Microsoft Suffers Chinese Triple Whammy

The strong position it has built in the People's Republic could be jeopardized

The first in a series of blows to Microsoft Corp. (Redmond, Wash.) came on 18 August, when Chinese newspapers reported that Beijing will require its ministries to purchase domestically produced Linux-based software in its next upgrade cycle, starting at the end of 2003.

Then, a couple of weeks later, in response to Microsoft's demands that the Shanghai Education Commission pay it full licensing fees for software used in schools, the government resolved the problem by simply taking Microsoft operating systems and applications off students' computers and replacing them with domestic ones.

If that wasn't enough, the third punch came when China announced in early September that it had been discussing developing an alternative to Microsoft Windows with Japan and South Korea.

The implications of China's new policies could be far-reaching. The consulting firm Gartner Inc. (Stamford, Conn.) anticipates that the policy requiring government use of Linux could trickle down to China's top 100 companies, all state-owned, and in turn lure lower-tier companies down the Linux path as well.

Combine all that with a software revolution in China's classrooms, and Microsoft could begin to lose its grip in China, which appears to be exactly the government's intention. ”The Ministry of Information Industry would like to break Microsoft's dominance” and widen the constellation of available software choices, says Scott Kennedy, an assistant professor of political science at the University of Indiana (Bloomington), who is writing a book about software lobbying in China.

”The government is trying to gain some independence from foreign multinationals” in general and Microsoft in particular, agrees Dion Wiggins, the research director for Gartner Asia/Pacific (Hong Kong). If the strategy succeeds, it will hugely benefit budding domestic software companies like Redflag Software Co. and Kingsoft Corp. (both based in Beijing). Redflag, a spinoff from the Chinese Academy of Sciences' Institute of Software Research (Beijing), has been developing Linux-based software since 2000 and aims to be profitable by the end of the year, its vice president, Zhao Xiaoliang, told the Chinese press in August.

Kingsoft, which was established in 1988, says it has 50 million users of its desktop PC applications. When Microsoft alleged that Shanghai schools were violating licensing agreements, Kingsoft was the company that swooped in to provide its WPS office suite and other applications.

Creating a national software standard based on Linux should also help some foreign information technology vendors, as the government probably won't stop domestic companies from setting up alliances with outsiders. The case of Redflag illustrates the point. In early September, shortly after the government announced its push to increase the use of Linux-based products in the ministries, Redflag formed an alliance with Hewlett-Packard Co. (Palo Alto, Calif.) to develop and market Linux-based software.

Is China trying to drive Microsoft out, or is it merely seeking to increase its bargaining leverage while opening more options for Chinese software users? Some analysts believe that Microsoft's reaction to China's triple whammy will be to lower the price of its software in China, just as it did recently in Thailand, where it also faced a government initiative favoring Linux. There, it slashed the price of Windows XP and Office XP to US $40 each, compared with global retail prices of $199 (Windows) and $399 (Office).

”If the Chinese government is serious about this, we'll start to see some real changes” in Microsoft's policies, says Gartner's Wiggins. Indeed, the research firm's data indicate that Chinese businesses remain heavily dependent on Microsoft products. The People's Republic has the lowest level of use of Linux in corporations among Asian countries, with a user rate of 19 percent.

Don't forget, says Kennedy, that Microsoft has invested a lot in building a position in China, giving away software in certain situations and holding training and certification programs for technicians.

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