Why Is Microsoft's Unlimited Potential?

"It's not the philanthropy," Clive Longbottom, service director of Business Process Analysis for Quocirca, told Microsoft Watch. "There is a very strong commercial angle to this."

He emphasized: "Microsoft is trying to gain access to the 3 billion [people] that they wouldn't otherwise reach without something off the wall."

In its announcement today in Beijing, Microsoft outlined a strategy of providing PCs to the next billion people by 2015. But Microsoft's larger goal is the poorest 3 billion people, which are also least likely to buy PCs.

Microsoft essentially views its market potential as three slices of a single pie: Developed nations, upper-income people in emerging markets and everyone else—meaning people the World Bank classifies as low income.

"The industry can probably survive selling incrementally better hardware and software to the people who already have technology in their lives, but the vast majority of growth in the PC and related industries will come from emerging markets," said Simon Yates, a Forrester research director.

Some of Microsoft's new initiatives to reach the poorest people are quite bold, such as the Student Innovation Suite. Microsoft charges governments $3 a student, for which they receive Learning Essentials 2.0 for Microsoft Office, Microsoft Math 3.0, Office Home and Student 2007, Windows Live Mail Desktop and Windows XP Starter Edition on new PCs.

"Any technology company worth its salt knows that there is limited growth potential in mature markets and that the competitive nature of the industry means that if they don't solve the riddle of reaching the next billion or two people, that someone else will," Yates said.

Going for Growth
For Microsoft, emerging market expansion is particularly challenging. Most of Microsoft's revenue comes from a single market: The United States, where two products—Office and Windows—generate most of the profits. Most of the remaining 40-45 percent of revenue comes from developed nations.

Windows revenue, in particularly, is closely aligned with PC sales. Based on IDC projections for 2007, less than 30 percent of PCs shipped worldwide will go to the United States. Manufacturers will ship an estimated 253.9 million PCs this year, 184.4 million of which will go outside the United States.

Unfortunately for Microsoft, more than 50 percent of desktop PC shipments go to geographies with fairly high piracy rates, according to IDC.

Pushing Back Open Source
High piracy rates and low incomes present huge barriers to Office and Windows in PC growth markets. Meanwhile, many disadvantaged economies have embraced open-source software, such as Linux, in part because of the prohibitive costs of commercial products from companies like Microsoft.

Longbottom said the $3 Microsoft suite for students "removes the impetus to the free open-source movement."

Microsoft achieves a whole lot for just a little—and more than enough to diminish the appeal of open-source alternatives. There, existing users, whether legitimate or pirates, work to Microsoft's advantage.

"When you are standing in the middle of the Kalahari Desert, you won't meet many people [promoting] open source," Longbottom said. "But you will meet someone who supports Microsoft [software], because charity workers and [others] use it."

Even in the emerging markets, it's far more likely they'll be running a Microsoft stack than an open-source stack.

The broader economic appeal would come from Microsoft training and educational programs, which look to be more far reaching than open-source counterparts.

Longbottom said that for local governments, it makes sense for people to "build up the skills that are applicable to commercial entities in their regions."

Target Asia
Some portion of the worldwide low-income market would be available for Microsoft to tap. According to World Bank, average annual growth rates are accelerating in low-income economies—about 5.1 percent between 1995-2005 compared to declines in high-income economies.

Strongest growth rates are in East Asia and the Pacific, which also contain the largest population centers. The region also had the greatest decline, about 260 million, in the number of people living on less than $1 day, according to World Bank.

Microsoft tacitly says something about the opportunity in Asia by its Beijing launch venue.

Asia's potential is more than economics. Businesses, consumers and governments are not yet locked into any one dominant software product, unlike many developed nations. Even where open-source or non-Microsoft technologies are deployed in emerging markets, the supporting infrastructure doesn't exist that would make switching costs prohibitive.

"When you're looking at 3 billion [people] in China, it's more of a blank page," Longbottom said. "There's everything to fight for. If Microsoft can make a tenth of the money it makes in the United States, it can increase it's revenue 50-60 percent."

By conservative math: if using Microsoft's 1 billion goal by 2015 and assuming 300 million are students, Microsoft reaps nearly $1 billion in additional revenue, Longbottom said.

Roger Kay, president of Endpoint technologies, agreed.

"It's worth noting that selling software at $3 a pop to the next billion is pretty good business, given that the marginal cost of producing software is pretty close to zero," he said.

Related Posts:

• Microsoft's $3 anti-Linux Weapon, Linux Watch, April 19, 2007
• What Is Microsoft's Unlimited Potential?, Microsoft Watch, April 19, 2007
• Tellme About Dial Tone 2.0, Microsoft Watch, March 16, 2007
• Windows Mobile Turns Six, Microsoft Watch, Feb. 8, 2007
• It's the Gulag or Linux for Some Russian Schools, Microsoft Watch, Feb. 7, 2007
• Microsoft Q2 2007 by the Numbers, Microsoft Watch, Jan. 25, 2007
• What the HP-Microsoft Deal Really Means, Microsoft Watch, Dec. 14, 2006
• Microsoft Launches 'Pay As You Go' PC Trials, Microsoft Watch, May 22, 2006
• Will Vista Pump Up Microsoft's Future Profits, Microsoft Watch, Feb. 3, 2006
• Microsoft Readies Two More Cut-Rate Windows Bundles, Microsoft Watch, Aug. 11, 2004