Microsoft Growth May Slow as Software Pirates Curb China Sales

Posted by bink on July 17 2008, 6:16 PM. Posted in Piracy.

Microsoft Corp.'s profit growth may be stunted this year by a resurgence of software piracy in China, the second-biggest personal-computer market after the U.S.

More than 8 out of 10 pieces of software in use are copied illegally in China, and money lost to piracy worldwide will increase this year, IDC, the Framingham, Massachusetts-based technology researcher, said. Efforts to combat the distribution of unauthorized applications had a setback this year, Microsoft said in April.

Chief Executive Officer Steve Ballmer touted a drop in traffic in bootleg Windows and Office applications in earnings statements during the first half of the fiscal year that ended June 30. An unexpected jump in piracy caused Windows sales to miss estimates by $300 million in the third quarter, UBS AG analyst Heather Bellini said in April.

``I was surprised that it could swing that much to the downside in a single quarter from what had been cited as a big positive in the first half of the fiscal year,'' said Tony Ursillo, a Boston-based analyst at Loomis Sayles & Co.

Microsoft may cut its forecast for the year that started this month when it reports fourth-quarter earnings today, partly because of the piracy problem, Ursillo said. Marketing of illicit copies of the software is heightening the pressure from slowing U.S. growth and an increase in sales of lower-priced software versions, he said.

`Tough Battle'

The company still gets two-thirds of its sales in the U.S., and piracy has spurred Microsoft to increase offices and staff in emerging markets as a way to combat illegal software, Ballmer said in February.

Microsoft declined to comment on efforts to fight piracy. Spokeswoman Kristin Widing said the company's software is pirated at about the same rate as the overall industry.

``The rate of growth of new PCs in markets where we either have lower prices and/or higher piracy is really quite dramatic versus developed markets, and not likely to change in the next few years,'' Ballmer said at the financial analyst meeting last year.

More than half of all software sold outside of Western Europe and North America is an unauthorized copy, said IDC and the Business Software Alliance, a Washington trade group pushing copyright enforcement.

Ballmer also is coping with investor concern that he lacks an effective Internet strategy after six months of on-and-off talks to buy all or part of online search company Yahoo! Inc. Loomis, which now owns 1.43 million shares, sold more than 11 million shares as of March 31 because managers were ``uneasy'' about the potential Yahoo acquisition, Ursillo said in an e-mail.

$1 Vista

Profit probably rose 47 percent to $4.46 billion, or 47 cents a share, in the fourth quarter ended June 30, according to the average of 17 analysts' estimates in a Bloomberg survey. Sales may have gained 17 percent to $15.6 billion.

Revenue from Windows rose about 8.7 percent to $4.14 billion, meeting Microsoft's estimates, RBC Capital Markets analyst Robert Breza in Minneapolis said. The Microsoft unit that sells Windows accounts for about 30 percent of total sales.

Microsoft rose $1.11 to $27.26 in Nasdaq Stock Market trading yesterday. The shares have dropped 23 percent this year, more than the 14 percent decline in the Standard & Poor's 500 Information Technology Index. The stock sank 6.2 percent after the last earnings report on April 24.

In Shanghai, copies of Windows Vista and Office sell for less than $1 at a shop in the downtown Xuihui district, just outside the campus of Shanghai Jiaotong University. Cardboard boxes full of DVDs and CDs wrapped in paper and plastic sleeves printed with Microsoft, Adobe Systems Inc. and Electronic Arts Inc. logos sit on tables for shoppers to browse.

FBI Probe

``The reason I buy pirated software is price,'' said Chen Ming, 26, who works at a real estate agency. ``The quality may not be as good. You get a lot of discs that don't work, but even then it's still much cheaper.''

Piracy in China and smaller countries such as Cambodia, Brunei and Bhutan cost the industry $47.8 billion worldwide last year. Breza estimates that 38 percent of all software sold this year will be pirated versions. The piracy rate is the highest in Armenia, at 93 percent.

Ballmer, 52, made gains against pirates by working with local officials, encouraging PC makers to sell computers with legal software already installed, and letting illegal software users exchange their copies for genuine ones at no charge.

In 2007, the company helped the U.S. Federal Bureau of Investigation and the Chinese government expose a counterfeiting ring that had distributed more than $2 billion in illegally copied Microsoft software.

Old Problem

``Some investors thought that the successes that they had the last couple quarters against piracy were going to be a permanent feature in the landscape,'' said Brent Williams, a New York-based analyst at Benchmark Co. who advises investors to hold Microsoft shares and doesn't own any. ``You don't just do deals once and they go forever. It takes a lot of cultural change.''

Microsoft has grappled with piracy since its foundation. Gates wrote a letter to programming hobbyists in 1976, a year after the company started, asking them to stop making illegal copies of software for its Basic programming language.

``Who can afford to do professional work for nothing?'' Gates wrote.