Microsoft figures out open source...in China

Fortune Magazine has a great article on Microsoft's growth in China. Gates is apparently a rock star in China, with government officials and groupies clamoring to meet him. He owns China, as the article suggests.

Gates says he's certain China will eventually be Microsoft's biggest market, though it may take ten years. Projected sales this year are already three times what they were in 2004, yet still less than annual revenue in California. (Microsoft will not disclose figures, but Fortune estimates China revenue will exceed $700 million in 2007, about 1.5% of global sales.)

Why? How did Microsoft get to this point in China? Well, funny enough, by acting very much like an open source vendor, despite its best efforts :

The story begins 15 years ago, when Microsoft sent a couple of sales managers into China from Taiwan. Their mission? Sell software at the same prices the company charged elsewhere. Says Craig Mundie, the top Microsoft executive who now guides its China strategy: "It was the classic model - hang out a shingle and say, 'Microsoft: Open for business.'" But the model didn't work.

The problem wasn't brand acceptance; everyone was using Windows. It's just that no one was paying. Counterfeit copies could be bought on the street for a few dollars. As Ya-Qin Zhang, who heads Microsoft's Chinese R&D, puts it: "In China we didn't have problems with market share. The issue is how do we translate that into revenue."

Microsoft, of course, fought this piracy, but it was that very piracy that made it pervasive and ultimately interesting to the Chinese market and government. Microsoft began spieling the Chinese government on the value of collaboration, as Craig Mundie notes:

[W]here we were most broken was that our business practices and our engagement did not reflect the importance of having a collaborative approach with the government.

Microsoft offered up source code (and allowed the Chinese government to replace portions of it with its own code). It started talking about how it wanted to help China develop its own software industry. But piracy was the big winner:

Today Gates openly concedes that tolerating piracy turned out to be Microsoft's best long-term strategy. That's why Windows is used on an estimated 90% of China's 120 million PCs. "It's easier for our software to compete with Linux when there's piracy than when there's not," Gates says. "Are you kidding? You can get the real thing, and you get the same price."

Microsoft is farther down the road to open source than it thought. It has the distribution model down pat. Now it just needs to expand its vision on development. The greatest enemy to any business is indifference. If you have users, you can figure out how to turn them (or some percentage of them) into customers. But indifference will kill you.

Microsoft needs to abandon its control fetish, as it has in China. Here, as there, the model of opening up works. This is not about religion - it's about maximizing profits for the company. Microsoft's software would be much more useful and used if it would just open up. The same holds true for other proprietary vendors. The answer is not to fight open source; the answer is to embrace it.