麦肯锡-微软中国Microsoft China SMB findings-20070509

CONFIDENTIALCapturingtheSMB

OpportunityinChinaSMBInitiativesPrioritizationWorkshopMay9,2007Thisreportissolelyfortheuseofclientpersonnel.Nopartofitmaybecirculated,quoted,orreproducedfordistributionoutsidetheclientorganizationwithoutpriorwrittenapprovalfromMcKinsey&Company.ThismaterialwasusedbyMcKinsey&Companyduringanoralpresentation;itisnotacompleterecordofthediscussion.TODAY’SAGENDABriefprojectupdateAgreeonbaselineunderstandingofSMBmarketcharacteristicsandopportunitiesSharepreliminarysetofinitiativesassembledfrom

1-on-1interviewswithGCRBGleadsanddiscussadditionalonesDiscusspreliminaryprioritizationofinitiativesandagreeonwhichinitiativestodeepdiveinthenextphase5mins45mins40mins30mins1WearehereWHEREWEAREINTHESMBPROJECTActivitiesTimingKeymilestonesConduct10additionalSMBCEOinterviewsConductpreliminaryanalysesofresearchresultsSegmentationDecisionmakingprocessBusinessfocusTechnologyimplementationDriversofgenuineDevelopinsightsrequiredforstrategydevelopmentConduct“Insightsworkshops”todiscussandpulloutimplicationsoffindings(Agency)ConductsfacetofacefieldinterviewMonitorprogressandprepareweeklyprogressreports(Agency)Cleansdataandpreparesdatatabulations(Agency)conducts2,5001hourface-to-faceinterviewstoensuresufficientcoverageofallsegmentsofSMBsKickoffMar9StartfieldworkTabulationsdeliveredReviewInitialFindingsAssembleandsynthesizefactbaseonChinamarket(e.g:SMBchannellandscapeandtrends,competitivelandscapeinkeyareas,etc)Conductdetailedanalysesincludingeconomicsizing,segmentcharacteristicsCreateBGspecificstrategies(e.g.:product,price,alliances)Mapoutstrategyimplementationplans,pilotsandorganizationalrequirementsandinvestmentsneededtoimplementPhase4:DevelopSMBstrategyPhase1:ConductqualitativeresearchanddevelopquantitativesurveyPhase2:ConductfieldresearchPhase3:CEOinterviewsandanalyzeSMBsurveyresultsCollectrelevantdata(e.g.:SMBinsightsfromMSChinamarketresearch,relevantdatabases,interviewswithSMBteams)Conduct12minifocusgroupsand10oneononeinterviewstosupportdesignofquantitativesurveyDevelopquantitative

researchbriefSelectagencyDesignandagreeonkeyelementsofquestionnaireEndproductsWeeklyprogressreportsCleandatatablesCEOinterviewsynthesisChinaSMBmarketlandscapeSMBsegmentationKBFanalysisInitialsetofopportunitieswithhighleveldescriptionandpriortizationImplicationsforSMBintegratedstrategyInnovativeproduct,marketingandchannelapproachestodrivebreakthroughsforpriorityinitiativesPreliminaryhypothesesQualitativeinsightspresentationSampledesignSurveyquestionnaireJan31Jan4Apr16Jun15IntegratedSMBstrategyProgresstodate2EXECUTIVESUMMARYLMM/SB(entitieswithlessthan50PCs)representalargeandgrowingsegmentforMicrosoftinChinaTotalsoftwarespendreportedbyLMM/SBestimatedtobe2.3-2.8billionUSDin2006,withspikesinFinanceandAccounting(430millionUSD),Office(210millionUSD)andERP(200millionUSD)Thistechnologymarketconsistsof8.7millionentitiesinChinawhocurrentlyuseorintendtobuyPCs,representing20millionPCIBtoday(35%ofnonconsumerPCIB)SoftwareandservicerevenuesfortheoverallSMBmarketinChinaareexpectedtoreach~10billionUSDin2011Thebehaviorsandpreferenceofthesecustomersaredrivenmainlybythecomplexityoftheirbusinessandtheenvironmentinwhichtheyoperateinasapposedtotheirsectororgeography4segmentsand9sub-segmentscanbeidentified,allowingustoidentifythemostimportantsoftwareneedsforeachsegmentandtheirevolutionalongITmaturityTop4sub-segmentsaccountfor~75%oftotalsoftwarespendMicrosoftbrandonlyaccountsfor10%ofthebusinessapplicationspend.

