|BUSINESSWEEK ONLINE : DECEMBER 18, 2000 ISSUE|
Microsoft Misfires in China
Its Web appliance, Venus, was going to rule China. What happened?
One box that solves two problems and offers three functions. That was Microsoft Corp.'s (MSFT) hope for Venus, a $240-$360 gadget running Windows CE software that turns Chinese TV sets into Internet appliances. Venus would solve two problems by making it both easier and cheaper for Chinese consumers to access the Web. The three functions: education, entertainment, and Web surfing. For Microsoft, Venus was the key to penetrating China, because it would make Windows nearly ubiquitous in living rooms from Shenzhen to Shanghai.
Fast-forward to late 2000: Venus seems more like one box containing two disasters and three catastrophes. Of the three main Chinese companies that signed up to sell Venus boxes, two have pulled them from the market. Only Legend Computer is still selling the units in China--and it ships most of its supply to Southeast Asia. Microsoft won't reveal sales figures, but Sean Zhang, managing director of Microsoft (China) Research & Development Center in Beijing, concedes they are ''below our expectations.''
Why has Venus fizzled? Zhang blames both a lack of online content and the relatively high cost of Internet access. But others say Microsoft misjudged the willingness of Chinese to buy what is essentially low-rent technology. And with PCs selling for as little as $600, there isn't much reason to buy Venus. Moreover, while Zhang says his company is committed to the project, local TV maker TCL International Holdings never sold Venus because it felt Microsoft wasn't fully behind the concept.
A DISMAL IMAGE. The Venus project is not the only misfire in Microsoft's China strategy. Besides the feeble market response to Venus, the Redmond (Wash.) giant continues to battle software pirates, a poor image with Chinese authorities and consumers, and a growing threat from local rivals offering inexpensive Linux-based service. Microsoft won't release its China revenues, but analysts say they're probably under $100 million this year--less than the company makes in Hong Kong. ''We are much smaller than we expected,'' says Microsoft General Manager Jack Gao, with a sigh. ''We have a lot of things to improve.''
So Microsoft is launching a fresh offensive, starting with public relations. A new China management team, headed by Gao, is trying to burnish the company's dismal image, which took a hit this year with the publication of a memoir by former executive Juliet Wu, who trashed Microsoft's China strategy as aggressive and culturally insensitive. Gao has formed a public relations division to combat negative press coverage--such as a report erroneously suggesting the government had decided to withdraw support for Windows. And the company has launched retraining programs for workers laid off from state enterprises. This is strictly a PR exercise; the workers will not get jobs at Microsoft. As Gao says: ''Even though our business is not what it's supposed to be, we want to show that we have a long-term commitment.''
Microsoft is not just concerned with image. It wants customers, too. So the company has been diligently courting the country's new entrepreneurial class, providing training for the staffs of startups that use Microsoft software. Bill Gao, a 28-year-old founder of Shanghai Intranet Systems (no relation to Jack), has worked with Microsoft for three years developing an e-mail system that will work on various appliances. Microsoft paid to send him to last year's Comdex consumer electronics conference in the U.S., and provided management training for many of his staff.
Microsoft has been currying favor with the government, too. When CEO Steven A. Ballmer visited China in September, he announced an $80 million expansion of the company's Shanghai service center, which provides technical assistance to Microsoft software users in Asia and the U.S.
While there have been grumbles that the center was set up for PR purposes, its general manager, Jun Tang, insists Microsoft chose China for its engineering talent. That also seems the main reason the company set up its R&D center in Beijing two years ago. One of only three such centers worldwide, its staff of 100 focuses on speech-recognition, multimedia, and wireless technology. Still, while Microsoft insists the two facilities are an integral part of its global strategy, their location certainly will ease the company's relationship with China's sometimes xenophobic leadership.
Yet Microsoft must still persuade Chinese companies to buy its products and services. Consider China Netcom Corp., a state-owned broadband provider that serves 17 cities. It plans to quadruple its coverage by 2004 and is looking for partners to help with a range of voice and data services. But China Netcom is playing hard to get. Besides Microsoft, it is considering bids from IBM (IBM), Hewlett-Packard (HWP), and Sun Microsystems (SUNW). ''We've seen what's good and bad,'' says Xingcha Fan, Netcom's vice-president for strategy and business development. ''We want the best.''
Other rivals are making headway, too. Increasingly, Microsoft must contend with companies offering Linux, the open-source operating system. The threat is perhaps more political than anything else. Beijing likes to set one foreign company against another--as it has done with Boeing and Airbus. By playing up the potential of Linux, the government may be telling Microsoft that it had better play by its rules. Still, Linux is making inroads. TurboLinux, a San Francisco company that provides Linux support, recently won a contract to help the post office use the platform to automate some of its operations.
PERSISTENT PIRATES. But Microsoft faces no greater competitor than the thieves who have elevated software piracy to a fine art. Last year, overall sales of computer hardware in China topped $18 billion. But software sales were a measly $2.1 billion. In other countries, the ratio is closer to even. Blame the shortfall on the pirates. Because of all the counterfeiting, Microsoft sold only 2 million licensed copies of its software in China during the year ending in June.
Despite these setbacks, Microsoft's China team insists it is well positioned. The disappointing Venus gambit? Not to worry, says Sean Zhang of the Beijing R&D center. While the Venus boxes haven't been setting the sky ablaze in China, Microsoft is signing on partners elsewhere. In mid-2000, Hong Kong and China Gas Co., the city's monopoly gas utility, introduced a consumer Internet service using Venus software. Zhang says the company is talking to potential customers in South Korea and other parts of Asia. Meanwhile, he says, China will take time to develop sufficiently compelling Internet content to attract buyers to Venus: ''The ecosystem for this kind of information appliance is not ready.''
Chinese aren't ready to give up on counterfeit versions of Windows either. ''We have a lot of users,'' says Jack Gao ruefully. ''But we don't have a lot of customers.'' With Beijing intent on developing a local software industry, he says, cracking down on the pirates is in China's interest, too. That will take time. For now, a more humble Microsoft will have to keep trying to win friends in the emerging market it values most.
By Bruce Einhorn in Beijing, with Alysha Webb in Shanghai
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