In China, Microsoft losing out increasingly to free software and piracy
On a trip to Beijing a decade ago, Bill Gates was asked by a senior government official how much money Microsoft made in China. The official asked the interpreter to double-check Gates's reply as he couldn't believe the figure was so low.
It's a problem that hasn't gone away. Despite the popularity of its Windows operating system and Office suite, few people in emerging markets are willing to pay for legitimate copies.
This not only costs Microsoft in lost revenue, but it also holds back the spread of its newest Windows 8 version. Analysts say even buyers of pirate software prefer older versions. According to StatCounter, a website that tracks what software is loaded on internet-connected computers, more than 90 per cent of PCs in China - now the world's biggest market - are running pre-8 versions of Windows.
Microsoft is trying to tackle this. This year it's offering Windows 8 at a discount to PC manufacturers who install its Bing search engine as the default. And it's giving away versions of Windows 8 for phones and tablets.
"The great danger for the company is that what has happened to them in emerging markets - basically no revenue from new PCs because of piracy - is not far off what's happening everywhere," said Ben Thompson, the Taiwan-based author of stratechery.com, a technology blog.
Many of the problems are tied to a broader push by the Chinese government to limit foreign firms' dominance and encourage local technology firms to become viable competitors.
After years of healthy relations with Beijing, Microsoft was last month suddenly targeted by anti-monopoly regulators who raided its China offices as part of a price-fixing investigation.
In truth, Microsoft has never cracked how to get people in emerging markets to pay for its software.
According to the BSA anti-piracy lobby group that Microsoft co-founded, emerging markets account for 56 per cent of all PCs in use, and 73 per cent of software piracy. Of the US$77.8 billion revenue Microsoft generated in its 2013 financial year, China, Brazil and Russia each "exceeded" US$1 billion, according to a Microsoft presentation. For comparison, Apple generated US$27 billion in Greater China, which includes Hong Kong and Taiwan, in its 2013 financial year.
Microsoft doesn't just lose revenue from pirate copies, it also loses customers who might buy other Microsoft products.
The problem starts with computer makers, says Sameer Singh, an Indian analyst, since "convincing them to ship every PC with Windows pre-installed is difficult". Margins on PCs for a company like Lenovo are "near single digits," says Bryan Wang, an analyst at Forrester Research.
The result is that up to 60 per cent of PCs shipped in the emerging markets of Asia, says IDC research manager Handoko Andi, have no Windows operating system pre-installed - so-called "naked PCs", which usually carry some free, open source operating system like Linux.
In 2006 China announced a new law requiring PCs to be shipped with operating systems. That merely dented piracy rates, which fell to 79 per cent in 2009 from 92 per cent in 2004, according to the BSA.
Lenovo said it reached an agreement with Microsoft in June of this year to ensure that Lenovo PCs sold in China would come pre-installed with a genuine Windows operating system.
Microsoft's new approach is to push the price of Windows low enough to make it worth a PC maker's while. The cost of a Windows licence has fallen to below US$50 from as high as US$150, said IDC's Andi, taking Microsoft down to "levels where they've never competed before".