Chinese officials seize Microsoft PCs, emails, financial info in antitrust probe

Regulators in China today said that they made sudden appearances at several Microsoft offices on Monday to gather evidence for an ongoing antitrust investigation, increasing the tension between the U.S. technology company and a government increasingly at odds with foreign firms.

In a note on its website, China's State Administration for Industry and Commerce (SAIC), one of several agencies tasked with enforcing antitrust laws, said that with the help of nearly 100 law enforcement officers, regulators made unannounced visits to four Microsoft offices in Beijing, Chengdu, Guangzhou and Shanghai.

SAIC said it was after information about how Windows and Microsoft Office are bundled, about Windows-Office compatibility, and about other unnamed concerns after fielding complaints since June 2013.

During the raids, SAIC regulators and police seized two Microsoft computers; internal emails, contracts and financial information; and interviewed senior managers and other personnel in the company's marketing and finance departments.

The investigation, which one translation claimed was a criminal probe, was in its early stages and ongoing, SAIC said.

The SAIC notice was posted the day after the sudden visits, which at the time were unexplained by authorities.

In the interim, more state-controlled media outlets hammered at Microsoft, a typical pattern in the People's Republic.

The People's Daily, the Communist Party's official organ, tied the current investigation to previous antitrust cases pursued by European and U.S. authorities against Microsoft. The publication quoted Xue Kepeng, a professor of civil and economic law at the China University of Political Science and Law, who called the investigation "expected" and said he was "not surprised" by the raids.

"The government should never hold back in fighting monopoly," Xue said, characterizing Microsoft's behavior as monopolistic.

Other government mouthpieces weighed in as well. The Xinhua News Agency, an official press arm, speculated that the investigation was based on unfair trade concerns, as that's one of SAIC's responsibilities. Xinhua also reminded readers that earlier this year another agency had banned government organizations from buying or deploying Windows 8.

Additional reports from local media cited the demise of Windows XP support as a possible reason for the investigation, linked the probe to others like the one aimed at Qualcomm, or put Microsoft's case into the context of other disputes with foreign firms, including IBM.

Some have wondered whether, for all the noise about bundling and the broad charge of unfair trade, China wasn't pressuring Microsoft for something very specific: Windows XP.

"This investigation is on the heels of China having banned Windows 8 for 'security reasons.' ...At the time, I speculated that the Windows 8 ban was an attempt by the Chinese government to force Microsoft to continue to support Windows XP," said independent analyst Ben Thompson in his daily email brief from Stratechery (subscription required). "Microsoft has not given in, at least to date, and I wonder if this investigation is all about ratcheting up the pressure."

As Thompson said, Microsoft has refused to budge on retiring Windows XP, whether across the board or in China only. In March, after some Microsoft customers got the impression that the company was going to patch Windows XP systems in China after April 8 -- the target retirement date -- Microsoft was quick to reply, saying that China would not get special treatment.

At the time of the Windows 8 ban, Xinhua, which often speaks for the government, described it as one way for China to avoid a repeat of the aged OS's widespread use and its exit from support. "The Chinese government obviously cannot ignore the risks of running OS without guaranteed technical support," Xinhua said in May. "It has moved to avoid the awkwardness of being confronted with a similar situation again in future if it continues to purchase computers with foreign OS."

Microsoft has long had a China problem, particularly with the country's rampant software piracy. In 2011, then-CEO Steve Ballmer noted that while China was the world's largest country, with 1.3 billion people at the time, revenue there was less than what was collected from customers in the Netherlands, a nation of only 17 million.

According to Ballmer, Microsoft's China revenue was just 5% of that in the U.S., even though the number of personal computers in the two markets was about equal.

If that comparison remained accurate, Microsoft's revenue in China would have been approximately $2.1 billion in the firm's 2013 fiscal year -- the 12 months that ended June 30, 2013 -- and the last period for which figures were available.

That amount -- about 2.7% of Microsoft's total revenue for fiscal year 2013 -- made Thompson question a business-as-usual reaction from the Redmond, Wash. company.

"If I'm right, I think Microsoft has to think seriously about abandoning the country. It would be a very painful decision, but I simply think it is too difficult for any Western software or services firm to compete in China," said Thompson, who lives in Taiwan.

However, in the next breath Thompson pointed out that such a move "will never happen," and cited the partnership with 21Vianet, a China-based datacenter company that now offers the Microsoft Azure cloud services in the country, as one clue.

Yesterday, Microsoft said it would cooperate with the investigation and would "address any concerns the government may have."

Repeated email messages requesting comment and additional information from SAIC have been returned undelivered, with the contact email address listed on the agency's English-language website citing an error of "Exceed User's quota size limit ... this is a permanent error, I've given up. Sorry it did not work out."

Gregg Keizer covers Microsoft, security issues, Apple, Web browsers and general technology breaking news for Computerworld. Follow Gregg on Twitter at @gkeizer, on Google+ or subscribe to Gregg's RSS feed. His email address is gkeizer@computerworld.com.

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