Fighting piracy, censorship on path to billions

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BEIJING--Chinese President Hu Jintao?s visit earlier this month to Microsoft Corp.?s campus in Redmond, WA.--including a dinner at the home of Chairman Bill Gates--capped a series of developments that could turn the mainland into a highly lucrative market for the software company.

After years of struggling to combat rampant piracy of operating software in China?s fast-growing computer industry, the country?s largest computer makers have agreed to pre-install Windows software on most of their hardware.

?Microsoft is going through an interesting time, there has been a major sea change. The whole issue for them in China has been pirated software. Literally up to three or four months ago, companies shipped computers naked with no operating system to keep prices competitive,? said a computer industry executive in Beijing.

?They were almost begging users to put in whatever software they wanted to and consumer incentive to buy legitimate software wasn?t high. Approximately 90% of computers had illegal software. If that figure drops to just 50%, it means huge revenue for Microsoft. These new deals could mean kazillions of dollars for Microsoft.?

Or billions, at least. The landmark deal with Lenovo, estimated at $1.2 billion over the next 12 months, has been a ?smashing success,? said Yang Yuanqing, the chairman of China?s biggest computer maker in a speech at Microsoft?s headquarters on April 18. ?The percentage of customers who choose the pre-installed Windows XP package has risen from 10% before we launched the plan [last November] to over 70% now.?

In Los Angeles on April 6, Microsoft signed a similar agreement with Tsinghua Tongfang Co., China?s third-largest PC manufacturer, worth $120 million, and a $60 million agreement with TCL Group. And on April 12, a contract worth $250 million was signed with Founder Technology Group Corp., China?s second largest PC maker with sales of 2.5 million units last year, out of 19 million total PC shipments in China last year, according to Gartner Inc.

Microsoft is supporting the developments with its first ads in China encouraging businesses to use only licensed software. Creative by McCann Erickson, Beijing shows unsavory creatures like red ants crawling into a computer and a snake coiled like a CD with the slogan, ?Why take the risk?? to suggest that illegal software practices can creep up on businesses and cause major problems. The campaign, launched three weeks ago, is running in outdoor media, particularly in airports, as well as Chinese business press and online media.

Industry experts say the computer companies were under significant pressure from the Chinese officials to take steps to protect intellectual property, because the government itself was being pressed by Microsoft?s large government relations team.

But it was fitting that the first enterprise to seriously prompt consumers to pay for software was Lenovo, a major international player since it bought IBM?s PC manufacturing division last year.

The company is eager to build its brand and reputation outside China and ending complaints from Microsoft, and its own government, about piracy was a stumbling block to its expansion plans.

The good news has helped the company temper global criticism over another part of its business, MSN, the online services division that owns the e-mail service Hotmail and operates a Chinese-language web portal. MSN, which operates in China through a joint venture with Shanghai Alliance Investment, is eager to expand in China, the world's second-largest Internet market with more than 110 million users.

?The rapid growth in Internet adoption and mobile device usage in China, along with the exceptional energy and talent of its people, make this one of the most important new markets for MSN," said the division?s senior VP, David Cole in Redmond.

Besides Internet services, Microsoft started a mobile technology center in Beijing last month to develop end-to-end mobile solutions in China, already the largest mobile phone market in the world. The center will work towards development of mobile multimedia, 3G wireless, seamless device connection and communication technologies and innovations. The company invests about $100 million in R&D in China annually.

But its eagerness to expand in China means adhering to the government?s strict control of content on the Internet.

?We operate in countries all around the world, it?s important for us to participate in the Internet experience and part of that participation is respecting the rules and regulations of those countries," said Bill Shaughnessy, Redmond-based general manager, Greater Asia and International for Windows Live and MSN. (See related Player Profile)

?We respect the environment in which we operate,? he added carefully.

Microsoft has good reason to be sensitive about the subject. Microsoft and other U.S.-based Internet companies like Google and Yahoo have taken a beating at home for helping China?s Communist Party leaders censor its citizens.

Chinese journalist Li Yuanlong, for example, was charged with sending subversive e-mails abroad under a pseudonym using a Hotmail account. And last December, Microsoft shut down a blog on MSN Spaces belonging to an outspoken critic of the Chinese government.

But Microsoft tiptoed around the subject of censorship during President Hu?s visit to Redmond, keeping the agenda focused on piracy and symbolic gestures about friendship, in its enthusiasm to grow in China.

?During the last 10 years, China?s information technology industry has emerged as a global center for growth and innovation. We?re encouraged by China?s efforts to strengthen intellectual property protection, which will provide the foundation for continued expansion of the IT industry in China,? Mr. Gates praised the Chinese during the meeting.

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