Microsoft agrees $1.2bn deal with Lenovo

Microsoft's bid to encourage PC makers not to ship machines without pre-installed operating systems got a boost on Monday when Chinese hardware maker Lenovo said it would buy $1.2bn of Windows licences over the next year.

Lenovo and Microsoft first agreed back in November 2005 that licensed copies of Windows would come pre-installed on Lenovo machines. The deal was formally signed on Monday - ahead of Chinese president Hu Jintao's visit to America on Tuesday. Around $200m worth of Windows licences are expected to be sold in the Chinese market.

Microsoft is believed to have sweetened the deal with both China and Lenovo by offering Windows at a significantly discounted rate, according to some reports.

The Lenovo deal comes just days after the Chinese government announced that all PCs manufactured within the country must have an operating system pre-installed.

The government ruling said: "Computers manufactured within the country's borders should have pre-installed authorised operating software systems when they leave the factory."

Microsoft is opposed to the sale of PCs without operating systems, as the software giant believes that this encourages resellers and consumers to install unlicensed operating systems.

The use of unauthorised software is rife in China and many technology companies have been lobbying the country to take action. It is believed that many Chinese consumers buy PCs without operating systems and later install cheap pirated versions.

Many have also pointed out that by curbing the sale of naked PCs Microsoft is also damaging the potential market for open source operating systems such as Linux. They argue that consumers should be able to buy PCs without Windows - which could be up to 30 per cent cheaper than PCs with the Microsoft operating system - and then install whatever platform they wish.

Microsoft has putting pressure on UK computer vendors not to sell naked PCs. Microsoft's actions were strongly opposed by the Free Software Foundation, which hopes that resellers won't be influenced by Microsoft's warning that selling naked PCs could pose "a risk" to their business.

The Chinese President is set to dine with Microsoft chairman Bill Gates at his Seattle mansion on Tuesday night, before meeting US president George Bush on Thursday.

Up to the point China joined the World Trade Organisation in 2001, pirated copies of Microsoft software were in common use, including in government agencies. Now it is part of the WTO, China must replace unlicensed copies of Microsoft software with licensed versions or open source alternatives.

ZDNet UK's Ingrid Marson contributed to this report

Graeme Wearden writes for ZDNet UK