling the versions on the mainland. Microsoft has been complaining about the near-universal piracy of its products in China for years, but today it is going to have to halt shipping entire product lines due to a few fonts. Fonts! The sound of forehead smacking in Redmond must be audible from Beijing.
The issue begs the question of whether Microsoft will ever make it big in China. The company has gotten some tepid policy support in the form of crackdowns on illegal versions of Windows like Tomato Garden, but at the same time, when Chinese internet cafes were forced to uninstall unlicensed Windows versions, they were also forced to replace it with a domestically developed OS. And now this.
How bad is this news? According to analysts, the decision won’t make much different to the company’s bottom line because most of the Windows installations are pirated anyway. Microsoft says it has lost a lot of money due to piracy, but this is sort of the inverse of saying that you saved a lot of money shopping. Microsoft only lost money if everyone who pirated the software would have been willing to pay for it had it not been available illegally. Clearly Windows’ high price point deterred some buyers; when Microsoft drastically reduced the price of the operating system in China, sales went up. Also, cutting a deal with Lenovo to pre-install genuine Windows on new computers is a clever shortcut around piracy, since the price of the software is hidden in the cost of the computer. Still, the talk you hear from Microsoft today sounds a lot like the talk you heard four years ago. Lots of potential, not much profit, learning curve, adjust to the Chinese system etc.
That said, Microsoft’s strategy here has upsides. For one thing, Microsoft cannot abandon the Chinese market, whether it is profitable here or not. Windows is a standard, and it is in Microsoft’s interest for that standard to be as widely adopted as possible. By pirating Windows, studying it, learning to use its applications and developing applications for it, Chinese consumers and developers are effectively deciding not to adopt any other operating system. Windows isn’t the world’s best operating system – Vista was atrocious by all accounts – but the attraction of it is the amount of software written for it. Had Microsoft somehow miraculously managed to prevent Windows from being pirated here, they would have risked the development of an indigenous operating system – or the wider adoption of open source systems like Linux – and a community of developers surrounding it. And presto, 1.3 billion people are now passively lobbying their global trading partners to somehow integrate their IT systems with the Chinese standard, and lobbying foreign software firms to develop software written for this new OS, and all of a sudden you have a real problem.
However, software development appears to be moving into a new phase, and we will see how long this format advantage will last. For one thing, as software has increasingly become a hosted service instead of an installed product, switching costs have declined dramatically. For the other, most people don’t use a fraction of the features of the software they have installed. Must of us don’t need a more sophisticated word processor, for example. When was the last time you used Word’s Autosummarize function? Competitors like Google and mobile device software developers are simplifying, not complicating. Microsoft’s biggest problem in China isn’t piracy, its obsolescence.