In the midst of what can be described as political posturing between the U.S. and China, Microsoft (NASDAQ:MSFT) has become the Chinese government's most recent target. Extremely complex and prohibitive national laws regarding appropriate business practices, Internet security, and censorship have made it challenging -- if not nearly impossible -- for U.S.-based companies to conduct business there.
If China eventually forces out foreign technology companies, whether through official legislation or pressure and interference tactics, American consumers could ultimately pay the price. Lost revenue, and the expenses incurred in moving operations to neighboring countries, may trickle down to end users in the form of more expensive software and hardware.
Why China is Giving Microsoft a Hard Time
Some of the NSA documents leaked by Edward Snowden last year apparently indicated that Microsoft facilitated the NSA's covert intrusion into users' accounts. According to the Guardian, Microsoft "helped the NSA to circumvent it's encryption" to gain unencumbered access to email, cloud storage, and Skype video calls.
Additionally, China's vindictive attitude toward Microsoft could be related to the company's decision to end support for Windows XP. Since the majority of the Chinese government's computers still run that OS, the high cost of upgrading to Windows 8 was perceived as an unnecessary forced expenditure.
In May, the Justice Department indicted five members of China's People's Liberation Army for hacking into U.S. corporate networks to steal trade secrets. The New York Times called the indictments symbolic, knowing that China would never turn over the accused. Instead, China responded by attacking Microsoft.
Fearing back doors in Microsoft's Windows 8 OS, China banned its use on government computers to prevent infiltration by the NSA, CIA, and FBI. Further, Chinese officials raided several of Microsoft's offices, seizing documents and hard drives in a search for evidence of anti-trust law violations.
According to Fox News, "There have been growing concerns that China has decided to use anti-monopoly laws to stifle international companies and boost domestic competitors." Considering the government's interference with other U.S. websites, software providers, and technology companies like Google (NASDAQ:GOOG), Symantec (NASDAQ:SYMC), and Qualcomm (NASDAQ:QCOM) it seems clear that foreign competition is increasingly unwelcome.
From Bloomberg's perspective, the Chinese government "seems eager to show American companies that they will pay a price for U.S. government actions." That price may be exile for some of Microsoft's popular products, or at least hindrances so severe that it will be nearly impossible to conduct profitable operations in the country.
How Might American Consumers Suffer?
While Microsoft does not specifically break out its China revenue, Reuters says the company revealed that "sales for the year ending June 2013 surpassed $1 billion for the first time." Extrapolating from available data, which includes $765 million in revenue from Nokia (NYSE:NOK) the Chinese market comprises approximately 2% of Microsoft's global revenue of $83 billion. Overall, then, China alone does not represent a significant portion of the company's revenue.
However, if China's investigation finds Microsoft guilty of anti-monopoly activities, the company could face hefty fines. This, plus lost revenue and the operational costs, is money that might be recouped through higher prices for consumers throughout the rest of the world, including the U.S. This wouldn't be the first time that Microsoft raised prices for consumers to make up for slow sales and increased expenses. In Nov. 2010, the company bumped the price of an Xbox Live subscription by $10 to cover "the costs associated with maintaining a service" and "adding the customer service infrastructure," according to an interview with Xbox Live senior marketing director Craig Davidson. In Dec. 2012, Microsoft raised prices on several enterprise products and licenses by 8%-400%. While the company did not specifically relate those increases to poor sales, many analysts and affected customers couldn't help but note the correlation with lower-than-expected sales of Windows 8.
Despite its claims that Windows 8 contains no security loopholes or back doors for U.S. spy agencies -- and that "customers around the world have evaluated and embraced Windows 8 as our most secure operating system" -- Microsoft remains under fire in China. The country's Central Government Procurement Center has removed the OS from its list of approved software, and the State Administration for Industry and Commerce has launched an aggressive investigation into apparent claims of anti-monopoly law violations. Apparently, the Chinese government wants to set an example with Microsoft, using the software ban and antitrust investigation to demonstrate its strength in the digital Cold War.
Together, the expenses incurred by Microsoft in mounting its defense, combined with lost revenue and potentially giant fines, will ultimately lead to more expensive products for consumers. For investors, this could result in short-term volatility due to uncertainty about the company's future in China. Longer-term, Microsoft shares could stay depressed if things remain difficult in the region and lost revenue can't be recovered through other means.
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