Microsoft: Looking Forward To A Future With China

| About: Microsoft Corporation (MSFT)
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"We hope that in a few years we will have systems that can completely break down language barriers. In other words, we may not have to wait until the 22nd century for a usable equivalent of Star Trek's universal translator." These are the words of Microsoft's (NASDAQ:MSFT) chief research officer, Rick Rashid.

Rashid spoke at a demonstration in China on October 25- in mandarin. Rashid doesn't speak mandarin, but Microsoft's new gadget in the works does. The video of said gadget can be seen here. Microsoft partnered with the University of Toronto to create a translator that is capable of building a profile from a user's native language (including nuances each individual speaker makes) and then translating it into Chinese combining data from native Chinese speakers. Apparently the technology even reorders spoken English words grammatically into Chinese correctly, as well.

In my opinion, Microsoft intentionally demonstrated the new technology in Chinese first to court their huge base of potential consumers, as well as make them a priority. They seemed to have taken a similar strategy with the surface tablet.

Making China a top priority:

Microsoft chose the site of its very first pre-launch of Windows 8 not in the United States, but in Shanghai. The first "official" launch occurred a few days later in New York, however. The tech company also made a deal with leading Chinese retailer Suning Company, instantly creating a distribution network (500 locations across China) for selling Surface tablets to Chinese consumers.

Microsoft's chief executive officer for China explained in an interview in Beijing that:

"This is the first place in the world where people will be able to get Surface devices in their hands... Having it here in China is addressing the capability of the China market, the fact that we produce these devices here and can bring it to a big, big addressable consumer market."

Why does this matter? It matters because Microsoft is demonstrating to the Chinese market that they view them as a top priority by releasing their Surface tablets and Windows 8 products in China without delay, as opposed to companies like Apple (NASDAQ:AAPL), who often delay products like the ipad for months before releasing them into China. Actions speak louder than words. Debuting the Surface in China directly and having it available for sale right away was a big action.

Bryan Ma, an analyst for research firm IDC commented on the situation, stating:

"For most Apple products, people have to pay a premium to get products on the gray market in the months it takes Apple to launch officially in China... Microsoft putting China first in the priority list could help to make buyers feel special."

The Cloud in China:

Microsoft is also aggressively pushing their cloud into China. The company's Azure Cloud will help monetize the company's Office software, by offering it as a service instead of a pirateable commodity. Microsoft will be offering its cloud services and Office 365 to the Chinese market through a partnership with 21Vianet Group Inc (NASDAQ:VNET). The company has also declared that its first customer for this service will be the Shanghai government. 21Vianet is the company providing the data storage center in Shanghai.

This is good for Microsoft, because (as cited on

"Forrester Research this year estimated the market for public cloud services in China would reach $3.8 billion by 2020, up from $297 million in 2011." It is most likely a good thing for Mr. Softee to have government support in China as well.


Microsoft is attempting to court Chinese consumers by making them the center of attention. They are releasing products and services into the Chinese market without the traditional delay many American companies exhibit, giving actionable evidence that they hold China as a serious customer. They are also providing services that are being adopted by China's government, such as their Azure cloud services. Cloud is a market in China that will offer explosive growth, and Microsoft is getting their foot in the door now.

Offering Office as a service is also a smart move to monetize profits and ditch pirates. Office as a service will eliminate the possibility for pirates to obtain illegal codes that enable them to create and sell bootleg copies of the software. Office 365 will work as an online service that charges a monthly subscription fee. Microsoft will no longer offer Windows 8 boxed in China, as consumers will have to purchase and download it online, or receive it pre-installed on a new Windows 8 device. How successful Microsoft's new strategy to curb piracy will be is still up for debate, but apparently the Chinese government is already helping, spending $160 million on licensed versions of the software.

Shares of Microsoft currently trade at $28.83, in between their 52 week high and low prices of $32.95 and $24.30. The company offers a dividend yield of 3.19% and would be a good buy at a current valuation of 15.5 P/E. The company should see significant cash flows coming in from its new products and services, as well as growth in cloud-based services in China. China will be key moving forward, especially since they seem to be adopting Windows 8 at twice the speed of the United States.

Disclosure: I am long MSFT. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.