Microsoft Putting All Its Chi in China

And even if the government becomes more serious, the result may not be as many billions of extra dollars as Ballmer suggests. In a note earlier this summer on software in China, SG Cowen analyst Peter Goldmacher said that Microsoft contacts estimated that each percentage-point reduction in piracy would yield only $10 million in sales.

So, at the extreme, Goldmacher noted, the Chinese market for Microsoft could be calculated at roughly $1 billion under current market conditions. That's only about 2.5% of Microsoft's $40 billion in sales in the past fiscal year.

Overstating Open Source

On the other hand, the Chinese government has shown some bias to Microsoft's open-source rival Linux, partially because of cost but also out of the fear of relying on a big American company for software.

But research firm Gartner has suggested that media reports of Chinese governments using and supporting Linux may be exaggerated. "Regardless of the potential savings for governments in emerging markets, we have seen much talk about the move to Linux and relatively little action," Gartner analysts wrote in a June report.

Outside of government, widespread use of pirated Microsoft software has been a hurdle to Linux adoption. Gartner estimated that 8% of PCs shipped in emerging markets in 2005 will be preloaded with Linux, and at least 80% of these machines will end up running a pirated copy of Windows soon after they are shipped.

Analysys, meanwhile, estimated that Linux commands less than 3% market share on Chinese desktops, but notes that similar to the U.S., Linux is enjoying more success among businesses on servers.

Indeed, it's probably in the business market where there is more opportunity for Microsoft to make money from software than in the piracy-plagued consumer market, Analysys' Zhang noted.

"In China, software outsourcing is growing very fast," Zhang noted, pegging the growth rate at more than 25%. Indian companies such as Tata Consulting Group are building a strong presence in China.

Microsoft recently got into the act this summer, too, by becoming a minority investor in a joint venture with Tata and two software park development companies.

"It's another way to build the installed base" of legal Microsoft software users, Zhang said.

But it remains to be seen whether that base becomes as big in China as the world's largest software maker would like.

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