Microsoft Fights Piracy In China, Linux Wins

On virtually any street in Shanghai or Beijing, you can buy a Hollywood DVD or hot new CD for $1 or less. Vendors peddle Microsoft Office, Windows XP, and every other popular software applications out of cardboard boxes jammed full of discs. Entire markets in the major cities are dedicated to selling knock-offs of designer goods for pennies on the dollar. If you're interested in high finance, $200,000 worth of annual derivatives data is available from online vendors for $500 a year.

According to Jones Day intellectual property rights lawyer Xiang Wang, the Chinese case law on many aspects of intellectual property rights is not yet well developed, and cases can take years to settle. The Business Software Alliance—a trade group including software giants such as Microsoft, Apple, and IBM—alleges that 90 percent of all software used in China is pirated and that software vendors suffered $3.5 billion in losses last year due to Chinese piracy.

The Chinese government has started to realize that this is an obstacle to economic development. And if anybody pays attention to economic development these days, it's China. Now, China is beginning to look at open source software as a way out of the intellectual property quagmire that doesn't involve paying high costs.

Linux is a keystone in this strategy.

In the past few months, the state-owned Industrial and Commercial Bank of China (ICBC) decided to roll out Linux in all of its 20,000 retail branches. The news was trumpeted by Turbolinux, the Tokyo-based vendor that won the contract. ICBC has 100 million customer accounts, and 8 million corporate accounts. It is the largest bank in China, and will buy an unrestricted user license and integrate Linux throughout its entire banking operations network over the next three years. It's the largest Linux deployment to date in the Chinese financial industry.

The bank will use Linux as the basis for its web server and a new terminal platform, and Turbolinux will provide three years of upgrade availability, virus protection, and maintenance service support. Turbolinux said that ICBC was looking to business with a company that was involved in systems research, development, and service, has a proven track record, meets deadlines, and can offer long-range and immediate technical support. And that's just the beginning, said Tony Le, deputy general manager for Turbolinux China. He promised more customer announcements in the Chinese government and financial sectors in the next few months.

The Chinese government plays an important role in driving the development and application of Linux in China, he added. "The political climate in China is quite favorable," he said. "The Chinese government sees Linux as a good chance to revive the software industry."

Turbolinux has already provided a payment surveillance and control system to the Bank of China and a web site development platform to the China Construction Bank. The China Ministry of Railways has deployed Turbolinux operating systems in 14 railway bureaus, 230 railway stations and more than 440 package processing stations, to encourage standardization for package delivery operation and management.

According to the International Data Corp. (IDC), Turbolinux's market share in servers in China was 62 percent in 2004. On the desktop, it holds a 25 percent share. Other Linux vendors are gracious about the ICBC win, describing it as an indication of growth in the overall Linux market. "ICBC is a good sign," says Chris Zhao, vice president of Beijing-based Red Flag Software, a leading Chinese Linux vendor. "We are happy to see this. It represents the rise in usage at the enterprise level, not just in the government sector."

RedFlag, which is one of the top three Linux players in China, claims the China Post and Agricultural Bank of China as customers.

The Linux technology and applications are mature when it comes to enterprise applications, Zhao said. "It meets the requirements of mission-critical applications."

Chinese state-owned media have also reported that the Agricultural Bank of China, another top-four bank, is expected to announce a deal similar to ICBC's. Meanwhile, the fourth major bank, the China Construction Bank, is expected to announce that it will move its IT systems to Linux sometime this year. "The Chinese government is working to promote legal software," confirmed Shouqun Lu, chairman of the Chinese Open Source Software Federation. "In the past, Linux wasn't mature enough, but now the situation has changed."

Linux is a desktop alternative for users who want to avoid the cost of Windows. But, for the most part, Linux is replacing proprietary UNIX platforms, Lu said. In his view Linux is as secure and reliable as UNIX, and many European governments are already embracing it as an alternative or even as a preferred platform.

Meanwhile, local and foreign vendors are able to make a profit by selling business that works on the Linux platform. HP, IBM, NEC, SAP and other international software firms are members of the OSS Federation, Lu said.

China is also working with Linux developers in other Asian countries. "We cooperate in East Asia, with Korea, with Japan, because the culture is similar," Lu said. "In the past, China was behind other countries in using Linux. Now we are starting to catch up, but we cannot spend another 10 or 20 or so years to develop the Linux industry from scratch. We have to use advanced technology developed in other countries." Community Building

A major difference between Linux in China and Linux in other parts of the world is the lack of a strong, vibrant open source community in the Asian giant. But one place that Linux enthusiasts can get together formally is at conferences, and China is hosting a lot of them this year.

