Microsoft Blaming 'Piracy' Rather Than Basic Economics For Its Struggles In China

from the econ-101-time dept

Fri, May 27th 2011 10:13am — Mike Masnick

Steve Ballmer is the latest Microsoft exec to whine about how much "piracy" is costing the company in China, noting that they make so much less in that country than in the US, despite similar numbers of PCs being sold in each country. The mistake should be obvious to anyone who understands basic economics -- or anyone who's read the SSRC report on "piracy in emerging economies." That detailed study lays out, quite clearly, that the issue isn't "piracy," but business models and pricing. People in China, on average, make significantly less than people in the US, so it's no surprise that fewer people are willing to pay Microsoft's high prices. Automatically blaming the issue on "piracy" totally and completely misses the underlying reasons for the difference in revenue. It's a bit scary that someone like Ballmer doesn't seem to recognize this, because it suggests his strategy in China is not going to do much good at all.

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Filed Under: china, economics, piracy, steve ballmer
Companies: microsoft

56 Comments

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Nick Dynice (profile), 27 May 2011 @ 10:19am

I would say it is a cultural difference too. China is a communists country. Communists = commune = sharing. Sharing resources is the way one survives in China.
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Anonymous Coward, 27 May 2011 @ 10:26am

The Chinese are smart enough...
...not to run Windows. What's he seeing isn't lost sales, it's superior choice in operating systems.
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iamtheky (profile), 27 May 2011 @ 10:26am

socialist = social = slutty. Being the lowest bidder with no regard to quality....
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Anonymous Coward, 27 May 2011 @ 10:27am

Microsoft is sinking fast anyway.

Windows is still the dominant OS, but I see more and more people shifting away from it, either to Linux or MacOS. But the biggest shift is happening in the Smartphone and Tablet PCs.

Android dominates the smartphones. M$ Tried to penetrate the smarphone market, but failed miserably. And now, they aren't even trying to into the tablet market, which is still pretty much wide open.

Then you have to add to the fact that the majority of users are still probably using XP (dropping quickly, but there are still a lot of them).

You also have the browser wars, where it took Microsoft three whole versions to TRY to stay on par with the competition (people claim that IE9 is very good...I never cared to try).

Microsoft was used to the comfort of the monopoly, but times are changing fast. They are not failing because of piracy, they are failing because of their own incompetence.
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Greevar (profile), 27 May 2011 @ 10:27am

Re:
I wouldn't call China a communist country. It's still very much a dictatorship.
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crade (profile), 27 May 2011 @ 10:32am

I thought it was well known that China is heavily saturated with linux machines.. They have had several govn't projects to get linux based PCs into classrooms for schools and other projects like this one:
http://www.desktoplinux.com/news/NS4254330887.html
The chinese govn't has put out several statements saying they are pushing for more linux saturation,
http://www.wsws.org/articles/2000/jul2000/lin-j15.shtml
Their local computer shops ship with linux preinstalled and
The Loonsan processor that they make is linux exlusive I believe.

I'm sure there are some pirated windows systems too, but to just ignore their govnts stated goals and obvious progress that they are actively working towards of getting as many pcs off microsoft software in a legal way seems a bit dishonest.
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Anonymous Coward, 27 May 2011 @ 10:34am

Given that pirated versions of the software are sold on the open market there for pennies and there are effectively zero penalties for using it, what price do you think they should set? Would dropping their prices say, 10x from the American prices work? Because they've already done that.
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MrWilson, 27 May 2011 @ 10:38am

Re:
Ooh ooh! I want to play that game too!

The US is a capitalist country. Capitalist = capital = city where the government is located. We survive on the government!

Nazi Germany was a fascist country. Fascism = fasces = bundle of rods around an axe. The Nazis survived by having their lictors carry around bundles of rods.
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fogbugzd (profile), 27 May 2011 @ 10:43am

>>It's a bit scary that someone like Ballmer doesn't seem to recognize this, because it suggests his strategy in China is not going to do much good at all.

This is only one of many problems that Ballmer doesn't seem to recognize or have a good strategy.
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Anonymous Coward, 27 May 2011 @ 10:44am

Re:
Microsoft should probably start by making their product worthy of buying. I mean, people want to use it, of course (for games, mostly). But they don't really feel the need to buy it. So they don't. And, as you said, there is virtually no penalty for doing so.

