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By Ina Fried, 10 May 2004 08:50

NEWS Microsoft knows its sales model for emerging markets around the world isnÂ’t working. But just how to fix that model isn't clear, company executives said last week.

"We haven't gotten this figured out," said Matthew Price, a senior director in Microsoft's Windows Client unit said in a panel discussion at the Windows Hardware Engineering Conference (WinHEC). "There's lots of work to be done."

Emerging markets are important to Microsoft, and to its PC-maker customers, because they represent a large, untapped source of new revenue. Four countries in particular - Brazil, Russia, India and China - have less than 10 per cent PC penetration today, as compared to roughly 60 per cent in the US. Currently, those developing areas contribute just a tiny fraction of Microsoft's overall sales.

Microsoft also is eager to stem the use of Linux and open source software, which has become popular with some foreign governments and universities.

The company's best effort so far at tackling emerging markets may be the basic versions of Windows XP and Office that Microsoft has sold as part of a Thai government programme to offer low-cost PCs to the country's population.

The programme managed to get 150,000 computers in the hands of Thai citizens, Price said, though in most cases, the PCs were sold to people already considering buying a computer.

There were also a number of problems with the Thai programme that stemmed from the fact that the government became the computer reseller, shipping the units through the postal service and setting up their own call centres to handle customer support, Price said.

"It was a bit of a mess," Price said of the programme's execution. "People were actually pretty dissatisfied with the quality of units."

A similar programme has just started in Malaysia but Price said the interest there was lower than in Thailand. "They have not had the same kind of success. They have had a much, much lower volume in terms of orders."

As a result, Microsoft is still grappling with how to tweak its business model. "We're trying to test things," Price said. "The jury is still out in terms of whether, as an industry, this is going to be helpful for us."

In February, Martin Taylor, Microsoft's general manager of platform strategy, indicated that the company was considering various approaches that would break with the long-standing practice of pricing Microsoft software the same across the globe.

"How much does a Big Mac cost in India versus in New York versus in Taipei, and how do you map a similar Big Mac index to software?" Taylor said in the February conference call. "It's a very difficult problem."

The issue remains a big challenge, Price said. "There's no silver bullet and this is not even close to a silver bullet."

At the same time, Price said, the idea of just waiting around for people in emerging markets to be ready to pay for PCs in the same way as in developed countries just isn't working.

"At current course and speed, we are not going to get there," he said.

Without tapping the emerging market, the PC business will get a whole lot less interesting as companies struggle to achieve single-digit growth by convincing PC owners to replace their current models, Price said.

If Price was looking for help from the crowd at WinHEC, he probably didn't get much. Just 35 people turned up for a session on exploring emerging markets, as opposed to the hundreds who, earlier in the day, attended a panel on the opportunities presented by 64-bit computing. Nonetheless, a good chunk of worldwide PC growth is coming from emerging markets.

Microsoft said it is seeing many governments in developing countries eager to try to work out a way to better equip their populations with technology. They see foreign investment as directly tied to a country's communications and technology infrastructure.

"They are looking to technology like never before," Price said.

Ina Fried writes for CNET News.com.