In his first official visit to the United States in 2006, China President Hu Jintao arrived for dinner at Microsoft Chairman Bill Gates' house with a gift for the host. Shortly before Hu's Seattle visit, the Chinese government had issued a decree requiring all personal computers manufactured in China to come with a licensed operating system before leaving the factory gates. Now, nearly two years later, that gift keeps giving. The software company co-founded by Gates is seeing the benefits of more stringent intellectual property policies in China, with a decline in piracy rates and improved results at its mainstay Windows division.
China is by no means the worst offender. More than a dozen other countries--including Indonesia and Ukraine--have higher software piracy rates, according to a study from the Business Software Alliance and IDC. None of those countries, however, offers the promise of China, the world's second-largest PC market, growing at more than 10 percent a year. China's piracy rates, the level of pirated software in a particular country, dropped to 82 percent in 2006 from 90 percent in 2004, the study said.
"In China, where piracy is the way things are done with respect to software, any marginal money Microsoft gets back is super important," said Kim Caughey, portfolio manager and senior analyst at Fort Pitt Capital Group. Reducing software piracy and selling more expensive versions of Windows are ways for Microsoft to generate sales growth that exceeds the overall PC market, a task made difficult since its global market share already tops 90 percent. Microsoft said improvements in fighting piracy accounted for about $164 million of the $822 million revenue gain at the Windows client unit in the quarter ended September.
Windows is Microsoft's most lucrative product with an operating margin exceeding 80 percent. "Every pirated copy that Microsoft converts into a paying customer all flows to the bottom line," said Morningstar analyst Toan Tran. "It could have a dramatic effect on its profit margin."