Microsoft and China: Impossible bedfellows?

UPDATE: China has confirmed it is conducting a formal investigation into Microsoft.


There’s a definite chill in the air.

American technology firms operating in China have felt it ever since Edward Snowden spilled the beans, alleging that America’s National Security Agency was spying on Chinese leaders with the help of US tech companies.

Now, Microsoft is the latest company to suffer the backlash.

Officials from China’s State Administration for Industry and Commerce, the body responsible for enforcing competition laws, have met Microsoft managers in four Chinese cities.

The meetings could signal the beginning of an antitrust investigation into Microsoft’s possible monopoly over China’s operating system market.

One news agency, AFP, quoted a source saying that some Microsoft offices were raided as part of an investigation, though neither Microsoft nor the Chinese AIC agency has confirmed this.

“Microsoft is happy to answer the government’s questions,” the company said in a statement, without providing any further details.

The company hasn’t been accused of wrongdoing. And, AIC officials sometimes visit industries under government scrutiny but take no action.

However Qualcomm Inc, the world’s biggest mobile phone chip maker, is facing penalties that could exceed $1 billion, after being accused of overcharging and abusing its market position in China.

It’s too early to say whether the Microsoft meetings will result in an antitrust investigation, says Joe Sweeney, an analyst with Sydney-based IT advisory company Intelligent Business Research Services (IBRS).

“Who really knows? I wouldn’t be able to make a guess on that one. What I will say, however, is that the timing is more than coincidental. There are rising tensions, economic tensions, between the US and China and I think this incident forms at least part of that story.”

Mr Sweeney says those tensions have been rising for the last two decades as China moves from an industrial third world economy to a first world knowledge economy, putting foreign IT companies in the firing line.

“It’s about China is flexing its economic muscles, absolutely. Now that means that companies like Microsoft, like Google, are going to be facing an increasingly difficult time.

“Some months ago China announced that its government would no longer procure Microsoft Windows and would be moving towards the Linux-based operating system which is manufactured and developed in China. So we are seeing a great deal more emphasis on domestically-developed technologies for the domestic market.”

And part of Microsoft’s problem says Peter Grant, a former Microsoft State Director for Queensland and now analyst at IBRS, is that the company hasn’t encouraged compatability between its products and other technologies.

“Microsoft’s previous CEO was famous for saying that Windows is the air that Microsoft breathes. So they were encouraging all of their products to be run on Windows and for people to lock themselves in to a Windows environment,” Professor Grant says.

“Well, good business would say you wouldn’t do that in 2014 and the Chinese, being a green field, will almost certainly make that choice.”

But the Chinese government’s decision to bypass Windows is also a political one.

In May, a State Internet Information Office spokesman said “governments and enterprises of a few countries” were taking advantage of their monopoly status and technological edge to collect sensitive information.

The country’s state-run broadcaster recently aired a program that questioned the security of Windows 8, with Chinese experts alleging that Microsoft was cooperating with US government cyberspying activities.

Some say that’s retaliation for the US Justice Department charging five Chinese military officers with hacking American companies’ computers and stealing trade secrets.

The political angst between the US and China is not Microsoft’s only worry.

IBRS’s Joe Sweeney says consumers, not businesses, have become the main drivers of technology and that’s impacting those who’ve traditionally supplied businesses.

“It’s not uncommon to see police, ambulance, rescue personnel using their mobile phones instead of their workplace radio or file storage system. It’s not uncommon to see staff taking in their own mobile phones, with their own network connectivity to work and using their own personal technology rather than the company’s technology. The consumer technology is, in their minds, superior,” Joe Sweeny says.

“This is changing how companies buy their technology and Microsoft has to address that.”

To keep up, Microsoft has to persist in the smartphone market.

It bought Nokia earlier this year but last week announced it was shedding 18,000 jobs – 14 per cent of its workforce – and most would come from Nokia.

That’s indicative, Joe Sweeney says, of Microsoft’s struggles to make Nokia work.

“Microsoft has made, in past years, major fundamental mistakes about how it approaches the mobile phone space. It still continues to make those mistakes,” he says. “The issue here is that Microsoft believes that your mobile experience should be the same, or very, very similar to, your desktop experience. And while it does sound like a good story in reality consumers don’t actually want that. What they want is a highly optimised experience for the device they’re working on.”

Chinese smartphone users are no different, says Peter Grant, and so if Microsoft is to thrive in the Chinese market, it has to overcome that obstacle as well as the political ones.

“Smartphones is where the industry’s going and if you want to be successful in China that will be a cornerstone of how that’s done. People want to access as much as possible from mobile devices. So, smartphones and that market segment are absolutely critical.”