VideoThe 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.
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.
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