Microsoft CEO Treks To China, Settlement Coming?

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Summary

The fact that Microsoft is most likely leaking news of this trip hints that it may believe a settlement is imminent and that it could face a big financial penalty.

The Microsoft case dates back three years and is related to practices of compatibility, bundle sales and file verification issues involving Windows and Office software products.

The case splashed into the headlines in 2014 after Microsoft's offices were raided by government officials as part of that investigation.

Bottom line: A Beijing visit by Microsoft (NASDAQ:MSFT) CEO Satya Nadella hints that a settlement will soon be announced in the three-year-old antitrust probe against the company, which could include a fine of more than $1 billion.

Just weeks after Apple (NASDAQ:AAPL) CEO Tim Cook came to China on a trip partly aimed at damage control, Microsoft's CEO Satya Nadella is in Beijing on a similar mission involving a long-running antitrust probe against the world's biggest software company. The trip, and the fact that it was probably leaked by Microsoft, hints that the nearly three-year-old probe against the company is nearing completion and we could soon see China announce corrective action against the company. A similar series of events unfolded before last year's antitrust settlement of a similarly long Beijing probe against US telecoms chip giant Qualcomm (NASDAQ:QCOM).

Foreign tech companies have complained loudly over the last two years about what they perceive as discrimination against them by Beijing. Some complaints center on antitrust probes that they say they are aimed at undermining them to help domestic high-tech companies. Others say foreign tech companies are being unfairly forced to disclose their product designs to government officials under a new national security law passed by Beijing last year.

I don't really agree with Beijing's national security concerns and the corresponding tough requirements under the new national security law, which seem overly intrusive and unnecessary. But I'm less sympathetic to the foreign tech giants over the antitrust probes since many of these big companies really do engage in actions designed to quash competition. Microsoft is no stranger to such probes, and has come under previous anti-competitive investigations in both the US and Europe.

We'll review the history of the Microsoft antitrust case in China shortly, but first let's look at the latest headlines that don't really contain much news beyond the fact of Nadella's trip (English article, Chinese article). The reports simply say that Nadella is in Beijing this week to discuss the antitrust probe with officials at China's State Administration for Industry and Commerce (NYSE:SAIC).

Bracing Markets for Bad News

As I've said above, the fact that Microsoft is most likely leaking news of this trip hints that it may believe a settlement is imminent and that it could face a big financial penalty. Qualcomm's CEO Paul Jacobs made a similar trip to China in late 2014 not long before Beijing announced a similar settlement in that case, which included a record fine of nearly $1 billion and orders to change its licensing practices.

The Microsoft case dates back about three years and is related to practices of compatibility, bundle sales and file verification issues involving the company's core Windows and Office software products. The case splashed into the headlines in 2014 after Microsoft's offices were raided by government officials as part of that investigation.

Nadella visited China in 2014 around the time the investigations broke into headlines (previous post), though it's unclear if he has visited again since then. Apple's Tim Cook came to China in May in a bid to prop up his company's weakening China sales and provide some positive news after a series of minor scandals (previous post). Such trips are an increasingly frequent occurrence for many high-tech CEOs who now count China as one of their top global markets.

As to this latest trip, I suspect we will hear an announcement of a settlement between Microsoft and Beijing in the next few weeks, which is likely to include a fine as big as or even larger than Qualcomm's. That won't have a huge financial impact on a company as large and profitable as Microsoft, though it could also be forced to make big changes in its business practices. But such actions look less worrisome for the company at this point and instead Microsoft should focus on its rapid loss of market share to a new host of more mobile-friendly products.

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