DespiteMicrosoftbeingrecognizedasthetoptechnologycompanyoverall,itisperceivedasbeingdisconnectedfromcustomerbase.Mainchallengescanbeclusteredinproduct/services,pricing,andchannelProducts

LimitedtailoredandreadyproductsavailableforLMM/SBsinChina,despiteOBAseemtocaptureimportantshareofmarketHostingwillnotrepresentasignificantsourceofrevenuesintheshortterm,althoughtheSMBmarketsurveyindicatesapotentialforhostingservicesof70-140millionUSD,focusedonselectedsegment(~6%oftotalLMM/SBs)andcenteredaroundeCommerceandOfficeautomationChannels

PCMallsarekeytouchpointswithLMM/SBfortechnologypurchaseandservice,butMicrosoftisnotvisiblewithbusinessapplicationsMicrosoft’slimitedinfluenceinPCmallsleadstosoftwarerevenueleakage,upto200millionUSDforMSOfficealoneLeadingcompetitors(e.g.UfidaandKingdee)inthisspacerelyheavilyondirectsalesforces,overlookingPCMallasanimportantchannelVisibleandstrongonlinepresenceiskeytoinfluencepurchasingconsiderationPricing-CurrentMicrosoftSKUs,bothstand-aloneandinbundledsolutions,arepricedbeyondthecurrentrangethatLMM/SBspaytodayAsetofinitiativeshavebeenidentifiedandsized.Theseinitiativesneedtoprioritizedandplannedaccordingtotheirneartermpotential,long-termstrategicimportance,andeasetocapture.3CurrentsoftwareadoptionPercentofSMBswhousePercentofSMBswhopayforsoftwareamongstthosewhousePaidtoacquiresoftwareTOTALSOFTWARESPENDBYLMM/SB(ENTITIESWITHLESSTHAN50PCs)ESTIMATEDTOBE2.3-2.8BILLIONUSD,WITHSPIKESINFINANCEANDACCOUNTING,OFFICE,INVENTORYMANAGEMENTANDERPInventory managementWindows*OfficeFinance& accountingServersoftwareTaxreportingsoftwareCRMTimesheetandPayrollERP*POSsystem**Possibledoublecountingisadjusted(e.g.spendforfinance&accountisignoredifithassameERPvendor,sameapplytoEPRandinventorymanagement,financeandaccountingandtaxreporting,ERPandPOS)* ERPdefinedasanintegratedsoftwarepackageincludingmultiplefunctionssuchasfinance&accounting,inventorymanagement,etc. Source: MSSMBSurvey2007;teamanalysis1.9-2.2(*%)2.3-2.8(29%)3.8-4.7(*%)100%=USD8.0-9.7billionsServiceSoftwareHardwareLMM/SBITspendbreakdown2006ReportedSoftwarespendbySMBs*SDmillions,Year2006Top4BottomupestimationTopdownestimation404THISTECHNOLOGYMARKETCONSISTSOF8.7MILLIONENTITIESINCHINAWHOCURRENTLYUSEORINTENDTOBUYPCS,ACCOUNTINGFOR~20MILLIONPCIB

0.15.92.78.79.32.317.1028.7PCIBUMM/CMMLMMSBIntender=100%0.1 Source: IDC,2006;MSSMBsurvey,2007FocusofstudySMBTechnologymarket2006Million~20millionPCIBNumberofentitiesAllentitiesInactiverural/mobile2.0PSG/EPGALLMMandSBNoPCsandnointentiontobuyNoPC/withintentiontobuyMMandSBwithPCs~8.7millionentities6.0Entitynumberin2006Million20millionPCIBrepresent35%ofnon-consumerPCIBin20065SOFTWAREANDSERVICEREVENUESFORTHEOVERALLSMBMARKETINCHINAAREEXPECTEDTOREACH~USD10BILLIONIN2011

