Microsoft Looks To State For New China Skype Partner

| About: Microsoft Corporation (MSFT)

I really would like to compliment Microsoft (NASDAQ:MSFT) from time to time for its China strategy, since I personally have no objections with the world’s largest software maker in general. But it’s often difficult to find anything positive to say about Microsoft’s strange decisions in China, and that’s certainly the case with the latest news about its choice of new local business partner for its Skype instant messaging service. Microsoft made headlines earlier this month when it dissolved a longstanding China tie-up for Skype without naming a new partner for the service; now it has formally chosen new partners in 2 stodgy state-run enterprises, Guangming Daily and Founder Group.

Despite its global popularity, Skype has been a non-player for years in China as it operated under an ineffective partnership with the Hong Kong-controlled Tom Group (OTC:TOCOF). It announced 2 weeks ago that it was formally ending that partnership, though at the time it didn’t name any new partner. Now we’re learning that the new partner is a company called Guangming Founder, which itself is a joint venture between the ideological newspaper the Guangming Daily and Founder Group, a state-run conglomerate connected with the prestigious Peking University. (English article; Chinese article) The new alliance will operate a Chinese version of Skype at

There’s not much more detail beyond that, except that users of Skype’s previous China service will be migrated to new software under the Guangming Founder partnership. My first reaction is that this new alliance looks quite bizarre. Foreign multinationals usually choose private-sector local partners for their Internet ventures in China, but in this case Microsoft has clearly chosen a company with very strong state-run credentials.

Guangming Daily is one of China’s oldest newspapers, and is mostly known for its ideological focus rather than its business acumen. Founder also has strong ideological overtones through its Peking University connections. I’m familiar Founder for its former PCs, which used to be China’s second largest brand. But mismanagement and aggressive competition from international brands and domestic rival Lenovo (OTCPK:LNVGF) led Founder’s PC business to struggle, and it ultimately left the area.

This kind of state-run background for its new partner hardly looks promising for the future of Skype in China. Nearly all of China’s most successful players in new media and social networking (SNS) are privately-funded companies, with names like Sina (NASDAQ:SINA), Sohu (NASDAQ:SOHU) and Tencent (OTCPK:TCEHY) dominating the spaces. State-run entities like Guangming still dominate traditional media because private enterprise is banned from that area. But those state-run players have had little or no success in new media, lacking the commercial instincts to compete with the privately funded players.

More broadly speaking, this new tie-up is just the latest in a long string of strange decisions in China by Microsoft. The company recently indicated it intends to enter the China gaming console market, even though online products are much more popular among Chinese gamers. (previous post) The company also recently launched a campaign to promote its struggling Bing search engine in China, and a year ago announced a tie-up with China Unicom (NYSE:CHU), the most disorganized of China’s 3 big telcos.

All of these and other similar initiatives seem to reflect a lack of understanding of the China market, and also an inability to pick good partners that can help it succeed outside its core software business. Microsoft has a history in China of working closely with Beijing to achieve its goals, and I suspect that closeness affects many of its business choices for its non-software initiatives. In this case, the choice of Guangming Founder continues a tradition of bad choices for its partnerships, and I expect that Skype will remain a non-player in China under this new tie-up.

Bottom line: Microsoft’s Skype service will remain a non-player in China under its new Guangming Founder partnership, which continues a tradition of bad business decisions in the market.

Disclosure: Author has holdings in Qualcomm.