But wouldn't you agree that around $250 for JUST an operating system is a bit of a stretch? MacOS X + iLife + iWork costs $130. That's almost half of the price, and you get more bang for your buck.

So no, piracy is not the problem here.
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PW (profile), 27 May 2011 @ 10:56am

Embattled CEO
Perhaps we should also consider that investors are calling for Ballmer's head and so he may be starting to grasp at straws to save himself ;)
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crade (profile), 27 May 2011 @ 10:57am

Re: Re:
The only difference I can tell between the "political" communism (ie: vs. democracy) china claims and a dictatorship is that the dictator is a group of people instead of one guy.

Economically they are mostly just plain capitalist as far as I can tell.
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m3mnoch (profile), 27 May 2011 @ 11:00am

symptoms and causes
their logic amounts to blaming the symptom for the cause rather than the other way around.

"i came down with a runny nose and now it's gone and given me a cold!"

silly people. treat the cause, not the symptom.

m3mnoch.
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Chosen Reject (profile), 27 May 2011 @ 11:17am

Re: Embattled CEO
I've often thought that Gates knew where things were headed and decided to get out while MS still had some semblance of glory. That way he'll be remembered as having taken MS to its peak and keeping it there, whereas everyone will associate the downfall with Ballmer.
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Greevar (profile), 27 May 2011 @ 11:38am

Re: Re:
Capital is a resource of commerce.
Capitol is the designated city in which each state's government is located.

Congratulations on failing at language skills!
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Anonymous Coward, 27 May 2011 @ 11:41am

Re: The Chinese are smart enough...
too bad thst's not really true. they love windows. but for them, its the cheapest part of the computer. (as it should be)
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sam sin, 27 May 2011 @ 11:47am

you didn't expect him to tell the truth or even use common sense, did you? if you did, you must be a fucking idiot! he is no different to any one else that works for (in charge of) a big company that produces software, games, music or movies. it is an opportunity to blame piracy yet again rather than for the failure of that company's business model. they are all liars, all greedy and all back in the dark ages. that is even more sad when it is a company that produces, among other things, an actual operating system. the majority of Chinese earn less in a year than most USA workers earn in a week. get real for god's sake, moron!
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Anonymous Coward, 27 May 2011 @ 11:47am

Funny, they seem to have money for the computers.

They don't have money for the software?

Of course the problem is piracy. duh.

what a stupid and worthless article...
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laythun, 27 May 2011 @ 11:49am

Re: Re: Re:
You must mean American English, because over here, where English was forged we say Capital City
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Robin, 27 May 2011 @ 11:49am

Re: Embattled CEO
I read yesterday that he also addressed the issue of software pricing in these markets by saying that if people there could afford to buy the computer, then they could afford to buy the software!
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Christopher Gizzi (profile), 27 May 2011 @ 11:55am

It isn't piracy
Remember, people cry piracy when their business models fail.

And Ballmer isn't a great CEO - which others have noted.

But the real issue is this: when you make a bad product, treat your customers poorly, don't adapt to different markets/consumers/customers in a way that the free market expects, you're bound to suffer.

That's the bottom line.

Make a better product, react to the market faster, & don't disrespect your customer base (and assume they're all criminals) and you might win some business back - even if its in a new form.
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NotMyRealName (profile), 27 May 2011 @ 12:05pm

Re:
Apparently you haven't seen how cheaply you can buy hardware there.
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Anonymous Coward, 27 May 2011 @ 12:11pm

Re: Re: Re: Re:
I'll agree, "over there" English was thrown into a fire, beat with a hammer, and then doused in water.

We prefer ours in a more natural state.
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Anonymous Coward, 27 May 2011 @ 12:22pm

Re:
Windows 7 home premium edition cost around 399 RMB or about $62 US. That is about $30 less than the US or about 33% cheaper, not 10x cheaper or 93% cheaper as you claim.

The average household income in China is around $10,000 US while the average household income in the US is around $85,000.

If Microsoft used the same ratio for pricing as the ratio between incomes then Windows 7 in China would be around $10 US or 65 RMB.

