In the long run, China could pose dangers to Microsoft. If Linux flourishes there, it could spawn formidable low-cost rivals to the American company. “The real value of open source to a country like China,” says Kevin MacIsaac, an analyst with the MetaGroup in Sydney, “is developing a public infrastructure for a software industry. It’s a reasonable and cost-efficient way for China to compete globally.”
Others in Asia see the potential. Japan and South Korea joined China in April on a project to jointly develop a new operating system based on Linux as an alternative to Microsoft’s Windows. Thailand and Malaysia have instigated programs to offer low-cost PCs to citizens with Linux operating systems (see “The Butterfly Effect on Global Pricing?”). They’re being helped along by Microsoft competitors such as Sun Microsystems, which has signed a deal with the Chinese government to supply its Linux desktop operating system and office program to as many as a million PCs there. Future electronics products shipped from Chinasuch as mobile phones and DVD playerscould be developed free from dependence on the Windows operating system.
Interviewed in May, [Microsoft CFO] Connors presents the company’s global future with measured optimism. “We have a good presence in a very small part of the business market today on the desktop,” he says, “and a very small share of the overall budgets, as well as a small share of the consumer market in terms of things that are going to be digitized. And we have a very small share of the market in terms of small- to mid-sized business apps.” He adds: “We think that overall markets will grow at some rate better than world GDP. If we can grow the business better than world GDP, and the business we’re in is growing faster than world GDPthat’s a good place to be.”
It all depends, he says, on what happens to price. “As long as volumes grow and prices remain relatively firm or even soften a bit,” says Connors, “we can have a great business from the revenue perspective, and we can also have a good business from a cash generation or a value generation perspective.”
Put another way, Microsoft is relying on current pricing and a goodly portion of the world’s tech growth to sustain its 31 percent net profit margins. But an increasing portion of global tech growth will come from Asia’s burgeoning economies. And it’s precisely in Asiawith China in the leadthat pressure to alter the uniform pricing structure for its software is the strongest in the world.
“I would like to use your software, but how can I invest in it when I now have cheaper options available?” asked a CFO of a healthcare chain based in Singapore at an executive breakfast where Connors was speaking that morning. The CFO added: “What can I tell my shareholders?”
Connors responded that the total cost of ownership of Microsoft Windows and Office productswhich account for 80 percent of its revenueis in fact less than that of cheaper, open-source software, because Microsoft can offer the entire weight of the ‘eco-system’ that supports its products. This eco-system can be described as the support, customization, integration services, and software that evolve around the Windows product. Connors cited studies that have endorsed this view from Forrester Research and Merrill Lynch.