May 7, 2004 12:40 PM PDT

Microsoft struggles in emerging markets

SEATTLE--Microsoft knows its sales model for emerging markets around the world isn?t working. But just how to fix that model isn't clear, company executives said this week.

"We haven't gotten this figured out," said Matthew Price, a senior director in Microsoft's Windows Client unit said in a panel discussion at the Windows Hardware Engineering Conference (WinHEC). "There's lots of work to be done."

Emerging markets are important to Microsoft, and to its PC-maker customers, because they represent a large, untapped source of new revenue. Four countries in particular--Brazil, Russia, India and China--have less than 10 percent PC penetration today, as compared to roughly 60 percent in the United States. Currently, those developing areas contribute just a tiny fraction of Microsoft's overall sales.

Microsoft also is eager to stem the use of Linux and open source software, which has become popular with some foreign governments and universities.

The company's best effort so far at tackling emerging markets may be the basic versions of Windows XP and Office that Microsoft has sold as part of a Thai government program to offer low-cost PCs to the country's population.

The program managed to get 150,000 computers in the hands of Thai citizens, Price said, though in most cases, the PCs were sold to people already considering buying a computer.

There were also a number of problems with the Thai program that stemmed from the fact that the government became the computer reseller, shipping the units through the postal service and setting up their own call centers to handle customer support, Price said.

"It was a bit of a mess," Price said of the program's execution. "People were actually pretty dissatisfied with the quality of units."

A similar program just started in Malaysia, but Price said the interest there was lower than in Thailand. "They have not had the same kind of success. They have had a much, much lower volume in terms of orders."

"How much does a Big Mac cost in India versus in New York versus in Taipei, and how do you map a similar Big Mac index to software?"
-- Martin Taylor, general manager of platform strategy, Microsoft

As a result, Microsoft is still grappling with how to tweak its business model. "We're trying to test things," Price said. "The jury is still out in terms of whether, as an industry, this is going to be helpful for us."

In February, Martin Taylor, Microsoft's general manager of platform strategy, indicated that the company was considering various approaches that would break with the long-standing practice of pricing Microsoft software the same across the globe.

"How much does a Big Mac cost in India versus in New York versus in Taipei, and how do you map a similar Big Mac index to software?" Taylor said in the February conference call. "It's a very difficult problem."

The issue remains a big challenge, Price said. "There's no silver bullet, and this is not even close to a silver bullet."

At the same time, Price said, the idea of just waiting around for people in emerging markets to be ready to pay for PCs in the same way as in developed countries just isn't working.

"At current course and speed, we are not going to get there," he said.

Without tapping the emerging market, the PC business will get a whole lot less interesting as companies struggle to achieve single-digit growth by convincing PC owners to replace their current models, Price said.

If Price was looking for help from the crowd at WinHEC, he probably didn't get much. Just 35 people turned up for a session on exploring emerging markets, as opposed to the hundreds who, earlier in the day, attended a panel on the opportunities presented by 64-bit computing.

Nonetheless, a good chunk of worldwide PC growth is coming from emerging markets.

Microsoft said it is seeing many governments in developing countries eager to try to work out a way to better equip their populations with technology. They see foreign investment as directly tied to a country's communications and technology infrastructure.

"They are looking to technology like never before," Price said.

If Microsoft does start adjusting its pricing based on country, analysts say, the company will have an easier time in countries with relatively uncommon languages. That may explain the fervor with which Microsoft is translating its software as part of a new Local Language Program. The company is adding "language interface packs" in 50 countries this year, all but four of which are emerging nations.

In the program, Microsoft is working with local universities to help do the translations needed to quickly adapt the most common Windows commands.

"I could see that becoming not just a technical way to get Windows into those markets, but as a precursor to more segmented sales of Windows and Office in those markets," said Directions on Microsoft analyst Rob Helm.

Helm said Microsoft recognizes that Linux is more of a threat overseas and has moved quickly, assigning a top Linux expert in the company, Maggie Wilderotter, to head worldwide public sector sales.

Another option for emerging countries may be so-called thin clients, PC-like devices that lack a hard drive and store information on a central server. But while devices without a local hard drive are easier to support, they require strong network connections and also have proved unpopular with consumers thus far.

"In fairness, it's never worked with consumers in the developed world," Helm said. "It's not clear why it would work in developing world."

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A New York and Taipei Big Mac cost about the same!
Software index? Bah. Things are actually more expensive for the average Taiwan resident. I had a McDonalds breakfast in Taipei yesterday - hotcakes with a coffee and hashbrown. How much was it? 92 NTD. That comes out to be arround 2.75 USD. There is global pricing parity for most large companies. This is actually seen as a positive economic indicator and prevents "grey market" sales of products.

How much is a Sony digital camera in New Zealand compared to the US? The price is about the same. This will end up hurting Microsoft.

The thing that isnt mentioned here is that opensource alternatives are now just as good as many commercial packages. Sure there is no support but I have owned MS Office for years and I never remember calling in to complain about any issues. Many governments (wxample: Germany and India) and retailers (example: WalMart) are finally realising that opensource alternatives are just as good.
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