A Computer You Can Afford

REDMOND, Wash. , May 22, 2006 — When Ana Maria Garcia’s husband lost his job, her family’s chances of owning a PC seemed remote at best. Like many families in Brazil, hers was reluctant to get locked into a traditional financing agreement for such a big-ticket item in an economy where income flow is volatile, job security low and the social safety net virtually nonexistent. Even after her husband got a new job, the uncertainty lingered as the couple thought about buying a PC for the family to use.

Then in April 2005, Garcia learned of a promotion by Brazilian retailer Magazine Luiza in partnership with Microsoft that sounded too good to be true: a pay-as-you-go plan for purchasing a PC. The family made a small down payment, took the computer home and began using it while paying off the balance through prepaid cards — much as millions of people around the world buy prepaid minutes for their cell phones.

“If I had purchased a PC with traditional financing, I would be paying very high installments,” says Garcia. “Now I’m paying what I can afford, based on what I can make.”

At WinHEC 2006 this week, Microsoft is announcing a pay-as-you-go PC initiative — one of two new flexible business models enabled by Microsoft FlexGo technology. The initiative is part of Microsoft’s ongoing efforts to make technology accessible to more people in emerging markets, company officials say.

“We saw the enormous popularity of prepaid cell phones around the world, and thought the model could be applied to buying a PC as well,” says Will Poole, senior vice president of Microsoft’s Market Expansion Group. “By working with other industry players, we are confident that this model will make the dream of owning a PC a reality for people who previously could not afford it.”

“Pay-As-You-Go” for Your PC – An Industry First

The experience of the mobile phone industry vividly illustrates the appeal of pay-as-you-go plans in developing markets. Over a billion cell phones round the world are used on a pay-as-you-go basis. Among cell phone users in emerging markets, 72 percent pay for their service this way, and that figure rises as high as 90 percent, according to research groups Strategy Analytics and Gartner. Pay-as-you-go methods are also commonly used in South Africa to pay for electricity, and prepaid Internet service is available in more than 80 countries.

With this in mind, Microsoft began testing the pay-as-you-go model for PC ownership in Brazil over a year ago. Consumers such as Garcia paid a portion of the upfront cost to bring home a computer running Windows XP Home. Consumers pay off the remaining balance by purchasing from local vendors prepaid cards that activate the machine for a defined amount of time. If time runs out on the PC, it enters a “reserve tank,” or limited access state, until additional time is added. Once the computer is paid off, the metering technology is deactivated and the consumer owns the machine outright.

The response from Brazilian consumers was extremely positive, with PC sales more than doubling Magazine Luiza’s previous sales record. When customers who participated in the trial were surveyed, more than 31 percent said they had not intended to buy a PC in the next 12 months, but were able to do so because of the pay-as-you-go model.

“Microsoft FlexGo will be revolutionary for us in the way we sell and finance PCs by making this new flexible pay-as-you-go model possible,” says Frederico Trajano, sales and marketing director for Magazine Luiza. “Our lower-income customers are excited to finally buy their first PC with minimal upfront investment, paying for time as they need it, and owning a computer with superior features and genuine software. “Magazine Luiza is very pleased to be working with Microsoft to bring this to the people of Brazil.”

Microsoft recently expanded market trials in Brazil, and is launching similar trials in Mexico, India, China and Russia over the next three months.

Microsoft FlexGo Technology Makes Pay-As-You-Go Possible

In emerging markets, selling higher-priced consumer items like the PC carry a high risk of default to the financial institutions financing the purchase. Microsoft FlexGo technology significantly lowers the risk of default for pay-as-you-go and subscription computing models by integrating hardware, software and Web-services solutions. FlexGo technology consists of three key components: a full-featured quality PC with modifications that enable metering of usage time and protection against tampering, operating system modifications that allow customers to purchase PC time in small increments, and a provisioning server system that validates the payment and delivers payment packets to the PC. This level of built-in security protects the underwriter’s investment so retailers, telecommunications providers, financial institutions and original equipment manufacturers (OEMs) can offer PCs to a broader range of customers on a flexible pay-as-you-go basis.

