Microsoft in China

A few weeks back, I posted a couple of blog entries on my recent trip to China. We have seen huge MySQL download numbers from Brazil, Russia, India, China (or “BRIC“) with very significant growth in the last few years in China.

I tried reading a book by Robert Buderi called “Guanxi (The Art of Relationships) – Microsoft, China and Bill Gates’s Plan to Win the Road Ahead” on the development of Microsoft’s research lab in China. However, the title should have been a warning to me. As much as I wanted to dive into this book it was just a puff piece and rather non-critical. But that’s just my opinion, perhaps others will get more out of it.

So I was pleasantly surprised by a great article in Fortune called “How Microsoft Conquered China — Or is it the other way around?” by longtime tech writer and senior editor David Kirkpatrick. The article describes Microsoft’s ups and downs in China and how they’ve had to evolve their approach in order to be successful. Kirkpatrick is as insightful as Buderi is tedious.

Microsoft has been involved in China for 15 years, initially trying to graft it’s existing strategy onto the local market without much success. After ten years with little to show for it, Microsoft began to look at China differently and realized that they could not compete under the same rules used in other markets. Their high-priced business model simply wouldn’t work in a country like China that had little regard for IP-enforcement policies. And for many years, you could pick up CDs of Microsoft products at local markets for a couple of bucks. Windows was popular in China, but no one was paying for it.

Somewhat coincidentally, in 1998, Microsoft began investing in building what was a small but significant research lab in Beijing. The lab was staffed with local top talent as well as returning Chinese “sea turtles“. The net effect was a huge boost in Microsoft’s image. Now it was not just selling software, it was investing in China’s development.

There’s an interesting angle that Kirkpatrick touches upon in the article, which is that not only was Microsoft competing against Linux in China, it was competing against pirated versions of its own software.

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.” Indeed, in China’s back alleys, Linux often costs more than Windows because it requires more disks. And Microsoft’s own prices have dropped so low it now sells a $3 package of Windows and Office to students.

So perhaps a question that might be worth asking is if Windows and Office only costs $3 in China, how sustainable are it’s prices in other markets?