Breakingviews-Microsoft stages nebulous Chinese comeback

Fri May 24, 2013 1:45pm IST

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(The author is a Reuters Breakingviews columnist. The opinions expressed are his own)

By John Foley

BEIJING, May 24 (Reuters Breakingviews) - Microsoft (MSFT.O) is staging a comeback in China. The world’s biggest software maker hopes to use the twin technological disruptions of cloud computing and mobile devices to get a second bite of a market where profit has proved elusive. Yet the financial benefits may prove no less hard to grasp the second time round.

China has been a piracy trap for Microsoft: many use its products, but few pay. Founder Bill Gates famously argued that he would rather see Chinese users steal his products than someone else’s, and they took him at his word. Chief executive Steve Ballmer has complained that Microsoft generates less revenue in China than in the Netherlands – though that will have changed since Microsoft started charging smartphone makers like ZTE patent fees.

Cloud and mobile services may provide an antidote. Windows Azure, the company’s cloud computing platform, is set to launch in June, and the hope is that piracy will be less of a problem in the cloud, where companies and developers store data and software on third-party servers rather than local PCs. In mobile, operating systems tend to be pre-installed by handset manufacturers, which creates tighter control over who's using what.

Yet competition is fierce. Alibaba, which already handles over 80 percent of online commerce, has high hopes for its own cloud computing service. While revenue from "public cloud" services are set to grow to $3.8 billion by 2020, according to Forrester, that’s still less than half the Business Software Alliance’s estimate of the Chinese market for illegal software. As for mobile, the industry is dominated by versions of Google’s Android operating system.

Microsoft may also escape the piracy trap only to fall into a political one. Foreigners aren't allowed to offer “value-added telecoms” by themselves, so Microsoft must share its cloud revenue with a local partner. Since cloud computing features in the Chinese government’s current five-year plan, the market is likely to develop in ways that favour local players. That makes Microsoft’s chances of turning China into a big source of revenue look pretty nebulous.

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CONTEXT NEWS

- Microsoft plans to hire thousands of new employees in China for the launch of its cloud computing services and the roll-out of smartphones, chief executive Steve Ballmer said on May 22. The U.S. software maker currently has a workforce in the country of around 4,000.

- Microsoft is due to launch Windows Azure, its cloud computing platform, in China in June, in partnership with local company 21ViaNet. Under the agreement, 21ViaNet would collect client revenues and pass a percentage on to Microsoft. China restricts foreign companies’ ability to offer “value added telecoms” services, leading most to partner with local players.

- In 2011 Ballmer complained that China provided less revenue for Microsoft than the Netherlands, despite having a population more than 75 times bigger. According to the Business Software Alliance, 77 percent of software by value was pirated in 2011, based on an estimated illegal software market worth $9 billion.

- Reuters: 21Vianet Announces the Public Preview of Microsoft Windows Azure Services in China [ID:nGNXUXVTQa]

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- For previous columns by the author, Reuters customers can click on [FOLEY/]

(Editing by Peter Thal Larsen and Katrina Hamlin)

((john.foley@thomsonreuters.com))

((Reuters messaging: john.foley.thomsonreuters.com@reuters.net)) Keywords: BREAKINGVIEWS MICROSOFT CHINA

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