Wednesday, August 20, 2014

Could U.S. Consumers Pay for China’s Opposition to Microsoft?

In the midst of what can be described as political posturing between the U.S. and China, Microsoft (MSFT) has become the Chinese government's most recent target. Extremely complex and prohibitive national laws regarding appropriate business practices, Internet security, and censorship have made it challenging -- if not nearly impossible -- for U.S.-based companies to conduct business there.

If China eventually forces out foreign technology companies, whether through official legislation or pressure and interference tactics, American consumers could ultimately pay the price. Lost revenue, and the expenses incurred in moving operations to neighboring countries, may trickle down to end users in the form of more expensive software and hardware.

Why China is giving Microsoft a hard time

In June 2013, Edward Snowden, the now-famous former NSA contractor, leaked top-secret internal documents to the press, including some that indicated Microsoft had been cooperating with the national spy agency to facilitate the NSA's intrusion into users' accounts. The documents apparently proved that Microsoft "helped the NSA to circumvent its encryption" to gain unencumbered access to email, cloud storage, and Skype video calls.

It's also been suggested that China's actions could be related to Microsoft's decision last April to end support for its Windows XP operating system, as the majority of the Chinese government's computers still run the software. Apparently, the government has complained about the high cost of upgrading to Windows 8. But, even though most of the desktop computers in the country still run on Windows XP, a large percentage are pirated versions of the operating system.

In May 2014, the Justice Department formally indicted five members of China's People's Liberation Army, accusing the group of illegally accessing computer networks of several U.S. corporations in attempts to steal trade secrets. The New York Times called the indictments symbolic and said "there is virtually no chance that the Chinese would turn over the five [accused] named in the indictment." Instead, China seems to have responded by attacking Microsoft.

China's reactions

Snowden's documents sparked an overnight firestorm of outrage across the globe. Since then, the Chinese government has implemented measures to prevent digital infiltration by U.S. spy agencies. Fearing back doors in Microsoft's Windows 8 operating system through which the NSA, CIA, or FBI could access computers, China's Central Government Procurement Center officially banned the use of Windows 8 on government computers.

Taking things one step further, late last month, Chinese officials raided four of Microsoft's offices, seizing documents and hard drives that could contain evidence supporting claims that the company violated the country's antitrust laws. If found guilty, Microsoft could be fined up to 10% of its annual revenue.

According to Fox News, "There have been growing concerns that China has decided to use anti-monopoly laws to stifle international companies and boost domestic competitors." Considering the government's interference with other U.S. websites, software providers, and technology companies like Google (GOOG), Symantec (SYMC), and Qualcomm (QCOM), it seems clear that foreign competition is increasingly unwelcome.

Bloomberg says the Chinese government "seems eager to show American companies that they will pay a price for U.S. government actions." That price may be exile for some of Microsoft's popular products, or at least hindrances so severe that it will be nearly impossible to conduct profitable operations in the country.

How might American consumers suffer?

While Microsoft does not specifically break out its China revenue, Reuters says the company revealed that "sales for the year ending June 2013 surpassed $1 billion for the first time." Extrapolating from available data, which includes $765 million in revenue from Nokia (NOK), the Chinese market comprises approximately 2% of Microsoft's global revenue of $83 billion. Overall, then, China alone does not represent a significant portion of the company's revenue.

However, if China's investigation finds Microsoft guilty of anti-monopoly activities, the company could face hefty fines. This, plus lost revenue and the operational costs, is money that might be recouped through higher prices for consumers throughout the rest of the world, including the U.S. This wouldn't be the first time that Microsoft raised prices for consumers to make up for slow sales and increased expenses. In Nov. 2010, the company bumped the price of an Xbox Live subscription by $10 to cover "the costs associated with maintaining a service" and "adding the customer service infrastructure," according to an interview with Xbox Live senior marketing director Craig Davidson. In Dec. 2012, Microsoft raised prices on several enterprise products and licenses by 8%-400%. While the company did not specifically relate those increases to poor sales, many analysts and affected customers couldn't help but note the correlation with lower-than-expected sales of Windows 8.

Final thoughts

Despite its claims that Windows 8 contains no security loopholes or back doors for U.S. spy agencies -- and that "customers around the world have evaluated and embraced Windows 8 as our most secure operating system" -- Microsoft remains under fire in China. The country's Central Government Procurement Center has removed the OS from its list of approved software, and the State Administration for Industry and Commerce has launched an aggressive investigation into apparent claims of anti-monopoly law violations.

Together, the expenses incurred by Microsoft in mounting its defense, combined with lost revenue and potentially giant fines, could ultimately lead to more expensive products for consumers. Apparently, the Chinese government wants to set an example with Microsoft, using the software ban and antitrust investigation to demonstrate its strength in the digital Cold War.

Article originally appeared on Seeking Alpha (08/20/14)

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