China Just Dealt a Temporary Blow to Microsoft's Windows 8

The Chinese government has refused to put the Windows 8 OS onto any of its computers or tablets because of what it calls energy and security problems.

May 22, 2014 at 10:00AM

Windows
Evidently, Windows 8 doesn't have everything the Chinese government loves. Source: Microsoft.

As if Microsoft (NASDAQ:MSFT) didn't have enough setbacks for its Windows 8 operating system already, the Chinese government said in a statement this week that it's prohibiting the use of the OS on any of its government computers and tablets.

Closing the window on 8
China's Central Government Procurement Center made the decision that Microsoft's latest operating system didn't meet the energy-saving requirements the government has for its devices, and that the OS also poses a security risk.

But as The Wall Street Journal reported, the refusal to adopt Windows 8 likely comes as a response to Microsoft's canceling support for Windows XP. The older software runs about half of all computers in the country, and about 37% of government devices, according to Net Market Share data.

At this point, the Chinese government has few options. It can stick with XP and risk security issues unless it pays Microsoft for extended service, or it can upgrade to Windows 7. A possible third option would be to tap into the Chinese government's own Ubuntu Kylin OS, but switching over at such a massive scale seems pretty unlikely right now. 

Not the only one getting snubbed
While it may seem like Microsoft is being singled out for not continuing its support of Windows XP, the company is actually just one of many US tech companies receiving backlash from the Chinese government

Cisco Systems (NASDAQ:CSCO) has seen orders in China fall as the government has increasingly ordered equipment from Chinese suppliers after the country set up new cyber security standards. Part of that move against Cisco likely comes after US National Security Agency documents leaked by Edward Snowden showed the US government had tapped communications of foreign governments. 

In an earnings call back in October Cisco's CEO, John Chambers, fielded a question on whether or not National Security Agency spying had affected overseas business. He said, "I think if you look at it, it is an impact in China. I think we're all aware of that." He also mentioned that, "China continued to decline as we and our peers worked through the challenging political dynamics in that country."

Cisco may not be out of the woods yet either. The company saw a decline of 7% in revenue in emerging markets this past quarter, including China, and is fighting to prove that it's not working with the US government on spying. In open letter written by Cisco's General Counsel, Mark Chandler, said, "As a matter of policy and practice, Cisco does not work with any government, including the United States Government, to weaken our products."

So while Microsoft's Windows 8 hiccup is isn't good, it's clearly not the only one trying to regain its footing in China.

What this means for Microsoft
Microsoft has lost out on a lot of revenue in China over the years because its software is frequently pirated in the country. This latest move is yet another step backward, because the Chinese government is probably using legitimate versions of Microsoft's Windows operating system. Obviously, this isn't good for Microsoft's Windows 8 platform right now, but it's not all doom and gloom either.

This could play out in several ways, and a few of them still involve Microsoft's selling something to the Chinese government. The first possibility is that China ends up paying the same multimillion-dollar fee to extend Windows XP support that the Netherlands and the United Kingdom are paying. If that doesn't happen, the Chinese government could still upgrade to Windows 7, which apparently doesn't have the same so-called problems that Windows 8 has.

Or, ultimately, Microsoft and the Chinese government could come to some sort of agreement and Windows 8 will be installed in government devices. I wouldn't put it past Microsoft to work with China to try to figure something out. Obviously we don't know, but it's definitely within the realm of possibility.

While Microsoft doesn't break out its revenue numbers by country, we know that China continues to have a serious piracy problem, which has hurt Microsoft and other tech companies. Back in 2011 Microsoft's former CEO, Steve Ballmer, said that the company's revenue in China was less than that of the Netherlands, despite the fact that PC purchases in the country match those in the US. That year, Microsoft's revenue in China was equal to about 5% of the revenue in US, because of piracy. 

For Microsoft investors, China's latest pushback against Windows 8 is bad news for the OS, but considering that the company already faces piracy issues in the country and the fact that the lockout is only for government devices, it most likely won't have much of a negative impact on the company's overall revenue.

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Chris Neiger has no position in any stocks mentioned. The Motley Fool recommends Cisco Systems. The Motley Fool owns shares of Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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