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Microsoft's China gamble
China signs on and gets a peek at Windows source code. But is that enough to stop Linux's momentum?
March 5, 2003: 5:45 PM EST
By Eric Hellweg, CNN/Money Contributing Columnist

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SAN FRANCISCO (CNN/Money) - As technology businesses around the world struggle with market saturation (Palm), murky sales forecasts (Hewlett-Packard), and painfully slow recoveries (Intel), one bright light shines on the horizon, drawing these and scores of other companies to it like curious, hungry moths.

That light is China, and for tech companies worldwide, the country's billion-plus population and recent privatization efforts represent a way out of the doldrums.

But China has long held promise as an economic panacea. In the 1850s, an English textile baron once famously said that if they "could add an inch of material to every Chinaman's shirttail, Manchester weavers would go forever." A more recent example came in the 1980s, when a Coca-Cola (KO) executive said that if the company could sell two cans of Coke to every person in China, it would "make a fortune." Today, Microsoft's (MSFT: Research, Estimates) version of the old saw might read, "If we could convince every Chinese citizen to purchase a (nonpirated) version of Windows, we could issue dividends forever."

To accomplish that goal (or a lucrative fraction thereof), Redmond is in the midst of an aggressive campaign to persuade the Chinese government to adopt its Windows product. Last week Microsoft chairman Bill Gates even paid a visit to President Jiang Zemin.

In part to appease the Communist Party's concerns about security and malicious backdoors, Microsoft is allowing the Chinese government access to the company's most precious asset: its Windows source code. China now joins Russia, the United Kingdom, and NATO among the trusted enlistees that, as part of Microsoft's Government Security Program, are granted viewing rights to the code in exchange for agreeing to Microsoft's conditions.

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But allaying Cold War-era security concerns isn't the only reason Microsoft is opening its ark to the GSP participants. Linux is looming large -- too large for Redmond's comfort. The open-source operating system has made serious inroads with governments around the globe, including those of Peru and Germany. Microsoft leaped into China when it realized that Beijing, too, was eyeing Linux. As the world economy worsens, more foreign governments grappling with budgets will view Linux's low cost and open-door nature as an attractive option. Growing anti-Americanism could also make Microsoft's products a harder sell.

And some believe that China is a critical battleground for Microsoft and Linux. According to a recent study by Gartner Group, more than 20 percent of Chinese organizations will have at least one server running Linux by the end of the year. China already has produced its own version of the OS, known as Red Flag Linux, and 1,200 branches of the Chinese postal service currently run the product.

Of course, Microsoft isn't accustomed to showing others its source code, and its contractual requirements reveal this. For example, according to Giga Information Group analyst Stacey Quandt, not all code may be viewed online. To view certain parts of the code, representatives must visit the Redmond campus.

What's more, "the terms of the agreement apply to all employees and contractors of government agencies," Quandt says. "Microsoft reserves the right to approve all contractors." The company will need to build more flexibility into its source-viewing contracts if it's serious about using them as a tool to thwart Linux's growth.

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