Source:IDCCAGRPercent1420221224%21%55%~10200626%23%51%~202011ServiceSoftwareHardwareSMBITspendprojection(IDC)USDbillions1010,2826EXECUTIVESUMMARYLMM/SB(entitieswithlessthan50PCs)representalargeandgrowingsegmentforMicrosoftinChinaTotalsoftwarespendreportedbyLMM/SBestimatedtobe2.3-2.8billionUSDin2006,withspikesinFinanceandAccounting(430millionUSD),Office(210millionUSD)andERP(200millionUSD)Thistechnologymarketconsistsof8.7millionentitiesinChinawhocurrentlyuseorintendtobuyPCs,representing20millionPCIBtoday(35%ofnonconsumerPCIB)SoftwareandservicerevenuesfortheoverallSMBmarketinChinaareexpectedtoreach~10billionUSDin2011Thebehaviorsandpreferenceofthesecustomersaredrivenmainlybythecomplexityoftheirbusinessandtheenvironmentinwhichtheyoperateinasapposedtotheirsectororgeography4segmentsand9sub-segmentscanbeidentified,allowingustoidentifythemostimportantsoftwareneedsforeachsegmentandtheirevolutionalongITmaturityTop4sub-segmentsaccountfor~75%oftotalsoftwarespendMicrosoftbrandonlyaccountsfor10%ofthebusinessapplicationspend.

DespiteMicrosoftbeingrecognizedasthetoptechnologycompanyoverall,itisperceivedasbeingdisconnectedfromcustomerbase.Mainchallengescanbeclusteredinproduct/services,pricing,andchannelProducts

LimitedtailoredandreadyproductsavailableforLMM/SBsinChina,despiteOBAseemtocaptureimportantshareofmarketHostingwillnotrepresentasignificantsourceofrevenuesintheshortterm,althoughtheSMBmarketsurveyindicatesapotentialforhostingservicesof70-140millionUSD,focusedonselectedsegment(~6%oftotalLMM/SBs)andcenteredaroundeCommerceandOfficeautomationChannels

PCMallsarekeytouchpointswithLMM/SBfortechnologypurchaseandservice,butMicrosoftisnotvisiblewithbusinessapplicationsMicrosoft’slimitedinfluenceinPCmallsleadstosoftwarerevenueleakage,upto200millionUSDforMSOfficealoneLeadingcompetitors(e.g.UfidaandKingdee)inthisspacerelyheavilyondirectsalesforces,overlookingPCMallasanimportantchannelVisibleandstrongonlinepresenceiskeytoinfluencepurchasingconsiderationPricing-CurrentMicrosoftSKUs,bothstand-aloneandinbundledsolutions,arepricedbeyondthecurrentrangethatLMM/SBspaytodayAsetofinitiativeshavebeenidentifiedandsized.Theseinitiativesneedtoprioritizedandplannedaccordingtotheirneartermpotential,long-termstrategicimportance,andeasetocapture.7SOFTWARENEEDSEVOLVEOVERTIMEDEPENDINGMAINLYONTHEIRBUSINESSCOMPLEXITYANDENVIRONMENTNumberofITproductsowned01-56-14>14#ofPCperentity*025119Sub-segmentprofilesIntenderCurrentlylowtechbutintendtopurchasePCsinthenext6monthsMicro-businessAdoptmostlyentrylevelproductswithlowITknowledgeSmallretailshopswhorelyheavilyonB2B/B2CeCommerceNetworkedSmallBusinessCompaniesfocusedonbuildingbackofficeinfrastructureratherthanfrontendbusinessapplicationsoftwareRiskaverseanduseITprimarilytooptimizefinanceandaccountingactivitiesBelieveonlinecommunityisanimportantpartofbusinessIntegrateinfrastructuretoensurehighproductivityinoperations,finance&accountingBusinessAdvancedEstablishedcompanieswithsophisticatedITsetupandstandardizedprocesstoenhanceoperationsMarketandsalesfocusedcompanieswhoadoptCRMsolutionstokeepclosecontactwithcustomersIntenderBeginnerIntermediateAdvanced15%34%40%11%PercentofentitiesX%E-commerceBasicFinancialBasicInternetServiceDrivenBusinessMaturedCRMDriven *Medianofsurveysample Source: MSSMBSurvey;Teamanalysis4segmentsCompanytype(%registered)78%73%41%27%FulltimeITemployee*0110Fulltimeemployee*351123SWspend*200630010502000n/aIncreaseITmaturity8TOP4SUB-SEGMENTSACCOUNTFORCLOSETO~75%OFTOTALLMM/SBSOFTWARESPEND5817628.6millionBusinessMaturedBusiness

