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Anti-piracy pledge fails to boot

Stuart Biggs

Beijing's mandate requiring China-made PCs to carry legitimate operating systems will not significantly curtail illegal software

Like all seasoned travellers, President Hu Jintao knew to pack some gifts before his United States trip to endear himself to some potentially hostile hosts.

Facing criticism over China's record on intellectual property protection, resistance to currency reforms and the country's burgeoning trade and foreign exchange surplus, Mr Hu's choice of gifts was aimed squarely at securing positive headlines and a soft stance from Washington.

'We will earnestly protect intellectual property rights,' Mr Hu told Microsoft chief executive Bill Gates in Seattle. And to ensure the promise did not ring hollow, he threw in a new mandate requiring all computers made on the mainland to be installed with legal operating systems before leaving the factory.

Lucrative contracts were signed by Microsoft and China's four leading PC manufacturers - Lenovo, Founder Technology, TCL Group and Tsinghua Tongfang, creating the impression of real change in China's software market.

But an old saying goes that 'to say nothing is half the art of diplomacy', and a closer inspection of the promises made last week suggests that many parts will not create a promising whole.

'I think it is big news, but more so for political reasons - at least in the short term,' Gartner analyst Simon Ye said. 'China-US negotiations are ongoing and it is quite common for the Chinese government to appear prepared to move on issues that the US is worried about.'

Because Mr Hu's mandate did not specify which operating system must be legally installed in Chinese-made computers, Mr Ye expected most customers to continue buying PCs installed with DOS or Linux and later load pirated versions of Windows onto their machines. It was a view shared by many other industry watchers, such as Forrester Research analyst Simon Yates.

'Some users will still buy machines with no operating system and install either a legal or pirated version of Windows or another OS like Red Flag Linux,' he said.

'However, in the longer term this sets up a roadmap to pre-installation of some OS on all machines, guaranteeing at least some licence revenue built into the price of the hardware.'

It would not be the first time that Beijing's promise looks better on paper than in reality. A public relations trip in January 2004 aimed at easing similar tension regarding the trade deficit supposedly yielded contracts for US telecommunications and computer equipment makers worth US$2.3 billion. Only later did it become clear that the 'buying mission' of mainland companies included US$1.07 billion in old deals for Motorola awarded the previous year.

Something similar occurred last week when Microsoft and Lenovo announced that China's largest PC manufacturer would spend US$1.2billion in the coming year for Windows licences. Not only was the contract a reaffirmation of an agreement reached between the two firms last November, but out of the US$1.2 billion only US$200 million will be spent on licences for computers sold in China.

Lenovo has declined to give any more details of the deal. But given that the company acquired IBM's PC and notebook business last year, it appears likely that the bulk of the Microsoft licences would be installed on computers sold overseas - in other words, in computers that would have shipped with Windows anyway under the terms of IBM's existing contracts with Microsoft.

Suddenly, the US$1.2 billion figure that grabbed headlines last week appears less significant.

Even if the mainland succeeds in reducing Windows piracy, there is still the far larger problem of piracy of applications.

International Data Corp (IDC) chief research officer John Gantz said the government's mandate, should it prove effective, would only put a small dent in an overall piracy rate, estimated as high as 95 per cent by the Business Software Alliance (BSA).

'Our research indicates that more piracy takes place in applications like Microsoft Office and Adobe Photoshop than operating systems, and that it is worse for software on the installed base than with newly shipped PCs,' Mr Gantz said.

'If all operating systems shipped with new PCs were licensed in China, this would only lower overall piracy by 5 per cent to 10 per cent.'

Others believe China's piracy problem is overstated. Gartner vice-president and research director Dion Wiggins suggested putting the numbers in context.

'The BSA claims that China has 90 per cent piracy of Windows. This is approximately 13 million copies a year,' Mr Wiggins said. 'The BSA also claims that the US has 22per cent piracy of Windows, which is approximately 12 million copies a year. Not a major difference in overall quantity.'

Nevertheless, the licence deals signed by Microsoft should give the world's biggest software maker a small boost.

IDC analyst Bryan Ma estimated that computer makers were paying between 150 yuan and 300 yuan for every copy of Windows, based on price increases at the retail level for computers installed with legitimate copies. Lenovo, Founder and Tsinghua Tongfang shipped 10.08 million computers last year in China, according to Gartner.

Mr Ye estimated Microsoft was giving mainland computer makers a discount of 'at least' 50 per cent compared with the list price. 'In monetary terms you are probably looking at 300 yuan per licence for Windows XP Home Edition, and more for the professional edition.'

Mr Ma said the biggest impact the licence agreements may have in China was not on piracy rates, but the composition of the mainland's computer market. 'It's basically helping the brand perception of the local vendors. It helps to make the brand look more like a worthy brand. It helps to position them in a better light.'

This leaves white box vendors, which presently account for about one-third of the mainland computer market, competing for cost-sensitive consumers for whom 300 yuan is a significant saving.

Mr Ye expected the PC manufacturing market to consolidate.

'The large vendors will use the heavy discount they receive from Microsoft to put the squeeze on second and third-tier vendors who do not have the scale to force the same discounts from Microsoft,' he said.

What is less certain is how the government's mandate that all PCs ship with a legitimate OS might impact the software market. One theory is that consumers could gain exposure to open-source software should PC makers distribute Linux variants to satisfy the government requirement.

But Paul DeGroot of research firm Directions on Microsoft said piracy had trained Chinese consumers to use the software maker's products. 'Pirated versions, though they generate no revenue for the company, have given Microsoft a presence and have limited the growth of alternatives such as Linux,' he said.

According to Mr Yates, software makers could also look to the video-game and music industries, which have developed unique business models around scratch-off cards and content downloads to sell in a market fraught with piracy.

'Microsoft and their hardware partners can only take anti-piracy so far in the consumer market. The most effective alternative to a traditional software licence approach is buying access to a set of applications on a monthly basis,' he said.

'These approaches have not caught on in more mature technology markets for PCs, but might be better suited to emerging markets.'

Additional reporting by Michael Logan and Bien Perez

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