Also, drop the snotty, asshole attitude; especially when you have no idea what you're talking about.
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Anonymous Coward, 27 May 2011 @ 12:25pm

Re:
Here are 3 step that will help to cure your stupidity concerning this subject.

1. See my post above where I explain how overpriced Windows is in China.
2. Lookup the price of computer hardware in China as compared to the US.
3. Repeatedly jab a q-tip into your ear until voices stop.
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DannyB (profile), 27 May 2011 @ 12:26pm

Re:
Behind door number 1, I could spend HUNDREDS of dollars on some higher end edition of Windows.

Behind door number 2, I could buy some tangible hardware, like a shiny new Android tablet.

Behind door number 3, I could get kicked in the . . . nevermind.

Hmmmm. Tough choice.
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Modplan (profile), 27 May 2011 @ 12:26pm

Re:
Not only have they not done that in general (not without crippling the software in other ways, or not going far enough), they're quite happy to significantly drop prices further and even give software away for free when faced with direct competition from alternatives.

The new strategy involved a mix of commercial and open- source solutions deployed in three-year pilot programs in three regions of Russia, with plans for expansion into the wider national education system and possibly into other governmental sectors. Pushed by Ponosov and Alksnis, Linux played a role in these programs but not an exclusive one. A wide range of commercial software, including products by Microsoft, Adobe, Corel, and other US firms, were included in the discounted package of software deployed in the pilot programs. Microsoft agreed to include Windows Vista in this package at a 95% discount off the retail price, suggesting the degree of its commitment to the Russian market when open-source alternatives are seriously in play.

The war of maneuver with Microsoft and other vendors continues. In June 2009, the FAS opened an antitrust investigation of Microsoft for its withdrawal of Windows XP from the Russian market�and closed it three months later without filing charges. In March of 2010, Microsoft agreed to provide free copies of Windows 7 to 54,000 Russian schools, with licenses set to expire at the end of 2010. This date also marks the scheduled end of the First Aid program, when license negotiation and the possibility of more widespread open-source adoption will presumably be back on the table.

[...]

In all the countries examined in this report, price competition and service innovation come primarily from competition among domestically owned media industries. The multinationals, our work suggests, simply do not have the incentives to offer significant price cuts in low- and middle-income markets, for fear that these will impact pricing in their larger, more profitable markets. In the software sector especially, piracy assists this policy by providing the vendors a form of de facto price discrimination that generates positive network effects for commercial products, while locking out �free� open-source alternatives. The Ponosov case suggests the complexity behind this balancing act�as well as the pragmatism of the Russian government in angling for advantageous deals with multinationals. The government�s strong stated commitment to open source appears to be just one part of this larger strategy of hedging and dealmaking.

Media Piracy in Emerging Economies, Russian Chapter

What was that about piracy being the problem again?
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terrybbarton (profile), 27 May 2011 @ 12:27pm

Re: Embattled CEO
Balmer fell into that CEO position that was created when someone smart enough to know when it was time to get out did so.
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crade (profile), 27 May 2011 @ 12:28pm

Re:
Of course the problem is not piracy. duh.
what a stupid and worthless comment.
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Anonymous Coward, 27 May 2011 @ 12:28pm

Re:
Logic failure.
Allow me to explain with math:

$500 worth of computer parts + Linux = $500

$500 worth of computer parts + Windows = ~$800

But then again, $500 is way too much to spend on a computer if you are short on cash. I got myself a (very basic and outdated) computer for less than $70. Somebody who spends $70 on a computer is not going to spend four times more in an OS.
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DannyB (profile), 27 May 2011 @ 12:29pm

Re:
Not using Windows should be a matter of national security for foreign countries.

Think about it. If your entire national infrastructure is using Windows, what kinds of things could the US Government and Microsoft do together? Suddenly shut things down? Sabotage your nuclear program? Or subtly spy on you over a long period of time?