AdvancedCRMDrivenSoftwareSpend2006$2.3-2.8B013222514PCIB200620million0InternetServiceDrivenFinancialBasicNetworkedSmallBusinessE-commerceBasicMicroBusinessLMM/SB

entities2006100%=1023179Intenders

Source:MicrosoftSMBSurvey

2007;TeamanalysisAdvanc-ed

Interme-diate

BeginnerIntenderSegmentSubSegmentSoftwarespendperentity(USD)1,1401,370575925215235190130N/A1009THESEGMENTATIONALLOWSUSTOIDENTIFYTHEMOSTIMPORTANTSOFTWARENEEDSFOREACHSEGMENTANDTHEIRLIKELYEVOLUTION

Source: MSSMBSurvey2007;TeamanalysisAnti-virusOfficeFirewallInstantMessageB2BB2C eCommerceLANServerFinance&accountingTaxreportingInventorymgmt.ServerSWOnlineAdvertisingExternal websiteHRrecruitingwebsiteCollaborationERPTimesheetandpayroll managementCRMTrainingwebsitePOSsystemCRMDrivenBusinessMaturedNetworkedSmallBusinessMicro-Business100100100E-commerceBasicFinancialBasicDifferentiatingproductsIntenderBeginnerIntermediateAdvancedIntenderSub-segmentSegment20100InternetServiceDrivenBusinessAdvanced10010IncreaseITmaturityKEYBEHAVIORSANDPREFERENCESTOBECONSIDEREDWHENADDRESSINGTHEFOURSEGMENTS

Source: MSSMBsurvey2007SourcesofinformationNumberofITproductsownedPreferredchannelsKeybuyingfactors68Price48ServiceIntender

Beginner

Intermediate

Advanced

1534401101-7

8-12

13+

59Price44Service50Service49Price48Service40Technical

capability53News-

paper49TV32Internet65Internet48PCmalls41Friend73Internet43PCmalls18Vendor76Internet39PCmalls38ITmaga-zine86PCmallsESS80PCmallsBranded

store67PCmalls10Brandedstore65PCmalls10BrandedstorePriceisnotthetopKBFforIntermediateandAdvancedClearonlinepresenceiskeytoinfluenceconsiderationPCMallisbyfarpreferredchannelacrossallsegments38PercentofentitiesXKeydifference11EXECUTIVESUMMARYLMM/SB(entitieswithlessthan50PCs)representalargeandgrowingsegmentforMicrosoftinChinaTotalsoftwarespendreportedbyLMM/SBestimatedtobe2.3-2.8billionUSDin2006,withspikesinFinanceandAccounting(430millionUSD),Office(210millionUSD)andERP(200millionUSD)Thistechnologymarketconsistsof8.7millionentitiesinChinawhocurrentlyuseorintendtobuyPCs,representing20millionPCIBtoday(35%ofnonconsumerPCIB)SoftwareandservicerevenuesfortheoverallSMBmarketinChinaareexpectedtoreach~10billionUSDin2011Thebehaviorsandpreferenceofthesecustomersaredrivenmainlybythecomplexityoftheirbusinessandtheenvironmentinwhichtheyoperateinasapposedtotheirsectororgeography4segmentsand9sub-segmentscanbeidentified,allowingustoidentifythemostimportantsoftwareneedsforeachsegmentandtheirevolutionalongITmaturityTop4sub-segmentsaccountfor~75%oftotalsoftwarespendMicrosoftbrandonlyaccountsfor10%ofthebusinessapplicationspend.DespiteMicrosoftbeingrecognizedasthetoptechnologycompanyoverall,itisperceivedasbeingdisconnectedfromcustomerbase.Mainchallengescanbeclusteredinproduct/services,pricing,andchannelProductsLimitedtailoredandreadyproductsavailableforLMM/SBsinChina,despiteOBAseemtocaptureimportantshareofmarketHostingwillnotrepresentasignificantsourceofrevenuesintheshortterm,althoughtheSMBmarketsurveyindicatesapotentialforhostingservicesof70-140millionUSD,focusedonselectedsegment(~6%oftotalLMM/SBs)andcenteredaroundeCommerceandOfficeautomationChannelsPCMallsarekeytouchpointswithLMM/SBfortechnologypurchaseandservice,butMicrosoftisnotvisiblewithbusinessapplicationsMicrosoft’slimitedinfluenceinPCmallsleadstosoftwarerevenueleakage,upto200millionUSDforMSOfficealoneLeadingcompetitors(e.g.UfidaandKingdee)inthisspacerelyheavilyondirectsalesforces,overlookingPCMallasanimportantchannelVisibleandstrongonlinepresenceiskeytoinfluencepurchasingconsiderationPricing-CurrentMicrosoftSKUs,bothstand-aloneandinbundledsolutions,arepricedbeyondthecurrentrangethatLMM/SBspaytodayAsetofinitiativeshavebeenidentifiedandsized.Theseinitiativesneedtoprioritizedandplannedaccordingtotheirneartermpotential,long-termstrategicimportance,andeasetocapture.12MICROSOFTRECOGNIZEDASLEADINGITCOMPANYBUTLOSINGCONTACTTOLMM/SBINTHEACTUALPURCHASINGCONSIDERATIONBrandawarenessamongLMM/SB,percent*BrandrecognitionasanITcompany**,percentChinaMobileLenovoChinaTelecomSinaMicrosoftRisingHPAppleAlibabaIBMGoogleDellUfidaKingdeeOracleAdobeMicrosoftChinaMobileChinaTelecomLenovoRsingProvidesproductsandservicesfitLMM/SBneedsTheleadingcompanyinITindustryMicrosoftLenovoChinaMobileIBMChinaTelecomMostpreferredpartnerfortotalITsolutionMicrosoftLenovoChinaTelecomChinaMobileRsingLMM/SBcaneasilycontactwiththemChinaMobileChinaTelecomLenovoMicrosoftSinaHelpsLMM/SBbecomeaninternationalcompanyMicrosoftLenovoChinaTelecomChinaMobileSina *Selectionfromapre-definedlistof16brands** Onlytop5brandsareshowing

