By OWEN FLETCHER And JASON DEAN
BEIJING—Rampant piracy means Microsoft Corp.'s revenue in China this year will only be about 5% of what it gets in the U.S., even though personal-computer sales in the two countries are almost equal, Chief Executive Steve Ballmer told employees in a meeting here.
Mr. Ballmer's candid remarks provided a glimpse at the software giant's struggle with piracy in what will soon be the world's largest PC market. In China, copies of Microsoft's core Office and Windows programs are still available on street corners for $2 or $3 each, a fraction of their retail price, despite efforts by the company to curb theft.
In his address to employees at the company's new Beijing offices, Mr. Ballmer said Microsoft's revenue per personal computer sold in China is only about a sixth of the amount it gets in India. He noted that Microsoft's total revenue in China, population 1.3 billion, is less than what it gets in the Netherlands, a country of fewer than 17 million.
The company has worked hard to improve its ties with Beijing, while the U.S. government steadily ratcheted up pressure on China to improve copyright protections for American companies.
While visiting the U.S. in 2006, Chinese President Hu Jintao hailed Microsoft Chairman Bill Gates as a "friend of China" and dined at Mr. Gates's home, seeming to signal greater government favor for the company, as Mr. Hu also made new pledges to protect intellectual property. But Microsoft has continued to struggle in a market where piracy remains rampant in homes and offices.
The stakes are only getting larger. Already the biggest market for cars, cellphones, and commodities like iron ore, China is on track to surpass the U.S. as the world's largest PC market next year, according to IDC. This year, the market research firm projects PC unit shipments in China are likely to increase 12% to 71 million units, just shy of the 75 million units in the U.S., where it expects sales to be flat.
"We're literally talking about an opportunity that is billions of dollars today" if China's intellectual property rights protection were at the level of India's, Mr. Ballmer said Wednesday in Beijing.
He made the remarks to hundreds of employees—many wearing Microsoft T-shirts, in a crowded room in Microsoft's new research-and-development building, which he said cost Microsoft $400 million. PC sales in China will be "as big as the U.S. market this year," he said, yet "our revenue in China will be about a twentieth of our revenue in the United States."
![[BALLMER]](http://si.wsj.net/public/resources/images/MK-BM351_BALLME_D_20110526195534.jpg)
ChinaFotoPress/Zuma Press CEO Steve Ballmer spoke at the opening of Microsoft's new research center in Beijing on Wednesday.
The statement suggests Microsoft's revenue in China is close to $2 billion. For the fiscal year ended June 30, 2010, Microsoft reported U.S. revenue of $36.2 billion out of a world-wide total of $62.5 billion.
A Microsoft spokesman declined to comment.
Mr. Ballmer appeared to reject the argument, common in China, that many Chinese consumers use pirated software because authentic versions are too expensive.
"I'm not saying everybody in China could afford to buy a PC... but if you can, you could afford the software," he said.
The Microsoft chief is under pressure to improve the company's financial performance and revive its flagging stock. Micorosft shares gained 48 cents to $24.67 at 4 p.m. Thursday.
Microsoft, which lost its crown as the most valuable tech company to Apple Inc. last year, is now in danger of slipping behind International Business Machines Corp. On Wednesday, hedge fund manager and investor David Einhorn said it was time to replace Mr. Ballmer.
Microsoft has also long groused about piracy in China, but up until Mr. Ballmer's remarks has provided little detail on its impact.
The company has historically tried a collaborative approach with Chinese officials, securing deals to require Chinese PC makers to ship their products with legitimate copies from factories.
China's government has acknowledged problems but says it is taking steps to improve the situation. Among other measures, the government has ordered all state institutions to buy licensed software.
The Business Software Alliance, an industry advocacy group, estimates 78% of the PC software installed in China last year was pirated, down from 86% in 2005.
Chinese Vice Premier Wang Qishan said Wednesday in a meeting with Mr. Ballmer that a government campaign launched late last year has had "significant results" against violations of intellectual property rights, China's State Council said in a statement.
Microsoft opened its first China office in Beijing in 1992, and struggled for years with a string of departures by senior China executives. Many in China also began to resent Microsoft's efforts to fight piracy, which it pursued partly through lawsuits against infringers.
Despite its frustrations, Microsoft has continued to invest in China. Ya-Qin Zhang , chairman of Microsoft's Asia-Pacific R&D Group, said in February Microsoft planned to increase its R&D staff of roughly 3,000 people in China by around 10% this year.
Taking questions from staff Wednesday, Mr. Ballmer also discussed the increasingly competitive tablet sector. Microsoft is working on what its "unique contribution can be" in the tablet area and it will have "more news about that in the not-too-distant future," he said without elaborating.
He took a swipe at rival Google, saying it "has taken a failed approach so far" to tablets, while also acknowledging that Apple Inc.'s strategy with the iPad has been successful.
Google didn't reply to a request for comment.
Microsoft has struggled to gain traction in tablets, while Google's Android software is expected to gain share in a market currently dominated by Apple. Market researcher Gartner predicts that about 20% of the 69.8 million tablet devices sold this year will use Android, second to Apple's operating system, with 69%. By 2015, Gartner forecasts, 39% of the 294.1 million tablets sold will use Android, compared with 47% using Apple software.
Mr. Ballmer also acknowledged some telecom carriers are concerned about a potential drain on their business from Skype, which Microsoft this month said it plans to acquire for $8.5 billion—although he also rejected those concerns as unwarranted.
On Skype, Mr. Ballmer said Microsoft is likely to integrate "real [Internet Protocol]-based communication into a phone," though the company would need regulatory approval first and some telecom operators "want to make sure that that's not the only phone we offer." Skype lets users make phone calls via Internet networks, which some operators worry could enable users to avoid paying operator fees.
Mr. Ballmer dismissed those concerns. "The fact of the matter is, the best thing for the phone companies, the best thing for the consumer, the best thing for us, will be to innovate in the future of communication," he said.
The executive later travelled to India, where on Thursday he said Microsoft is looking to work with Finnish mobile handset maker Nokia Corp. to develop "next-generation" mobile devices. India will be a priority market for the company, given that Nokia is a market leader in mobile handsets in the world's fastest-growing telecom market and the second-largest market after China, he said.
"Certainly our partnership with Nokia is an important step forward with us...but the key there is not only to innovate on software, which we will work together over time, but also work on next-generation hardware innovations with them," Mr. Ballmer said while addressing a conference in New Delhi.
—Stefanie Qi contributed to this article.Write to Jason Dean at jason.dean@wsj.com
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