Why Windows 7 should be free in China

commentary Late in 2008, Microsoft CEO Steve Ballmer hosted a luncheon in Sydney where he proclaimed that China wasn't very important to the company's bottom line, even if he'd like it to be, because of the high rate of piracy and intellectual property theft.

"We need some IP reform in China for it to be important to our financial results," the Australian IT quoted Ballmer as saying.

Less than a year later and on the verge of releasing Windows 7, the company from Redmond still hasn't got an upper hand against pirates. Already counterfeit retail copies of Windows 7 Ultimate can easily be found on the streets of China for around RMB 5 (US$0.73).

When the operating system officially debuts in China, the asking price from Microsoft will start much higher at A$80 (US$70) for the basic version and almost double that price for the premium copy.

As a straight conversion, these are some of the cheapest prices for Windows 7 in the world. Considering the average income in a tier 1 city such as Shanghai or Beijing is less than A$800 (US$700) per month one can see why this is expensive. Move out of the tier 1 cities and the average income is about a third of their urban counterparts. No wonder almost 60 percent of survey respondents on Chinese portal site Sina said the prices set by Microsoft were still too high.

Outside multinational business users and OEM (original equipment manufacturer) installs, it's fair to say Microsoft won't win the war over piracy for the life cycle of Windows 7 under the current conditions in China.

Even though Microsoft is working hard to convince users to pay for Windows and that software piracy is a crime in China, policing it doesn't seem to be high on the list of priorities. Like many laws in China (and other countries) there is the law of the courts, the law of the land and what people do every day.

Which brings me to my point: Microsoft need not sit on its hands and wait for the government to police software piracy.

Microsoft has an opportunity to use Windows 7 as a Trojan horse to aggressively compete for the billion-dollar digital ads through its online services. It's a space that Microsoft competes not only against search giants Google, but even bigger search competitors such as Baidu, which holds even greater market share than Google in China.

The software giant should make a free version of Windows 7 to consumers that is optimized with its online services such as Bing search, Live Messenger, Live Mail, Mapping services, the MSN portal, Silverlight and various Windows Live services. Microsoft could even create new services for the China market and focus on getting more third-party developers interested in the company's upcoming Azure cloud platform.

The company could even partner closely with the likes of Alibaba, which runs Yahoo's business in China. Alibaba also owns the biggest payment gateway and a marketplace Web site, Taobao, which dwarfs eBay inside the great firewall. While the partnership may have some overlapping products or services, Yahoo owns a 40 percent stake in Alibaba and is keen to compete against Chinese search giant Baidu.

This idea might sound familiar. It's a similar premise of the upcoming Chrome OS by Google, which promises to be a Linux-based, Internet-powered operating system that ties the company's online products and services to a free operating system. An operating system that China's biggest PC maker, Lenovo, has already signed up for.

While Google might not be the poster child of online success in China just yet, Microsoft is trailing further behind. Other than Live Messenger, the company battles to compete for budgets such as CR-Nielsen's estimated US$223 million for digital advertising in July this year. China is also a savvy e-commerce market with volume expected to hit RMB 3.2 trillion (US$471.7 billion) by 2010 according to IDC.

Microsoft is on the verge of change in China. On the horizon is probably one of the biggest threats to the operating system/Web platform world for some time. Previously, the company has relied on poor competition and cheap pirate copies of Windows to keep its platform as the operating system of choice in China. Times could change quickly if Google Chrome OS gains traction.

Microsoft can either sit on its hands and wait for a change on piracy enforcement before making a significant income from Windows 7 in China, or it can optimize a free version of the operating system to beef up the company's income from online services offerings and cloud computing ambitions.

Which direction Microsoft chooses in the cloud computing era in China could possibly shift the future of operating systems as we know it.