Source: MSSMBSurvey,200725Awarenessoftechnologycompaniesishigh,butsuitableproductsforLMM/SBsaredeemedtobelowMicrosoftistheleadingITbrandandpreferredpartnerfortotalITsolution,butisviewedashardtoreach13MicrosoftUfidaGraspKingdeeOthers*Businessappsinclude:financeandaccounting,tax,POS,inventory,collaboration,timesheet,CRM,ERP

Source: MSSMBSurvey2007;TeamanalysisGraspOthersUfidaKingdeeMicrosoftMICROSOFTCAPTURED25%INUNITSHAREOFBUSINESSAPPLICATIONS,BUTONLY10%OFSPENDShareofLMM/SB’sspendonbusinessapplicationsbyvaluePercentNext5providersShareofLMM/SB’sspendSAPSuperdataNewgrandTangrenCVS2.2%1.8%1.6%1.6%1.4%9ShareofLMM/SB’sbusinessapplications*marketbyunitPercentNext5providersShareofunitsSuperdataTaxbureauInternallydevelopedHangtianeAbax2.9%2.6%2.3%1.6%1.5%SpendperentityunderMicrosoftbrandismuchlowerthanbothUfidaandKingdeeTotalreportedspendonMicrosoftof127MUSDismuchhigherthanactualMicrosoftrevenues

MajorityofspendreportedunderMicrosoftbrandareOfficeBasedApplications,offeredandearnedbysmallISV/SIsPRELIMINARY14CHALLENGESFACEDBYMICROSOFTTOCAPTURETHELMM/SBMARKETProducts

LimitedtailoredandreadyproductsavailableforLMM/SBsinChina,despiteOBAseemtocaptureimportantshareofmarketHostingwillnotrepresentasignificantsourceofrevenuesintheshortterm,althoughtheSMBmarketsurveyindicatesapotentialforhostingservicesof70-140millionUSD,focusedon~6%oftotalLMM/SBsandcenteredaroundeCommerceandOfficeautomationChannels

PCMallsarekeytouchpointswithLMM/SBfortechnologypurchaseandservice,butMicrosoftisnotvisiblewithbusinessapplicationsMicrosoft’slimitedinfluenceinPCmallsleadstosignificantSWrevenueleakage,upto200millionUSDforMSOfficealoneLeadingcompetitors(e.g.UfidaandKingdee)inthisspacerelyheavilyondirectsalesforces,overlookingPCMallasanimportantchannelVisibleandstrongonlinepresenceiskeytoinfluencepurchasingconsiderationPricing

