Moving to improve prospects in Asia, Microsoft reduced prices in Taiwan to settle a government investigation, announced significant investments in China, and signed an agreement with a large Chinese mobile operator. The company has also made the case for Microsoft platforms to the Japanese government, which is considering broad adoption of Linux. The payoff for all of these moves is likely several years away, however, and the price reduction in Taiwan has set a precedent that other national governments are likely to consider in an effort to reduce software prices.

Sales in Asia have been flat over the last few years, but like most other Western corporations, Microsoft wants to ensure that it doesn’t miss a significant ground floor opportunity that could generate major revenue, particularly in China.

Taiwan Deal Sets Precedent

The settlement with the Taiwanese government calls for Microsoft to reduce prices on major products, such as Windows XP and Office XP, by 14% to 54.5% and to make individual applications in Office XP (Word, Excel, PowerPoint, and Access) available as separate products, rather than only as part of a bundle.

The settlement ended an investigation by the Taiwan Fair Trade Commission (TFTC), which was investigating a Microsoft-backed antipiracy crackdown in Taiwan. Consumers and businesses told the commission that the company’s prices were higher than the company charged in other countries, and those high prices forced some to purchase pirated software as an alternative. Microsoft charges US$517 for Microsoft Office XP in Taiwan, nearly US$40 more than it charges for the same product in the United States.

Microsoft agreed to reduce the cost of Office 14% (about US$72) and will also cut the price of the academic version of Windows XP by 54.5%.

The price reduction is an unusual move for Microsoft. Although it will occasionally announce promotion pricing for particular products, and the price of Office has slowly come down over the years (early versions cost more than US$800), the company has not previously responded so directly to complaints that the Office suite is too expensive. However, the great virtue of this settlement is that it avoids the threat of an antitrust judgment leading to potentially burdensome regulations.

Furthermore, the impact on revenue might not be great, particularly if one consequence is greater tolerance of antipiracy campaigns. By Asian standards, Taiwan’s 53% software piracy rate (according to the Business Software Alliance, which does an annual survey of software piracy around the world) is slightly below average, but it is well above the 25% to 35% in some other countries (Japan’s rate is 37%, for example). Reductions in piracy could benefit Microsoft, whose operating systems and Office suite are among the most pirated software.

However, there is some danger that governments elsewhere could follow the Taiwanese example in an effort to win better deals or other incentives from Microsoft. Microsoft could find that other governments will put more resources into antipiracy efforts only if they win price concessions from the company first.

The Taiwanese government has also joined the Government Security Program, which gives governments the ability to view Microsoft source code. The program aims to reassure governments that the code is secure and contains no backdoors or other vulnerabilities that could endanger security.

Tour Focuses on Linux, Deals

The Taiwan announcement came during a visit to Asia by Chief Software Architect Bill Gates. Gates arrived during an outbreak of Linux fever in the region—in particular, Microsoft faces a growing threat that Asian governments will adopt or encourage Linux rather than Microsoft platforms. In 2002, the Taiwanese government announced its intention to fund efforts to develop a made-in-Taiwan Linux distribution that could be widely used by Taiwanese businesses, consumers, and government offices. China has already begun development of Red Flag Linux, a government-endorsed version of Linux, and many observers expect the Japanese government to adopt Linux for a new e-government initiative. All of these decisions could drive Linux adoption in not only government but also large government-related services, such as schools and hospitals.

During his tour, Gates participated in discussions with the Japanese government to stave off the threat of a Linux-based e-government initiative. In China, meanwhile, Gates presided at the signings of several deals that emphasized cooperation between Microsoft and Chinese government officials, businesspeople, and students. In particular, he signed a deal to help the Industrial and Commercial Bank of China improve the security system for its online banking business; announced a US$2.2 million investment in a "PC Innovations Lab" in Beijing, to support Chinese PC and device manufacturers; and agreed on a strategic relationship with China’s second-largest wireless operator, China Unicom, to develop new wireless services based on the .NET platform in exchange for an agreement to promote mobile phones based on Microsoft's Pocket PC Phone Edition. (Sun Microsystems signed a similar deal, involving Java 2 Mobile Edition, with China Unicom in Dec. 2002.)

Resources

For more information about the Government Security Program, see "Government Access to Source Code Expanded" on page 25 of the Mar. 2003 Update.

For a review on Microsoft efforts to promote its products more effectively in government, see "New Challenges Face Microsoft in Government Market" on page 26 of the Sept. 2002 Update.

The Business Software Alliance can be found at www.bsa.org.