| BUSINESSWEEK ONLINE : NOVEMBER 1, 1999 ISSUE | ||||||||
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| INTERNATIONAL -- ASIAN BUSINESS
A Hard Sell for Microsoft in China (int'l edition) Its plan to sell set-top boxes in China faces high hurdles Meet Wu Yanbin, a 21-year-old college student checking out the new computers at the Xidan Department Store in western Beijing. He's a devoted techie who surfs the Net every day, and he plans to be a Web-page designer after graduation. So ask him what he thinks about Microsoft Corp.'s key strategy for penetrating the China market: promoting set-top boxes with its WinCE software that allows anyone with a TV set to go online in their living room without buying a computer. ''Microsoft is a giant. I really admire it,'' he says enthusiastically. But would he buy one of their set-top boxes? ''I wouldn't even think about it,'' says Wu. ''Their functions are too limited for me.'' Both blessing and curse--that refrain seems to run through Microsoft's attempts to do business in China. After months of setbacks, Microsoft says that its new set-top technology, known as the Venus project, will be rolled out at the end of October. The box, with new TV-customized software, lets users read e-mail, surf the Net, and do simple word processing while sitting in front of the TV with a remote keyboard. The plan certainly has potential: More than 300 million households in China own a television. And Chinese so far own just 2 million PCs. So Microsoft wants to skip right over marketing to PC owners and ''stake a claim in the living room,'' says Sean Zhang, managing director of the Microsoft (China) Research & Development Center, and initiator of the project. Analysts say the set-top box market could soon be worth several hundred million dollars. PILLORIED. The problem for Microsoft is that China has laid a minefield for the company. For one, Beijing has given Microsoft competitors a headstart, even helping one local company develop a rival operating system. At the same time, Microsoft is regularly pilloried in the Chinese media, which condemns what it calls Microsoft's monopolistic impulses. Indeed, the public ill will has already led to the resignation of Microsoft's Chinese general manager. Analysts say the constant drumbeat could translate into poor response from consumers. Another danger is the threat by Information & Industry Minister Wu Jichuan to halt foreign investment in Internet-related industries. So far, this is only a threat. But if it's translated into action, it could seriously slow the growth of China's Internet industry. While no one expects Microsoft to be forced out of its project, that action would damage revenues. And by setting new technical standards for the industry, Wu could also tip the field in favor of domestic software companies. Says Beijing-based telecom consultant Edward C. Lanfranco: ''The Venus project is a real crapshoot for Microsoft.'' Microsoft is betting on navigating these hazards successfully. Already, China's Internet users number 4 million and are expected to reach at least 6 million by the end of the year. Most Internet users surf the Web at universities or workplaces. So Microsoft hopes to lure them online at home by selling set-top boxes at $240 to $360, far below the $780 a PC costs. Although Microsoft won't disclose exact numbers, Zhang says the company has spent millions developing Venus. One of Microsoft's seven set-top-box manufacturers hopes to sell more than 100,000 boxes by the end of this year. ''The number of potential users is astronomical,'' he says. As local partners, Microsoft has lined up the well-regarded Beijing-based computer maker Legend Group; the top large appliances maker, Haier Group Co., in coastal Qingdao; and in the south, a leading TV manufacturer, TCL. They, along with four other companies, will make the boxes and pay Microsoft close to 10% of their sales in royalties for using the Microsoft operating system. Microsoft is also working closely with Chinese-language portals Sohu.com and Sina.com to design content more suited to a television screen than a computer monitor and more appealing to less-educated Chinese. Education software and games are the focus. ''Content must be tailored more to the common, ordinary people,'' says Zhang. But competitors have gained ground too. Beijing-based Chinese software producer Hopen Software Engineering has developed a rival operating system for information appliances, including set-top boxes. Founded by the government-linked Chinese Academy of Sciences, Hopen expects to benefit from government-directed purchases as products using its software begin to roll out. Already, Hopen's operating system is used in set-top boxes produced by Shenzhen Huaqiang Holdings Ltd. They're priced at about $100 less than Microsoft's Venus. ''China wants to establish its own software industry,'' says Hopen President Zhong Xichang. The company has signed up more than 120 cable companies to provide information for a stock market service. ROYALTIES. Another competitor, MyWeb, a company started in California by three graduates of the National University of Singapore, has been selling its set-top boxes since July. MyWeb uses a Canadian-developed operating system, called QNX. Like Microsoft, MyWeb is relying on telephone modems until two-way cable connections are more widely available in China. But unlike Microsoft, MyWeb has begun selling ads on its TV portal site, now averaging 1 million page views a day, and plans limited e-commerce--in cooperation with an Australian TV shopping network--before the holidays. MyWeb President and Chief Operating Officer Danny Toe predicts that by next year, the company's advertising revenue will exceed that from box royalties. Microsoft has no immediate plans to start selling ads or doing e-commerce in China. ''We want to be very conservative at this point,'' says Microsoft's Zhang. But with so many companies piling in, it's going to be tough to make money on royalties alone. And with computer prices falling some 40% over the past year, there is sure to be added downward pressure on the prices of set-top boxes and less reason to choose them as a cheap alternative. Still, set-top boxes are capable of more than just Internet access. Once two-way cable begins to replace the telephone modem hookup now needed, the box can offer video on demand. Already, it can play video compact disks, music CDs, and CD-ROMs and provide simplified word processing and spreadsheets. Microsoft's software sales, which analysts estimate to be just $50 million in China now, could double if millions of Chinese start to demand these services. But for Microsoft, this war for China's couch potatoes is far from won. By Dexter Roberts in Beijing _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ BACK TO TOP |
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