CurrentMicrosoftSKUs,bothstand-aloneandinbundledsolutions,arepricedbeyondthecurrentrangethatLMM/SBspaytoday15MANYLMM/SBsUSECUSTOMDEVELOPEDAPPLICATIONSTOSUPPORTTHEIRBUSINESSNEEDSPackagesoftwareCustomdeveloped

software37%ofthesoftwarearecustomdevelopedSource: Microsoft;MSSMBsurvey2007;teamanalysis“WestartedwithsimpleExcel

programtotrackcustomerpreferencesbeforeadoptingKingdeesolution”“Packagesoftwareistoocomplicatedforustouse,sowejusthirethelocalshoptodevelopasimpleinventorymanagementsystemforus”SplitofsoftwarespendingbyproductPercent6316CurrentsoftwareadoptionUsedPercentMAJORITYOFMICROSOFTPRODUCTSARENOTTAILOREDTOLOCALMARKET;LEAVINGLOCALLYDEVELOPEDOFFICEBASEDAPPLICATIONSTOFILLTHEGAPS *Standaloneoffer Source: Microsoft;MSSMBsurvey2007;teamanalysisSoftwarespend2006USDmillionsLeveloflocalization/customizationOfficialChineseversionofferedbyMSTailoredtospecificneedsofChineseLMM/SBsbyMSChineseshelldevelopedbylocalSIOfferedonlyinEnglishinChinabyMSNooffer*n/an/an/an/aSomeSIs,e.g.,Tectura,havebuilttheirownChineseshellforMSproduct,e.g.,DynamicNavNooffer*Nooffer*Nooffer*Nooffer*Nooffer*Nooffer*8094Windows23Serversoftware71IM85Officesoftware31Finance&Accounting23Inventorymanagement22Taxreportingsoftware11CRM10Timesheet&Payroll10ERPPOSsystem80Firewall(personal)91Anti-Virus5080~*24043020080110130200804517PRODUCTSNEEDTOBETAILOREDTOSPECIFICCHINA’SLMM/SBREQUIREMENTSProductUniquerequirementsforChinaLMM/SBmarketFinancial&accountingSupportforChinaspecificaccountingstandards,e.g.differentpolicyonaccountposting,depreciation,expenseandassetrecognition–significantdifferencesexistbetweenChineseGAAPandInternationalAccountingStandards(IAS),TaxreportingVAT–ChinesegovernmentspecifiesonlyGoldenTaxcanbeusedforVATcalculationandreportingProfittax–Eachprovincehasalistofapprovedsoftwarevendors(3-5)SupportofChinastandardtaxreportingformatsTimesheet&payrollInclusionofChinaspecificpayrollcalculationschemes,includinghousingfund,andinsuranceCRMIntegrationofIMwithsupporttoQQandmobileSMSwithCRMcontactmanagement Source: Literaturesearch;Interviews;TeamanalysisIMInter-operabilitywithTencentQQLocalperformance-filetransferperformanceofMSNIMismuchslowerthanQQ,possiblyduetoserverslocatedinRedmondAnti-virusRapidresponsetoChineseviruses(NortoncannotdetectsomevirusspreadbyUSBdrives)DetectmobilephonevirusesSELECTEDEXAMPLES18SMBMARKETSURVEYINDICATESAPOTENTIALFORHOSTINGSERVICESOF70-140MILLIONUSDPRELIMINARY*Assume70%conversionforentitiesanswering“definitelywillbuy”and25%conversionfor“probablywillbuy”Source: MSSMBSurvey,2007LMM/SBs’attitudetowardshostingconceptLikelihoodofLMM/SBtosubscribeforhostingserviceinnext12monthsIthinkeverythingaboutthisconceptisclearand

