Microsoft’s $3.4 Billion Bet With China

So, what’s a little piracy between friends?

Despite the fact that the International Intellectual Property Alliance (IIPA) estimates 88 percent of all business software sold in China is pirated and $1.27 billion in sales was lost to piracy, Microsoft plans to buy US$3.2 billion in hardware over the next five years, plus another US$200 million to support the growth of China’s software companies through joint ventures and partnerships and through software development and service project opportunities.

The deal is part of a plan between Microsoft and China’s National Development and Reform Commission (NDRC) of the People’s Republic of China to improve international cooperation with Chinese firms and help develop its own software industry.

Under the deal, the NDRC will support Microsoft in expanding investments in China’s software companies through technical cooperation, training, development and service project opportunities, and hardware procurement over the next five years.

Microsoft and NDRC also plan to open Innovation Centers around major Chinese cities as part of this promotional effort, and also to train 10,000 software engineers, including software architects, to foster world class software talent.

The bulk of the money, however, comes from Microsoft’s pledge to purchase approximately US$700 million in hardware products annually for five years. Which vendors would provide the hardware was not specified, although Lenovo Group, the market leader in China that recently purchased IBM’s PC business, is likely to get most of the business.

The announcement comes on the heels of Chinese President Hu Jintao’s visit to the U.S., which included a visit to Microsoft’s headquarters and the home of Microsoft chairman Bill Gates. A few weeks prior to the visit, three Chinese PC makers, including Lenovo, agreed to buy almost US$1.4 billion of Windows software to preinstall on machines and end the practice of selling computers without an operating system.

This practice was considered a major example of the rampant software piracy in China, as customers would buy a computer with no OS and then obtain a pirated version of Windows for much less cost than the retail price.

“I’m sure it’s not lost on Microsoft executives that the world’s third largest computer company is from China,” says Joe Wilcox, senior analyst with Jupiter Research. “Microsoft has a problem: PC growth is highest in emerging markets like China, where software piracy rates are high. China deals could be construed as generating goodwill, which Microsoft would want to use to gain greater Chinese government cooperation fighting piracy.”

More importantly, it allows Microsoft to get into China, a relatively open market, rather than allow for an indigenous market to grow as an alternative to Windows, particularly if China decides to go the open source/Linux path, he adds.

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