Microsoft generated US$18.3 bilion in total company pre-tax income in fiscal 2006. Operations outside the U.S. accounted for $6.9 billion or about 38% of the software giant's total.
The international figures represent a vast improvement from fiscal 2000 when Microsoft's non-U.S. operations accounted for just 17% of overall pre-tax income.
Similarly, Microsoft's international operations employed about 12,100 full-time employees in 2000, which has mushroomed to 27,000 workers as of June 30, 2006. This is in addition to 44,000 full-time staff in the U.S.
Microsoft runs operational centers that support all operations in their regions, including customer contract and order processing, credit and collections, information processing and vendor management. Therefore the regional center in Ireland supports the European region, while the center in Singapore supports the Japan, Greater China and Asia-Pacific region. North America and Latin America are serviced by centers in Fargo, Puerto Rico, Reno, and Redmond.
To serve the needs of customers around the world and to improve the quality and usability of products in international markets, Microsoft "localizes" many of its products to reflect local languages and conventions. Localizing a product may require modifying the user interface, altering dialog boxes, and translating text.
And The Winner Is...
Microsoft hasn't been able to "localize" prices sufficiently to match demand for its software in China. Beijing technical analyst Huang Yong estimates that Microsoft's revenues from China are some $250 million - well under 1% of the company's total sales.
According to Newsweek author Sara Schafer, Microsoft's problems in China come down to software piracy. In Beijing customers can buy bootleg copies of Microsoft Office, Word and Excel for about a dollar - at least $199 less than the global retail price. The Chinese government sympathizes with local software pirates, is openly hostile to Microsoft's monopoly, and has officially embraced Windows' free rival, Linux.
With an average annual income of $1,000 and the highest savings rate in the world at some 40% of income, the Chinese people are simply not prepared to spend a large part of their earnings on Microsoft products.
Microsoft has fought back by hiring China CEO Timothy Chen from Motorola China, and has agreed to share source code with Beijing to ease security concerns.
But although Microsoft has experimented with selling cheaper, less-functional versions of its software in developing nations like Thailand, similar trials are unlikely in China. Nor has Microsoft shown any signs of lower prices for its regular software versions. The company bases its decision on the observation that as incomes rapidly rise in the People's Republic, more Chinese are buying expensive technology like notebook computers and cellphones.
In addition, Microsoft executives cite Taiwan and South Korea as examples of where software piracy fell as incomes rose, and with the help of governments fighting pirates. Unlike China, both Asian countries are now profitable for Microsoft.
Can an American monopoly overcome the traditional Chinese mindset and capture the hearts and wallets of consumers in China?
Not until Microsoft addresses what are perceived as ridiculously high prices for software, its ignorance of Chinese business practices, and a seeming lack of commitment to the vast marketplace in China.
Sources: www.microsoft.com; Sara Schafer, Microsoft's Cultural Revolution (Newsweek International June 21, 2006 edition)