understandableThisconceptcanaddresses

mycompany’sITneedsIthinktheserviceoffering

isuniqueDefinitelywillpurchaseProbablywillpurchaseNeitherpurchase,nor

notpurchase(undecided)ProbablywillnotpurchaseDefinitelywillnot

purchaseHostingrevenuespotentialforthesefocusedcustomers(~6%oftotalLMM/SBentities),estimatedat70-140M*USD219E-COMMERCEANDOFFICEAUTOMATIONAREMOSTDEMANDEDFEATURESACROSSTOP3SEGMENTSINTERESTEDINHOSTING * Involvedarethosemorelikelytousehostingservicesastheyshowhigherreliabilityscore(>0.5)acrosschoicesetexercise.Uninvolvedarethosewithlowerreliabilityscore(<0.5)onexerciseandarelesslikelytousehostingserviceSource:MicrosoftSMBsurvey,2007OveralladdressablehostingmarketeCommerceEmailOfficeautomationCRMSecurityERPIMHostingbrandBroadbandConnectionbrandMonthlyfeeITsupportDownloadspeed/UploadspeedMSOfficeSoftwareOfficeAutomationSecuredeCommerceBasiceCommerce4ShareofimportantfeaturesAmongemerginghostingsegmentsImportantfeaturesAPPfeaturesOtherfeatures20CHALLENGESFACEDBYMICROSOFTTOCAPTURETHELMM/SBMARKETProducts

LimitedtailoredandreadyproductsavailableforLMM/SBsinChina,despiteOBAseemtocaptureimportantshareofmarketHostingwillnotrepresentasignificantsourceofrevenuesintheshortterm,althoughtheSMBmarketsurveyindicatesapotentialforhostingservicesof70-140millionUSD,focusedon~6%oftotalLMM/SBsandcenteredaroundeCommerceandOfficeautomationChannels

PCMallsarekeytouchpointswithLMM/SBfortechnologypurchaseandservice,butMicrosoftisnotvisiblewithbusinessapplicationsMicrosoft’slimitedinfluenceinPCmallsleadstosignificantSWrevenueleakage,upto200millionUSDforMSOfficealoneLeadingcompetitors(e.g.UfidaandKingdee)inthisspacerelyheavilyondirectsalesforces,overlookingPCMallasanimportantchannelVisibleandstrongonlinepresenceiskeytoinfluencepurchasingconsiderationPricing

CurrentMicrosoftSKUs,bothstand-aloneandinbundledsolutions,arepricedbeyondthecurrentrangethatLMM/SBspaytoday21PCMALLSAREKEYTOUCHPOINTSWITHLMM/SBFORTECHNOLOGYPURCHASEANDSERVICE,BUTMSISNOTVISIBLEWITHBUSINESSAPPLICATIONS*Basedoninterviewsin10PCMallsinShanghai ** IncludingF&A,Inventorymanagement,CRM,andERPSource: IDC;MicrosoftSMBsurvey2007;teamanalysis;20follow-upinterviewsPCMallsarekeytouchpointswithLMM/SBKeycompetitorsinapplicationspacehaslimitedpresentOpportunityexistsforMicrosofttoalsosellbusinessapplicationsinPCMallsPCMallsarekeytouchpointNoMSpresenceforbusinessapplicationinPCMalls78%ofHWarepurchaseinPCMallsMostofsoftware/servicearepurchasedinPCmallincluding:71%ofdesktopsoftware,e.g.,Office,Antivirus,OS,etc67%ofbusinessapplication,e.g.,F&A,CRM,ERP65%ofinfrastructureservice/application,e.g.,DBserver,webserver,etcPCmallsseenasveryconvenientbecauseofproximityandbetterserviceLastingrelationshipbetweenLMM/SB’sandPCMallvendors79%LMM/SBsprefertobuybusinessapplicationinPCMall–somelearnabouttheproductsfromdirectsales,butstillprefertopurchasefromPCMall(e.g.FederalSoftwareshopinPCMall)PercentofstorescarryingFPPproductsinPCMalls*34RisingMicrosoft (OfficeandOS)

Microsoft (SBS)GraspKingdeeUfida122MICROSOFT’SLIMITEDINFLUENCEINPCMALLSLEADSTOSOFTWAREREVENUELEAKAGE,UPTO200MILLIONUSDFORMSOFFICEALONE*BasedonMicrosoftdata Source: IDCreport;MicrosoftSMBsurvey;teamanalysis~*Markupforchannel~200Retailchannelleakage210LMM/SBspendtoacquireOffice~**MicrosoftLMM/SBrevenue~*Othervendors’(Kingsoft,

Evermore)revenueExplanationEstimationfromIDCthatMSaccountsfor90%ofOfficemarketshareEstimated~20%revenueforchannelLMM/SBOfficespending2006USDMillions147.023KINGDEEANDUFIDARELYHEAVILYONTHEIRDIRECTSALES Source: Literaturesearch;teamanalysis;interviewsKingdee

Ufida

~900directsalesperson~77%1,492directsalespe