Microsoft stages nebulous Chinese comeback

China has long been a piracy trap for Microsoft. It hopes it can change that with new product launches and thousands of new employees in the country.

By John Foley, Reuters Breakingviews

Microsoft CEO Steve Ballmer

FORTUNE -- Microsoft is staging a comeback in China. The world's biggest software maker hopes to use the twin technological disruptions of cloud computing and mobile devices to get a second bite of a market where profit has proved elusive. Yet the financial benefits may be no easier to grasp the second time round.

Microsoft is due to launch Windows Azure, its cloud computing platform, in China in June, in partnership with local company 21ViaNet. Under the agreement, 21ViaNet would collect client revenues and pass a percentage on to Microsoft. China restricts foreign companies' ability to offer "value added telecoms" services, leading most to partner with local players.

The software giant plans to hire thousands of new employees in China for the launch and for the roll-out of smartphones, chief executive Steve Ballmer said last week. Microsoft currently has a workforce in the country of around 4,000.

China has been a piracy trap for Microsoft: many use its products, but few pay. Founder Bill Gates famously argued that he would rather see Chinese users steal his products than someone else's, and they took him at his word. In 2011 Ballmer complained that Microsoft (MSFT) generates less revenue in China than in the Netherlands -- though that will have changed since Microsoft started charging smartphone makers like ZTE patent fees. According to the Business Software Alliance, 77% of software by value was pirated in 2011, based on an estimated illegal software market worth $9 billion.

MORE: Why Alibaba could be China's next $100 billion IPO

Cloud and mobile services may provide an antidote. Windows Azure, the company's cloud computing platform, is set to launch in June, and the hope is that piracy will be less of a problem in the cloud, where companies and developers store data and software on third-party servers rather than local PCs. In mobile, operating systems tend to be pre-installed by handset manufacturers, which creates tighter control over who's using what.

Yet competition is fierce. Alibaba, which already handles over 80% of online commerce, has high hopes for its own cloud computing service. While revenues from "public cloud" services are set to grow to $3.8 billion by 2020, according to Forrester, that's still less than half the Business Software Alliance's estimate of the Chinese market for illegal software. As for mobile, the industry is dominated by versions of Google's Android operating system.

Microsoft may also escape the piracy trap only to fall into a political one. Foreigners aren't allowed to offer "value-added telecoms" by themselves, so Microsoft must share its cloud revenue with a local partner. Since cloud computing features in the Chinese government's current five-year plan, the market is likely to develop in ways that favour local players. That makes Microsoft's chances of turning China into a big source of revenue look pretty nebulous.

Read more at Reuters Breakingviews.

Posted in: China, cloud computing, Microsoft, software, Windows Azure

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