The Subscription Model

Around the world, consumers are familiar with subscribing to phone and Internet services. Microsoft FlexGo technology makes it easy to add a home computer to their existing subscription, creating a complete PC offering with genuine software and high-speed broadband, paid for over time in convenient monthly payments. Network operators can customize the subscription offering to suit their local customers’ and market needs with different options for connection speeds, software applications and PC-hardware selection. By securing the PC asset in this way, Microsoft FlexGo technology reduces risk to the underwriter and thereby puts subscription computing within reach for a much larger group of people. Microsoft has been running trials of subscription computing offers with partners in India, Vietnam and Eastern Europe. Market trials of subscription computing with Microsoft FlexGo technology will start in the next few months in several countries, including Brazil, India, Hungary, Slovenia and Vietnam.

Opportunities for Partners

Microsoft FlexGo technology combined with flexible purchasing models creates new opportunities for many technology industry partners. By expanding the possibility of PC ownership, hardware manufacturers, OEMs, telecommunications providers, retailers and financial institutions can now reach customers whose variable or uncertain income had previously held them back from purchasing technology through traditional ways.

In addition to Magazine Luiza, Microsoft is working closely with a broad range of global and local hardware, financial, telecommunications and retail partners to bring Microsoft FlexGo PCs to market. Industry leaders in hardware, telecommunications and financial services have signed agreements to work with Microsoft on FlexGo-enabled solutions.

For Microsoft’s hardware industry partners looking to expand their businesses in new market segments, this initiative offers opportunities to reach new customers for mid-range PCs by supporting Microsoft FlexGo technology, as well as helping create new local technology ecosystems.

“To be successful in today’s global economy, Lenovo and Microsoft are creating new business models and technologies that will work in different markets around the world,” says Philippe Davy, vice president of strategic alliances at Lenovo. “The innovation behind this initiative will help more people in emerging markets like China and India have access to Lenovo PCs and the ability to explore, experiment and take advantage of all the Internet has to offer.”

Financial partners wanting to grow their consumer credit businesses by making credit purchases more attractive to customers in emerging markets can also benefit from this model. Together with the International Finance Corporation (the private sector investment arm of the World Bank), Microsoft is exploring ways to encourage Brazilian financial institutions to provide credit to lower-income individuals who will participate in the pay-as-you-go computing pilot, as well as its expected national roll-out.

“We are pleased to be working with Microsoft to support pay-as-you-go computing trials in Brazil by encouraging local financial institutions to make credit more accessible to lower-income segments of the country’s population,” says Lars Thunell, executive vice president of the International Finance Corporation, ”By making access to personal computers and computing resources more affordable for lower-income individuals, Microsoft’s innovative pay-as-you-go computing model can help to bridge the digital divide in emerging markets. Pay-as-you-go computing has the potential to be replicated in a number of emerging economies and we look forward to exploring these opportunities with Microsoft.”

Finally, the models also benefit network operators wishing to grow network usage and broadband connections, as well as to establish new value-added services delivered over broadband.

“Vietnam Datacommunication Company (VDC) strongly believes that the subscription model and Microsoft FlexGo technology together will help us serve a much larger number of customers,” says Vu Hoang Lien, CEO of VDC. “We are very pleased to have launched a subscription offer called “OneClick” in the marketplace in April 2006 and look forward to providing PC technology access and broadband to many more customers in the years ahead”

The Road Ahead

The flexible nature and worldwide appeal has the potential to revolutionize the way consumers purchase technology in emerging markets and potentially in developed markets. As the market trials continue, Microsoft will work with partners to evaluate its success and potential to be replicated in many locations. The initiative is part of Microsoft’s larger vision for bringing relevant and affordable technology to consumers in emerging markets.

“Technology is increasingly becoming the determining factor for economic success,” says Microsoft’s Poole. “We want to put that technology into the hands of users in emerging markets, and watch their potential bloom.”

The pay-as-you-go trials in Brazil offer great hope that this model will help empower new customers. Ana Gabriella da Silva, another satisfied pay-as-you-go PC owner in Brazil, agrees: “Thanks to this opportunity, our dream of having a computer came true. It was like an unattainable dream, but now it’s real.”