Microsoft and the People's Republic of China (E-Commerce)

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Software piracy has been a major challenge for software makers such as Microsoft that want to sell software in the global marketplace. Laws that protect intellectual property vary from country to country, and the laws in many countries provide little or no protection. Governments in developing countries are reluctant to increase the protections afforded by their intellectual property laws because they see no point in passing laws that protect the profits of foreign corporations by imposing higher costs on their struggling local businesses and citizens. In the late 1990s, after years of holding firm on its global pricing, Microsoft began to offer significant discounts on its software to governments, small businesses, and individuals in developing countries. It also provided discounts on Windows operating systems software that was installed in new personal computers manufactured in developing countries. Microsoft donated software licenses to schools in developing countries. Just as these efforts were beginning to show some results, however, Microsoft faced a new threat to its global market position – open-source software.

Open-source operating system software, such as Linux, gives governments and businesses in developing countries a way to avoid paying any server software licensing fees to Microsoft. In 2000, the Brazilian state of Penambuco became the first government entity to pass a law that requires the use of open-source software on all computers used for state business. Shortly thereafter, the Brazilian state of Rio Grande do Sul passed a similar law that requires the use of open-source software in all of the state’s offices and in all privately operated utilities. In 2003, IBM realized the potential for open-source consulting business in the country and opened several centers for the development of Linux-based application software in Brazil. Concerned about a Latin American open-source domino effect, Microsoft embarked on a public relations campaign

in the region that included increased advertising spending and donations to public schools. In 2002, Peru was considering passing a law that would require public schools to use open source software. Microsoft founder Bill Gates flew to Peru and, with great public fanfare, donated $550,000 to the schools that would have been affected by the legislation. In 2004, Microsoft announced that it would donate $1 billion in cash and software over five years through the United Nations Development Program to not-for-profit organizations in 45 countries.

Most industry observers believe that Microsoft’s largest non-U.S. market today is the People’s Republic of China (PRC). Although the PRC generates about $300 million in licensing revenue for Microsoft, more than 90 percent of all Microsoft products used in China today are pirated. Bootleg copies of the company’s latest products can be purchased on the street for a few dollars. Thus, Microsoft believes that converting users to paid licenses could increase its PRC licensing revenues tremendously. As the PRC moves from being a less-developed country toward becoming a major economic power in the world, Microsoft sees an opportunity to increase its licensing revenue in the country. In the past, Microsoft has used a global anti-piracy strategy that relied on identifying users of pirated software and threatening those users with legal action, but the company is changing its approach in developing markets such as Latin America and Asia. In the PRC, Microsoft’s near-term goal is to develop a market for full-price software licenses that includes large business and government customers. Its new approach focuses more on recruiting major PRC business organizations as customers and less on sending threatening letters to users of pirated Microsoft software.

In developing its business in the PRC, Microsoft faces a number of challenges. Juliet Wu, former general manager of Microsoft China, published a book in 2000 that was highly critical of the company. The book was widely read in the PRC and received many good reviews. PRC officials have often criticized Microsoft for many things ranging from high prices to the company’s use of Taiwanese programmers (the PRC does not officially recognize Taiwan as an independent nation separate from the PRC). Government officials in the PRC are also concerned about security. Microsoft has always maintained that the code to its software products is a trade secret and has refused to allow its publication or distribution. Companies that develop software that runs on Microsoft Windows, for example, must sign a non-disclosure agreement with Microsoft to obtain information they need about how Windows operates so they can make their software compatible with it. Many PRC officials believe that Microsoft, as a U.S.-based company, might include secret back doors into its software that would allow the U.S. government to enter PRC government computers undetected in a time of international conflict or war. At a very basic level, the ideology of the PRC’s socialist government is a polar opposite to the highly competitive capitalist principles that have driven Microsoft to success. But the greatest challenge that Microsoft must overcome in the PRC is the attraction of open source software.

Open source programs’ code is public; thus it cannot have secret back doors that can remain undetected in the code. The PRC is training 600,000 engineers each year and is expected to soon become the second-largest semiconductor manufacturer in the world. These semiconductors are increasingly being used to manufacture Chinese computers, many of which ship with a Linux operating system. In 1999, PRC officials announced a Chinese version of Linux called Red Flag. The PRC’s national lottery and post office system all use Linux operating systems. The Province of Guangdong’s accounting system runs on Linux-based computers. IBM is the primary consultant on a multi-year project to put the PRC’s social security system onto Linux-based systems. As programming jobs in the United States dry up, some PRC Linux software developers have even been able to hire back Chinese programmers who had gone to U.S. companies. In 2003, the Procurement Center of the State Council issued an edict requiring that any computer purchased by the government after 2004 must be delivered with PRC-produced software only.

In the face of these challenges, Microsoft has worked hard to deliver its message that open source software can result in higher total costs because even though it is free, it requires more effort to install, maintain, and update than Microsoft products. In large organizations, this effort results in extra hours worked and thus, extra costs. Microsoft also argues that open source software’s publicly available program code makes it a greater security risk. According to Microsoft, attackers can easily learn how any open source program works and develop strategies for attacking the software when it is running on publicly accessible computers, such as Web servers.

  1. 1.  Assume that you are on the staff of a PRC legislator. Outline the arguments that you would use to support a law that required all government agencies to use only open source software on their Web servers.
  1. 2.  Assume that you are working for the marketing department of Microsoft China. Develop a detailed list of briefing points that would help your salespeople convince top executives of large PRC companies to use Windows operating system software on their Web servers.
  1. 3.  Assume that you are working for the business systems analysis department in IBM’s PRC division, which offers both Microsoft Windows and Linux consulting services to PRC businesses and government offices. Develop a checklist that IBM analysts could use in consulting projects that could help advise clients as they make a choice between Windows or Linux operating system software for their Web servers.
  1. 4.  Companies such as RedHat, Novell (with its SuSE distribution), and SCO (with its Caldera distribution) offer Linux operating system software for sale. Although Linux is available at no cost from various sources, these companies charge a fee for installation and configuration help. They also offer service contracts to help users maintain and upgrade the software on a continuing basis. Briefly outline the strategies that these companies might use to expand their market share in the PRC.

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