Microsoft dumping their OS in China, but to what purpose?

To set the stage for this article, consider the following:

From the above it doesn’t take a genius to see that Microsoft is trying hard to get a Microsoft OS, any Microsoft OS, on PCs in China. My question is simply this: Why?

Has Microsoft been reduced to giving away an old OS in pursuit of “market share” numbers? Except for a few Microsoft apologists, who thinks OS market share really means anything? Who will develop apps and services for a market that will not buy them (though they’ll be happy to pirate them)? If you’re a major software player it’s not worth it, if you’re a startup you’ll go broke.

Steve Balmer said that Windows’ one billionth copy will be sold next year, and that number is greater than the number of automobiles in the world. Is this a move to get there sooner? That would be silly, but Microsoft has done sillier things.

Look at Microsoft’s highly-touted 97% market share compared to Apple’s 3%, and then look at the profits driven by those percentages. It’s clear loss-leader hardware and software is not the way to profits.

If Microsoft’s moves are not about market share, then they must be about rampant piracy. That would certainly make more sense, but then their actions aren’t enough. I guess Microsoft believes the $3 XP pack will build a foundation upon which to cultivate a new generation of Windows users. I think they’re wrong. By giving away their old technology they’ll still face piracy; who wants the old OS when you can easily get the new one?

If piracy was the target, Microsoft should have dropped Vista Basic to $3 and left XP out of it entirely. At least then their new-found $3 customers wouldn’t immediately have to consider dumping a six-year-old OS with known security vulnerabilities for either Linux (maybe) or a pirated Vista (most likely). If you’re willing to take a loss to cultivate a new generation of users, then don’t be stupid and try to do it with your old software.

Whether an attempt to bolster market share or stem the flow of piracy, I think Microsoft’s latest moves in China will fall short. The former because market share means very little, the latter because a $1 Vista is pretty hard for a $3 XP to compete with.

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8 thoughts on “Microsoft dumping their OS in China, but to what purpose?

  1. Excellent point about whether the PCs can even run Vista, but note that I’ve been discussing a $3 Vista _Basic_. This is the version with no Aero interface, and should pretty much run on a machine that can run XP.

  2. The comments about the $3 XP aimed at students and poor households is true, but if either group can afford $3, then they can afford $1 for a pirated Vista.

    Only if Vista can run on these low-cost and refurbished systems bought with the help of the government. Is it at all possible? I’m not so sure about that.

    Ironically, the middle class can afford a better PC and the $60 Vista license, but piracy is so widespread, they may be tempted to pirate the OS.

    Any way you slice it, it will be challenging for Microsoft to increase revenue in emerging markets.

  3. Michael,

    Thanks for the thoughts. My point is that who cares that 90% of Chinese PCs run Windows when they’re pirated (so resulted in no revenue), and if they run other MS apps (like Office) they are pirated, too.

    The idea that eventually they’ll get “stuck” on the products, while simultaneously having more money so MS can raise the price is a ridiculous business plan in my opinion.

    As soon as you get more money, you don’t pay more for what you already have, because what you’d previously paid for it already established its relative worth. In other words, XP will never be worth more than $3 to most Chinese, and Vista not a lot more.

    Lots of people talk the “get them cheap then raise the price” game when they discuss Microsoft. But Microsoft has never shown the ability to do that. Xbox is a dud that has cost them billions. It’s all they can do to keep it afloat.

  4. Why? Because they don’t want them using anything else.

    Gates has even said in the past that he’d sooner people used pirated Windows than use another OS. In fact, he said much the same only the other day:

    Today Gates openly concedes that tolerating piracy turned out to be Microsoft’s best long-term strategy. That’s why Windows is used on an estimated 90% of China’s 120 million PCs. “It’s easier for our software to compete with Linux when there’s piracy than when there’s not,” Gates says. “Are you kidding? You can get the real thing, and you get the same price.”

    How Microsoft conquered China

    The point is that if people learn something else they may never switch even when they can afford to do so. As a long-term strategy this could pay off for Microsoft. If the Chinese economy booms and the average Chinaman has more money in his pocket ten or twenty years down the road, then MS can ask more and get it. In the meantime, what have they lost? Major software is horrendously expensive to develop; but once you’ve got it, it costs very little to make copies … which is why Mr. Gates was the richest man in the world. They can even afford to lose money on the deal.

    They do similar things in their home market, too: they’re losing money hand-over-fist on the Xbox but they’ve just discounted it even more. These gambles can be worthwhile if you’re playing a long game. Capture the market; then push the prices up.

  5. The comments about the $3 XP aimed at students and poor households is true, but if either group can afford $3, then they can afford $1 for a pirated Vista. That stuff is a lot more common in China.

    Further, with students, we’re talking about a demographic MOST likely to not worry about pirating, as well as wanting the latest and greatest. To me, expecting the students to be happy with a six-year-old OS is a bit much.

    Finally, if Microsoft is relying on the Chinese government to help fund the students and households and keep them strait, good luck with that. They’ve shown little compunction to slow the growth of piracy at all.

  6. MS has been hired by the U.S. Feds to give their OS to the Chinese – this is to help slow the Chinese economy. After installing millions more XP/Vista systems, the Chinese economy will definitely begin to slow, mainly caused by Windows issues. Most sectors will be affected, excepting IT departments…,which are projected to REALLY expand once more Windows systems are installed…

  7. Wow! How can they charge $3 dollars for Windows? It’s only worth 75 cents! (Wait: cut that in half.)

  8. According to news.com, Microsoft is aiming at students and poor households in emerging countries with the $3 software bundle (Windows XP Starter Edition, Office Home, etc.). The governments are supposed to give a hand: “The software maker will offer the $3 Student Innovation Suite to governments that agree to directly purchase PCs for students to use in their schoolwork and at home. […] Microsoft is hoping this program and others will help the company reach more of the 5 billion people who have yet to benefit from the PC revolution.”

    I don’t think that XP Starter Edition is competing with Vista. Pirated versions sell on the streets for $1 but if people living in rural areas can’t afford a PC, they won’t run Vista, even the pirated version. Vista won’t run well on a ultra low-cost PC bought with the help of the government, or on an oldish refurbished machine “which can cost as little as $50,” as the article states. Better stick with XP Starter Edition despite the limitations.

    According to Reuters: “Microsoft Corp. has more than halved the retail price of its Vista home basic computer operating software package in China to 499 yuan ($66) from 1,521 yuan ($201), and the price of its premium package to 899 yuan ($119) from 1,802 yuan ($238), effective from August 1.” I suppose that the Chinese middle class living in urban centers can afford a PC and a Vista license. They may be more computer savvy, too, and XP Starter Ed. is too restrictive.

    XP Starter Edition won’t be profitable, but if MS wants to expand the installed base, the company doesn’t have much choice. With the Vista price cut, Microsoft is trying to battle piracy, but China’s piracy rate is so high… All in all, it looks like emerging markets are challenging. And I didn’t even mention Linux.

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