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Originally published May 24, 2010 at 10:00 PM | Page modified May 25, 2010 at 11:38 AM

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Ballmer says India, not China, better Microsoft bet

Microsoft is less optimistic about China than India or Indonesia because of the country's lack of progress in stamping out software piracy, CEO Steve Ballmer said.

Bloomberg News

Microsoft is less optimistic about China than India or Indonesia because of the country's lack of progress in stamping out software piracy, CEO Steve Ballmer said.

"India is not perfect, but the intellectual-property protection in India is far, far better than it would be in China," the head of the world's largest software maker said in an interview Monday in Hanoi, Vietnam. "China is a less interesting market to us than India, than Indonesia."

Ballmer's concerns underscore growing dismay among U.S. companies toward operating in the world's third-largest economy.

Google in March moved its Chinese service out of the mainland to avoid censorship rules, and the American Chamber of Commerce in Beijing said last month its members face an increasingly difficult regulatory environment.

China has implemented more than 1,000 measures related to the protection of intellectual property and will continue such efforts, said Chen Rongkai, a media officer at the nation's Ministry of Commerce in Beijing.

"China's effort at strengthening protection of intellectual property is universally recognized," Chen said.

Lack of progress in protecting intellectual property has led China, which may overtake the U.S. as the world's biggest PC market in a year, to generate less revenue for Microsoft than India and South Korea, Ballmer said.

China's gross domestic product is twice the two economies combined.

The value of pirated software in China almost doubled to $7.58 billion from 2005 to 2009, the highest increase in the world, the Business Software Alliance and market researcher IDC said in a report in May.

While the piracy rate in China fell to 79 percent last year, it's higher than in India, the Philippines and Thailand, according to the report.

"Ballmer is right," said Sandeep Aggarwal, an analyst at Caris & Co. in San Francisco. "It is not easy to control piracy in China."

Aggarwal estimates that as much as 95 percent of the copies of Microsoft's Office software and 80 percent of its Windows operating systems are pirated in China.

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For Microsoft, the billions of dollars in lost revenue from piracy in China outweigh the possible benefits of expanding in the country through acquisitions, Ballmer said.

For example, owning Baidu, China's biggest Internet search-engine operator, would boost Microsoft's revenue only by about 1 percent, he said.

Microsoft gets about 3 percent of its sales from Asia, excluding Japan and Australia, Ballmer said.

"There are two things that make a country interesting. One is it buys a lot of PCs, the other is they pay for the software that gets used on those PCs," Ballmer said. In China, "there is no software market to speak of."

In its annual report last month, The American Chamber of Commerce in Beijing said it expects an increase in trade tension between the U.S. and China. While China should move toward a more flexible currency, the U.S. should focus more on pressing the Chinese government to better enforce intellectual-property laws, change rules that limit foreign ownership and reduce tariffs.

Ballmer's comments coincide with trade talks between U.S. officials, including Treasury Secretary Timothy Geithner and Secretary of State Hillary Rodham Clinton and their counterparts in Beijing. China should strengthen efforts to improve intellectual-property protection, Geithner said last week.

China should let its currency reflect market forces, Geithner said Monday in Beijing as he and Clinton led a U.S. delegation for the Strategic and Economic Dialogue with Chinese officials.

China's trade surplus with the U.S. widened in March, fueling concern the yuan has been kept undervalued to support Chinese exports.

Better enforcement of intellectual-property rules could save U.S. firms tens of thousands of jobs, Ballmer said.

"If the U.S. is going to export to Asia, it's going to export IP, whether it's in pharmaceuticals, technology," Ballmer said. "Otherwise the U.S. will have nothing to export."

Ballmer said he sees signs of improvement. Microsoft last month won a decision from a Shanghai court against a Chinese insurance company.

The victory came after a court ruling in the eastern city of Suzhou last year sentencing four people to prison for distributing pirated Microsoft software.

"It's a good start," Ballmer said. "I am not trying to be pessimistic; I want to be optimistic about China."

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