The title of this post is pretty explosive, or at least it will be in some people's eyes. But, in my view, the possibility that Microsoft's pricing strategy will encourage the movement of jobs from countries such as the USA to countries such as India is pretty difficult to avoid.
If you aren't up to speed on my pontifications about the Big Software War, have a look at my post of a few months ago entitled, "Big Software War" - Some Economic Factors for a basic introduction to the economic forces which are operative.
OK, so we have folk in India earning a nominal $2,000 per annum.
So, it doesn't take much insight for Microsoft to realise that it won't sell many copies of Windows XP and Office 2003 at a nominal $500 to someone whose family income is, say, $2,000 per annum.
So what options are open to Microsoft?
Here are all the options:
1. Do nothing
2. Increase price of software in USA
3. Reduce price of software in third world countries
4. A combination of 2. and 3.
Let's assume that option 1. is a non-starter, since the poor market penetration in rapidly growing software markets is a key factor in asking the question about software pricing in the first place. So, "something must be done".
Option 2. won't work, not least because there are downward pressures on cost in the USA.
Option 3. could increase sales in third world countries. It has the plus point that Microsoft's prices in, say Malaysia, Microsoft Readies Another Cut-Rate Windows Bundle , come more into line with the income in such third world countries and, so it is presumably hoped, increases Microsoft's market share there.
However, that beneficial effect in Malaysia has a corresponding downside in the USA. The more that copies of Office and other Microsoft software are offered at cut-prices to countries such as Malaysia and Thailand the bigger the competitive disadvantage that Microsoft is imposing on its customers in the USA and western Europe.
It would be silly to pretend that the price of Microsoft software is the primary driving force behind offshoring but, as Microsoft increasingly offers cut price deals to non-US customers, it is surely contributing at least a little to making business costs in third world countries even more competitive compared to business costs in the USA. The end result of that, given the inescapable logic of market forces, is that more jobs will be exported from the USA to third world countries.
Differential pricing may benefit Microsoft in the short term but it does so at the cost of worsening the competitive situation of Microsoft's US customers.
Option 4. is a non-starter, since option 2. is not realistic.
So, the only possible options for Microsoft pricing are to do nothing (and see market share for Linux and other open-source software increase in the growing economies of the third world) or take option 3. (and risk visibly exporting US jobs).
As I hope I have demonstrated, Microsoft is on the horns of a major, fundamental pricing dilemma.
Posted by Andrew Watt at March 23, 2004 02:14 PM