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Will the Penguin Conquer Asia?

By Bruce Einhorn Bill Gates and Steve Ballmer have to be a little worried these days. In Asia, the movement to use an alternative to Microsoft's Windows is picking up steam. Government officials from Japan to India increasingly are looking at Linux, the open-source operating system, as a way to keep costs down and stay in touch with the latest fashions in info-tech circles. While they haven't talked about it much, figuring out a way to stop -- or at least slow -- this trend has to be a top priority for the folks at Microsoft (MSFT).

The latest blow to Gates & Co. and boost to Linux came in early September from Japanese Trade Minister Takeo Hiranuma, who announced a plan calling for Japan, China, and South Korea to work together on research and development for Linux-based systems that can be used in the next generation of cellular phones, digital still cameras, and other devices.

It makes perfect sense for the Japanese and Koreans to team up with China. The Middle Kingdom already is the world's biggest market for mobile phones and is rising quickly in markets for high-tech products, too. Many Chinese government officials are attracted by what they see at Linux' lower costs and increased security. And the Japanese and Koreans could win big by helping Asia's giant develop those systems.

SERIOUS THREAT. The three-way cooperative agreement is far from being a done deal. The countries still have to work out the details, and a lot can still go wrong, especially given the bad blood that exists among the three historically. The enmity that many Koreans feel toward Japan, their former colonizer and current rival, is matched only by the enmity that many Chinese feel toward Japan, their former invader and current rival.

And even though Chinese electronics upstarts like TCL, Bird, and Legend are still no match for global powerhouses such as Sony (SNE), Matsushita (MC), and Samsung (SSNLF), the Chinese are starting to push into overseas markets. Such frictions could ultimately grind this cooperative effort to a haul.

Still, other signs indicate that Windows is under threat in Asia:

Across China, government offices are starting to shop around for alternative operating systems.

Last month, China's biggest developer of Linux software, Beijing-based Red Flag Linux, announced that it was forming an alliance with Hewlett-Packard (HPQ) to distribute its products not just in China but around the world.

Asia's biggest consumer-electronics makers -- including Sony, Matsushita, and Samsung Electronics -- announced in July that they were forming the CE Linux Forum to promote the development of Linux-based machines.

A growing number of Indian companies and government offices are adopting Linux.

The computer viruses that swept the globe last month may also make Linux more popular in Asia, since they were aimed at computers running Windows. Ironically, Microsoft may also have itself to blame for some of the business lost to Linux. The U.S. company has been waging a fierce lobbying campaign to get Asians to use legitimate, copyrighted software rather than knock-offs and counterfeits. Pirated software has remained immensely popular in many Asian countries, especially China, where the Business Software Alliance estimated more than 90% of the software was counterfeit in 2001. The situation is not so bad in India, but it's still a problem, with almost three-fourths of the software used there pirated.

To fight this problem, one tactics employed by the Business Software Alliance -- an industry group that counts Microsoft as one of its key members -- has been to work with government officials and convince them to use only the real thing. That has been successful in some of the major cities, such as Shanghai.

REDMOND'S RESPONSE. However, in China pirated software is so popular because it's so much cheaper than the legitimate stuff. Despite the hype about it being an economic superpower, China is still an emerging-market economy where most people make less than $1,000 a year. That means the real Windows is often too expensive. If it's no longer acceptable to use a fake version of Windows that's much cheaper, then government officials have even more incentive to find home-grown alternatives such as Linux-based systems.

It's not as if Microsoft is unmindful of the problem. For the past few years, a series of top execs have been to the Middle Kingdom, flying the flag of the Colossus of Redmond and talking up Microsoft products (see BW Online, 11/18/03, "Asia: Microsoft's Land of Opportunity"). This month, it named a new chief of China operations, Tim Chen, who was in charge of Motorola China.

Chen has a lot of experience dealing with local upstarts, as Motorola's (MOT) dominance in the handset market has become threatened by the growing popularity of Chinese made models. That experience will come in handy as he faces a growing Linux challenge. Einhorn covers technology from Hong Kong for BusinessWeek. Follow his weekly Online Asia column, only on BusinessWeek Online

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