Retailing Microsoft Office in China: Microsoft, Lenovo, and Gome

Posted on September 28, 2007
Filed Under China Business, China Distribution, Software Piracy |

Pacific Epoch reports that Gome and Microsoft have signed an agreement that Gome will only pre-install and sell legal copies of Microsoft software in its stores.

The deal has limited significance for Microsoft. While the Chinese market continues to be saturated with pirated software, Microsoft is slowly winning the battle. The Gome deal is just part of the new front: extending the same sales requirements for operating systems to applications. Every PC running a pirated version of Windows is likely to have a pirated version of Office as well.

Winning the O/S Piracy War
Microsoft first tried to fight software piracy in China by trying to sue everyone and generally throwing its weight around. This had little success and there were rumblings that the Chinese government may steer its own purchases away from the Microsoft platform. Microsoft got the message and began to invest in China-based R&D and Chinese IT firms.

In 2006 the Chinese government issued regulations requiring that all PCs sold have a licensed operating system installed. This was regarded as Microsoft’s reward for dropping its confrontational approach to software piracy in China. President Hu Jintao and Bill Gates cemented their new-found relationship at a gala dinner at Microsoft later that year.

In May of 2007 Microsoft and Lenovo extended a 2005 agreement that Lenovo would only sell PCs in China with licensed copies of Windows pre-installed. The deal’s value was estimated at US$1.3 billion annually, although neither company would reveal the details.

While piracy remains rampant, Microsoft has shrewdly positioned itself for the future. The incremental gains in regulations, investments, and licensing agreements will pay off as China’s retail technology market matures. Add to this Microsoft’s WGA strategy and the East is looking quite rosy for the folks in Redmond.

Why fix a strategy that isn’t broken?
China Retail News reports that Microsoft and Lenovo have struck another deal:

Lenovo will pre-install Office 2007 software in its consumer PCs. Users can use the software for free in the first three months and choose to uninstall it or purchase a legitimate copy for only RMB899 when the trial use period expires. This special offer is mainly targeted at Chinese families and students.

The article goes on to explain that Office typically retails for RMB1499. Microsoft has long made these kinds of bundling agreements with PC manufacturers elsewhere. Based on the success of the first operating system deal with Lenovo (China’s number 1 computer company), it’s no surprise that they would choose them for the first Office bundling agreement in China. RMB899 is by no means cheap for a Chinese consumer (even in the east), but it continues Microsoft’s trend towards pricing flexibility in China (prices were slashed for retail operating sales in August of this year).

And now the Gome deal. It speaks more to Gome’s ambition in the retail PC market than to Microsoft’s overall strategy. Gome just reached a deal to be Dell’s retailer in China. Gome goal is to position itself as the leading national electronics retailer and that includes PCs. Both gain incremental benefits: Microsoft in tying up another channel partner and Gome expanding its sales offering (and likely gaining a favorable wholesale price).

China’s retail computer market is still dominated by malls of individual shops. These electronics bazaars pay little attention to the niceities of software licenses. But between growth of the big box retailers such as Carrefour and the electronics specialists such as Gome, they may find themselves uncomfortably squeezed.

Just where Microsoft wants them.