Last month, the Chinese government banned the use of Windows 8 on government computers, ostensibly to improve security and save energy. Considerable amounts of analysis over the past two weeks have focused on this blow to Microsoft (NASDAQ: MSFT ) , as the company has essentially been blocked from strengthening its hand in China. But, it wasn't terribly strong to begin with, as former CEO Steve Ballmer admitted in 2011 when he argued that piracy cut Microsoft's revenue from China to just 5% of its revenue from the United States, even though both countries had nearly equal PC sales.
On its own, the Windows 8 ban isn't overly significant; Microsoft's struggles in China will continue, and so the status quo will persist. More significant, however, are the political motivations that underlie the ban and the fact that it is proof that Microsoft must continue to move beyond PCs to crack the Chinese market. Apple's (NASDAQ: AAPL ) success in China suggests Microsoft would be wise to follow a strategy outside of PCs.
Virtual and verbal sparring between China and the U.S.
The ban comes in a climate of China-U.S. tensions over cyber espionage, with charges flying in both directions. In May, the U.S. charged five officers of the People's Liberation Army with spying to steal trade secrets from American companies. China countered in recent weeks by resolving to cut relationships between state-owned companies and U.S. strategy consulting firms, and by identifying U.S. technology companies (including Microsoft, Facebook, and Yahoo) as security threats, given the NSA spying program that came to light last year. IBM (NYSE: IBM ) has also become a target, as the government urges Chinese banks to switch from IBM servers to ones produced by Chinese tech companies.
This context suggests that the ban is a political move. Microsoft is caught in a political spat between the U.S. and China, two countries whose relationship is often described as the most important of the 21st century. It is also one of the most complicated bilateral relationships today. Economic links between the two countries are incredibly strong, but the expansion of Chinese power poses problems for American power, not just in the Asia-Pacific region, but around the world. Unfortunately for multinational firms, international politics will continue to impact operations and bottom lines.
Moving beyond PCs is critical for Microsoft
Microsoft doesn't control international politics. What it can control, however, is what it offers the market. This episode highlights the need for Microsoft to move beyond PCs. The company's troubles in China might be compared to the stunning success of Apple, whose 600% revenue growth from 2009-2011 was driven by a Chinese iPhone frenzy. In China, as is the trend worldwide, it is mobile -- not PCs -- that's driving the tech world.
If Microsoft can make good on its promise to be a "mobile first, cloud first" company (and small moves, such as bringing Office to the iPad, suggest that it can) then it should be well on its way to gaining more relevance in China and around the world.
China's decision has little to do with Windows 8 as an operating system. The ban on the operating system is a symptom of international political posturing and competition. For Microsoft, it is also a development that should spur the company to more quickly transition to mobile and cloud, as opposed to placing all of its eggs in the rapidly shrinking Windows for PC basket.
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