Seems like the US ought to be subsidizing the use of Windows in China.
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ts, 27 May 2011 @ 12:30pm

Re: The Chinese are smart enough...
This is what I was thinking. I doubt it will ever happen, but if linux ever overtakes Windows in market share, I bet Microsoft will still be blaming piracy for its failures.
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David Liu (profile), 27 May 2011 @ 12:30pm

Re:
Hmm, every computer I've seen over there has Windows by a long shot still. So I would definitely say that Windows still has market dominance in China. It's just that no one is going to pay $100 for a copy of windows. You could literally feed yourself for a month with that kind of money.
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Anonymous Coward, 27 May 2011 @ 12:38pm

what, windows 7 isn't FREE?? oopsie
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crade (profile), 27 May 2011 @ 12:39pm

Re: Re:
Don't forget it also costs about 2G of extra RAM and at ~20G extra HD space. Probably a costly 3d card too. That stuff costs money and is only needed for windows. If you are trying to roll out a whole bunch of cheap machines for a school or an office it adds up pretty quick.
You also gotta think that if you want to set up a network, you need the fancy dancy non crippled version and probably an expensive server license. Then you need to buy the email server and office software and all that crap. It gets expensive and it's all stuff that is available at no cost from other sources with just a bit of extra effort.
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Berenerd (profile), 27 May 2011 @ 12:47pm

Re: Re: Re: Re: Re:
"'ll agree, "over there" English was thrown into a fire, beat with a hammer, and then doused in water."

We don't call it "thrown into a fire" over here...its "lightly seared"
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Berenerd (profile), 27 May 2011 @ 12:49pm

Re: Re: The Chinese are smart enough...
Linux is piracy! If you don't charge for it it is obviously piracy!
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crade (profile), 27 May 2011 @ 12:54pm

Re: Re:
They may still have "market dominance", but so what? Linux doesn't have to have taken over the country to be a factor in the reason windows isn't sold as much there. Even the couple hundred thousand PCs specifically mentioned in those articles are hundred of thousands of cases that that Microsoft dick is trying to claim he is owed money for when they are part of government projects seeking to make China technologically independent by becoming less reliant on Microsoft.

If microsoft has some evidence that the Chinese govt's official statements on the matter of trying to become technologically independent through legal means by not using microsoft's stuff and the progress they have made towards that end are just a lie, or they aren't really doing it at all they should show it, not just pretend the only possible explanation is piracy.
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Anonymous Coward, 27 May 2011 @ 12:56pm

Re: It isn't piracy
Remember, people cry piracy when their business models fail.

No, people cry piracy when there stuff is pirated.

No need to try and make this complicated.
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Dirty Tentacles, 27 May 2011 @ 1:02pm

Re: Re:
Why would you use the average income when the average household there is not even a likely consumer, unlike here in the US?

Look, we can complain about some very relevant cases where business models break down (music, news, publishing), but this probably isn't one of them. One quick stop in a Beijing market will prove that whatever MSFT prices at, the pirates will undercut it by at least half. It doesn't matter if it's a cheap $20 messenger bag, a pair of DG sunglasses or a copy of Windows. There is virtually zero variable cost to another copy of Win7 and so the pirates have all the room in the world to work with.

In fact, there is no possible business model that can compete with what is clearly a marketplace that does not value IP in the least.
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crade (profile), 27 May 2011 @ 1:16pm

Re: Re: Re:
That isn't really true at all.
(Not that microsoft should have to but: )
There are definately business models you can use to adapt to an market environment where copyright isn't a factor. They obviously still value software, or they wouldn't use it. You just sell services related to the software such as customization, installation and setup, certification, consulting, training, custom software for hire, etc.

Instead of building updates and trying to sell them to people, you could have companies who require updates and new features or software pay you to build them. (for example)
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Anonymous Coward, 27 May 2011 @ 1:21pm

so it's your speculation against his? how about there are a multitude of factors and it's foolish to try and pin it all one 1.

you are taking statistics out of context. you have to look at the income of those purchasing computers, not just the average income of all people in china.

if you are buying a computer, you can afford some software for it.
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MrWilson, 27 May 2011 @ 1:35pm

Re: Re: Re:
I'm aware of what capital is in the context of business and economics. Apparently you don't understand puns based on homonyms.

Congratulations on missing the intentional silliness of my post as a satire of how silly the originally post to which I was responding was.

But you're incorrect anyway.