There was the OSS Week, an open-source forum, in March. In April, LinuxWorld Shanghai. And, in May, Shanghai hosted a symposium dedicated to "Openness, Cooperation, and Promotion of the Linux Industry." It was co-hosted by the Shanghai Municipal Informatisation Commission, and included representatives from almost every part of the Linux industry. June's International Soft China also featured open source software. Last month there was LinuxWorld Beijing, and this month Beijing will host the OSS Promotion Forum.

It's a start, but there's a lot of work that needs to be done before a truly vibrant open source ecosystem emerges in China. "The industry chain isn't strong enough at present," said Naiping Han, president of China Standard Software Co., one of China's leading Linux vendors. Language barriers, cultural differences and a lack of personal relationships hinder full participation in the global open source community, he said. "Our overseas peers' community is strategic and world wide," he said. "Our community is localized and domestic."

The Chinese Linux industry is strongest in business applications, Han said. "What we domestic vendors specialize in lies in the tailored products for industry usage, not for commonly used applications," he said. This is also a way to avoid the intellectual property problem—commodity software is easy to copy. Custom-made software, however, specifically designed for a particular business application, is less susceptible to piracy.

Meanwhile, to help fill other Linux-related needs, Han said he's been working on forging ties with foreign companies. Sun Microsystems has signed an agreement with the company, for example, in hopes of establish Sun's Java Desktop System as a potential standard desktop in China. China Standard Software is part of a consortium of Chinese technology companies that have been handed a mandate by the Chinese government to develop a desktop operating system that can help bridge the digital divide to China's 1.3 billion citizens. And, in April, China Standard Software signed an agreement of cooperation with Novell, a leading global Linux distributor, owner of SUSE Linux.

Novell has upped its research and development into Linux specifically in order to expand its business in the Chinese market, says Wei Luo, Novell's senior marketing manager in Beijing. Linux in China has "passed the propaganda" stage and now the discussion has turned to concrete applications, he explained. China has strong enterprise demand for Linux, a large domestic market, a growing economy, and government support. That means that eventually, Linux in China has the potential to affect global Linux development.

"We're seeing a huge demand in China," Luo said. As a customer, for example, China has the potential to finally make Linux on the desktop a reality, simply due to the enormous size of the market and the fact that the government still has the ability to dictate behavior.

Novell is positioning itself to take advantage of these trends. Luo reports that Novell has come out with its Linux-based Open Enterprise Server recently and will help its old clients transfer from NetWare to the new system. NetWare used to be a dominant operating system for servers but now accounts for less than 6 percent of all installations, according to IDC, and the number is expected to continue dropping. "Chinese clients demand an upgrade of UNIX and the replacement of Windows," says Luo. "This has been Novell's area of expertise for 20 years."

Luo said that he is pleased to see the emergence of local software developers, given that China has lagged in this area. Instead, Europe and the U.S. have dominated the open-source community. But, given the rapid pace of growth in China's information technology sector, this may change quickly. International vendors like HP and IBM are setting up R&D shops in China to take advantage of a growing pool of talented yet inexpensive programmers. In April, IDC predicted that the Asia-Pacific region will surpass North America in the overall number of professional developers beginning in 2006.

China in particular will see compound annual growth rates of 25.6 percent in the number of developers in the next three years, predicts IDC analyst Stephen Hendrick. It's a good bet that many of them will be working on the Linux platform, especially since Linux is already gaining traction among Chinese college students.

"It has a great effect on campus," said Xiaoyue Chen, technology manager at Kingstar Group, a Shanghai-based software company. "It has a lot of fans." Chen says that he feels a "warm wind" for Linux in China, but has doubts about plans to move into the desktop market. Some observers warn that even if China is able to produce a cheap Linux computer, users will simply install a pirated copy of Windows when they bring their computers home.

"It's hard to compare with Microsoft," Chen said. "Development in this country should be on the server, not on the desktop."

IDC analyst Nielse Jiang says that Linux server shipments in China rose to $9.3 million last year, up 20 percent from 2003. By 2008, IDC expects the Chinese Linux server and client-end operating system market to reach $41.9 million. The Chinese Linux market will average a compound annual growth rate of 23.9 percent for the next four years, Jiang predicts.

China may yet develop the political will to combat piracy in all forms, and software piracy in particular. It takes a lot of work to do this. One hopeful sign, albeit a small one, is that China's 2004 piracy rate was two percentage points lower than in 2003, where it tied for first place in worldwide piracy rates. In 2004, China was third after Vietnam and the Ukraine.

At this rate, it will take a long time for China to get to the point where software makers can count on customers to pay for their products. But the open source model of free software with paid support and services may suit China well.

Wendy Yu contributed to this report.