How Much Are China Sales Worth To Microsoft ?

Microsoft (NASDAQ: MSFT) says that the sales of Windows in China are about 5% of what they are in the US although each country has about the same number of PCs. Piracy is the reason. CEO Steve Ballmer pounded the table about the problem during a recent speech in the People’s Republic.  Many foreign firms, particularly ones that rely on intellectual property, have complained bitterly for years about China’s tolerance of the sale of illegal knock-offs of their products.

Window’s global sales were about $20 billion last year. The division’s operating income for the period was $10 billion. Additional sales do not cost much to generate because it costs almost nothing to produce finished software. That means almost all of Window’s China sales go straight to the bottom line of the world’s largest software company.

Based on Ballmer’s comments, China piracy shortchanges Microsoft by about $4 billion per year in revenue and $3 billion in operating income. If Microsoft could collect all the money it.s owed in China–which it can’t–its annual global revenue would rise to about $66 billion and its net income to $21 billion.   That estimate is probably conservative since Microsoft must also be losing sales in its Servers & Tools and Business divisions to piracy in China.

Chinese IP theft probably costs Microsoft about $25 billion in market cap and $2.5o on its share price of $24.67. Interesting numbers, but there is nothing Microsoft can do about the problem, which affects firms like Apple (NASDAQ: AAPL) and Oracle (NASDAQ: ORCL) to a lesser extent.

Douglas A. McIntyre