“We prefer India”

No more Mr Nice Guy...

Bill Gates made one of his wilder forecasts back in 1998, saying that he didn’t mind the Chinese pirating his software. “As long as they are going to steal it, we want them to steal ours,” he claimed. “They’ll get sort of addicted, and then we’ll somehow figure out how to collect sometime in the next decade.”

But more than a decade on, and Microsoft is still working out how that collecting process is going to pay off. Perhaps that’s why Steve Ballmer no longer shares Gates rosy view on the country, and he has been outspoken on the difficulty of making money there.

Ballmer hinted to reporters recently that the company had reached a breaking point: “We see better opportunities in countries like India and Indonesia than China.”

Like so many others, Ballmer says the problem is intellectual property protection. And China’s is not just lower than other places; “It’s very low, very, very low,” he complained at a recent conference.

“There are two things that make a country interesting,” Ballmer told Bloomberg. “One is it buys a lot of PCs, the other is they pay for the software that gets used on those PCs.”

The real question, though, is whether Microsoft will be able to make money in China, a country that Ballmer says is in “a class by itself” with “no software market to speak of”. The company released Office 2010 last month, and Windows 7 OS last year. But it’s not hopeful that many of its customers will bother buying a license.

Officially-speaking, things are not supposed to be all that bad. “China’s effort at strengthening protection of intellectual property is universally recognised,” claims Ministry of Commerce official Chen Rongkai. But that’s cold comfort for Microsoft, which makes just 1% of its revenues in a country expected to become the world’s largest software user this year.

Unlike Google, Microsoft has refrained from direct criticism of government policy in the past. So this month’s public complaints came as a surprise to many. One Microsoft employee told the Economic Observer the company was running out of patience. “The situation now is more complex,” he said, “the company’s style of taking a long term view has changed… its practice of pursuing short term success will impact the business development of Microsoft in China.”

Persistent lobbying (and some pressure from US trade officials) had brought Microsoft some measure of success previously – though not as much as it would like. The Ministry of Science and Technology recently amended regulations directed at encouraging government departments to use ‘indigenous’ software instead of foreign companies’ products. And last year Microsoft managed to win a case against software pirates in the Chinese courts.

Ballmer seems reluctant to infer too much from the legal victories. “It’s a good start,” he said, “I am not trying to be pessimistic, I want to be optimistic about China.”

He has cause to be worried, as software piracy isn’t the only problem he’s facing. Two weeks ago Apple Inc’s market cap topped Microsoft’s for the first time – a powerful statement on the profit potential of ‘smartphones’. Similar computer-like phones are huge in China but Microsoft Mobile is a relative minnow in the market. It hasn’t yet been able to replicate the dominance it achieved with PCs.

Nonetheless, Microsoft hasn’t given up hope of turning things around. It’s now banking on ‘cloud computing’ to build a new fee paying customer-base. The technology is supposed to help businesses save money by moving their hard drives onto a remote Microsoft-controlled server, which can be accessed through the internet.

Of course, customers of cloud computing will want to be convinced on issues like privacy and data security, so the project’s success is by no means certain. But Ballmer will be paying close attention to the new initiative. The ‘cloud’ concept combines a service with a software product, so it’s not something that can be easily pirated.

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