Capitol is the building in which the legislature is housed.

cap�i�tal
1 [kap-i-tl] Show IPA
�noun
1.
the city or town that is the official seat of government in a country, state, etc.: Tokyo is the capital of japan.
...
4.
the wealth, whether in money or property, owned or employed in business by an individual, firm, corporation, etc.
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Prashanth (profile), 27 May 2011 @ 2:01pm

Mr. Masnick, I think you have missed the point here. Ballmer understands abundantly well that piracy is only helping Microsoft in China, because once the consumers make enough money to be able to buy the real thing comfortably, they will do so without giving a second thought to alternatives. He has said this himself, and that's why Microsoft isn't actually doing anything about piracy in China. This is just lip service being paid to the RIAA/MPAA/et cetera.
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crade (profile), 27 May 2011 @ 2:07pm

Re:
You also have to look at the cost of the computer. The cheaper the computer, the less likely you are going to be willing and/or able to pay for windows on it. Thats why microsoft charges practically nothing for them to put it on netbooks and such around here. If you look at the average cost of the computers sold there, it would probably be a factor as well.

Your comment of "if you are buying a computer, you can afford some software for it." is just naive. Computer hw can easily be dirt cheap.
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Anonymous Coward, 27 May 2011 @ 2:18pm

Re: Re:
Not using Windows should be a matter of national security for countries.

FTFY ;)
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Anonymous Coward, 27 May 2011 @ 4:33pm

I switched from Window$ to GNU/Linux years ago...
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techflaws.org (profile), 27 May 2011 @ 11:42pm

Re:
Would dropping their prices say, 10x from the American prices work? Because they've already done that.

So how ripped off do people feel outside China?
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Richard (profile), 28 May 2011 @ 9:10am

Re:
socialist = social

as opposed to ....anti-social!
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nasch (profile), 28 May 2011 @ 9:11am

Re:
Maybe they don't want to admit that Linux is actually competition for them.
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nasch (profile), 28 May 2011 @ 9:14am

Re: Re: Re:
Look, we can complain about some very relevant cases where business models break down (music, news, publishing), but this probably isn't one of them...

In fact, there is no possible business model that can compete with what is clearly a marketplace that does not value IP in the least.

So... the business model of selling copies of software has broken down in China. Time to find a new one, or just complain about the old?
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Gene Cavanaugh (profile), 28 May 2011 @ 12:28pm

M$ whining about China
First, I think I read that M$ had offered/would offer dramatically reduced rates in P.R.China???
Even so, I side with the Chinese on this. If M$ couched it in terms of trying to offer a better product/jobs in China/something, the Chinese (PR China), who I have found to be fair minded, might try to comply - but unlike the US, heavy-handed "rights" that make no sense won't fly there.

AND, let's get off the "communism = evil" nonsense, ala Joe McCarthy, "dictatorships = evil" not social systems.
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aikiwolfie, 29 May 2011 @ 2:37pm

Ballmer IS the problem
Ballmer orders the aquasition of Skype, (a company with patent or technology advantages to Microsoft), at a grossly inflated price tag. No sooner has the ink dried on the page and Skype falls over dead. And you people some how expect Ballmer to understand economics?
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Anonymous Coward, 29 May 2011 @ 7:05pm

I heard about another side of story.

At the inner provinces of China, where people earns roughly US$100 a year, there aren't much place selling software (you're not going to buy software if it costs many years of your income and you can just ask your neighbour burn discs for you, right? Those shops selling software can't make a living there). Buying software license is not easy even if you want to do that.

There aren't any "lost" if you're not going to "gain" anything from them in the beginning......
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nasch (profile), 29 May 2011 @ 8:33pm

Re: Ballmer IS the problem
No sooner has the ink dried on the page and Skype falls over dead.

What do you mean, falls over dead?
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lcloria2 (profile), 30 May 2011 @ 2:52pm

Re: Software cost?
Anyone posting on these pages, who would pay $250 for Win 7 Pro OS, doesn't know what they're talking about. I paid $139 (OEM). I'll not knock MAC, it is a fantastic OS. Linux is as well. They all have thier weaknesses and strengths. I hope to build my next Linux system shortly (one of many).

With that said, I am quite sure Win OS piracy is rampant in China, for it's gaming value alone. Gaming was my primary reason for purchasing Windows, I'm am quite satisfied with it in any case.
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