When it comes to the risks and rewards of doing business in China, software giant Microsoft (Nasdaq: MSFT) can write a lengthy book on the subject after years of ups and downs in the market. Just months after the company marked a modest advance with Beijing's lifting of a decade-old ban on gaming consoles, the central government has now formally banned the installation of Microsoft's flagship Windows 8 operating system (OS) on all government computers. It's clear from the media reports that this ban was unexpected, though Microsoft has certainly learned to expect this kind of sudden and unexplained move after 2 decades in the market.
Of course we can only guess what the reasons are behind the latest ban, since Beijing rarely discloses its reasons for such moves. Some may say it represents some form of retaliation for something Microsoft or the U.S. did. The move could also be a bargaining tactic, or it could be a sign that Beijing wants to promote alternative homegrown technology.
Before we go any further with more speculation, let's look at the actual news that had the ban coming in a low-profile announcement from the Central Government Procurement Center (English article). The directive was included in a posting on the center's website last week about the use of energy-saving products, which is perhaps why nobody saw it initially.
Microsoft said it was surprised by the move, since it had been working with the procurement office to make sure Windows 8 met government standards. The official Xinhua news agency implied the move might be retaliatory for Microsoft's high-profile decision to end support for its older Windows XP operating system that is widely used in China. That implied that if Microsoft was willing to abandon Windows XP despite its widespread use in China now, there was no guarantee it wouldn't do something similar later with Windows 8.
In fact, that kind of reasoning doesn't seem completely inappropriate. Microsoft's decision to abandon XP was probably made at least partly to boost sales by forcing users to upgrade to the newer Windows 8. So perhaps Beijing resents being told it will have spend millions of dollars to upgrade all government computers or risk leaving them vulnerable to attack due to future problems with XP that Microsoft will no longer fix.
If that's the case and this is all a bargaining tactic, then we could possibly see Microsoft alter its decision to abandon XP and set up a special team just to provide support in China. Beijing used a similar tactic about a decade ago, when it threatened a similar ban on Windows due to security concerns. As a result, Microsoft made the rare move of revealing its source code to Beijing and the situation was resolved.
Conspiracy theorists might argue that Beijing is taking its action as retaliation for revelations from the Edward Snowden cyber-spying scandal, and also for Washington's regular accusations of cyber spying by Beijing. Others might say Beijing wants to promote a homegrown OS called Ubuntu Kylin rolled out a year ago (previous post).
With the rise of a new generation of operating systems led by Google's (GOOG, GOOGL) Android and Chrome, it's also quite possible Beijing could simply be re-thinking its entire approach to computer operating systems. My guess is that we may see Beijing and Microsoft ultimately reach a compromise in this latest decision, but that Windows may be at the start of a long downward slope for use on government computers in China.
Bottom line: Microsoft will probably reach a deal to end a Beijing ban against Windows 8, but could see government sales of its Windows products start to decline going forward.
Disclosure: No positions