Technology


Microsoft fights piracy in emerging markets




Posted on August 12, 2014


MICROSOFT’s current issues in China conceal a deeper problem for the US software giant -- despite the popularity of its Windows operating system and Office suite, few people in emerging markets are willing to pay for legitimate copies.

This not only costs Microsoft in lost revenue, but is also holding back the spread of its newest Windows 8 version -- analysts say even buyers of pirate software prefer older versions. According to StatCounter, a Web site that tracks what software is loaded on Internet-connected computers, more than 90% of PCs in China -- now the world’s biggest market -- are running pre-8 versions of Windows.

Microsoft is trying to tackle this. This year it’s offering Windows 8 at a discount to PC manufacturers who install its Bing search engine as the default. And it’s giving away versions of Windows 8 for phones and some tablets.

But, as the industry shifts from desktop to mobile, the cloud and free or cheap software, China sums up both the old and new challenges Microsoft faces in making money in emerging markets -- and, increasingly, in developed ones.

“The great danger for the company is that what has happened to them in emerging markets -- basically no revenue from new PCs because of piracy -- is not far off what’s happening everywhere,” said Ben Thompson, the Taiwan-based author of stratechery.com, a popular technology blog.

CORE COST
According to the BSA anti-piracy lobby group that Microsoft co-founded, emerging markets account for 56% of all PCs in use, and 73% of software piracy. Of the $77.8-billion revenue Microsoft generated in its 2013 financial year, China, Brazil and Russia each “exceeded” $1 billion, according to a Microsoft presentation. For comparison, Apple, Inc. generated $27 billion in Greater China, which includes Hong Kong and Taiwan, in its 2013 financial year.

For Microsoft, that’s a lot of lost revenue from the heart of its business.

“Windows and Office are still very much the core of Microsoft,” says Sameer Singh, an India-based analyst.

Microsoft doesn’t just lose the revenue from pirate copies, it also loses access to customers who might buy other Microsoft products that work with or on top of Windows and Office.

NAKED PCS
Part of the intractability of piracy in emerging markets is that each part of the chain poses a problem.

For PC makers working on wafer-thin margins the operating system is one of the costliest parts of the machine, while mom-and-pop shops which form the bulk of retailers in such markets can’t afford to turn away price-sensitive customers who are comfortable buying pirate software.

The result is that up to 60% of PCs shipped in the emerging markets of Asia, says IDC research manager Handoko Andi, have no Windows operating system pre-installed -- so-called “naked PCs,” which usually instead carry some free, open source operating system like Linux. That compares with about 25% in the region’s developed markets like Japan and Australia.

Microsoft’s new approach is to push the price of Windows low enough to make it worth a PC maker’s while. The cost of a Windows license has fallen to below $50 from as high as $150, said IDC’s Mr. Andi, taking Microsoft down to “levels where they’ve never competed before.”

Andrew Pickup, Microsoft’s Asia PR chief, said it was too early to gauge take-up.

In any case, making Windows cheaper for PCs is just part of a broader response to deeper shifts in the industry. The rise of mobile, tablets, cloud-based services and free operating systems has marginalized Microsoft and challenged its business model.

Bringing down costs is a significant concession, analysts say, but Microsoft will have to learn to be a bit player, where its software and services run on other people’s operating systems.

“The biggest threat to Microsoft,” said Jan Dawson of US-based Jackdaw Research, “is the shift from a PC-based world where Microsoft dominated to a mobile world where Microsoft is an also-ran.” -- Reuters