Earlier this summer, Microsoft and China, two inscrutable monoliths waging a protracted cold war over copyrights and software pricing, finally decided to settle their differences via a three-year, $750 million "memorandum of understanding," the largest deal ever between the Chinese government and a foreign software company.

Details of the "understanding," announced in June, were both vague and open-ended. About the only overlap between both parties' descriptions was that Microsoft was supplying the $750 million and China was supplying the human resources. Still, given the background of the relationship, it seemed a safe bet that China's 92 percent software piracy rate -- second worst in the world, according to the Business Software Alliance -- had been a central issue during the negotiations.

Or maybe not. Asked about the glaring lack of a copyright enforcement clause in the new deal, Microsoft president and CEO Steve Ballmer did a quick Nixonian shuffle.

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"Certainly, software piracy rates in China are high, but there is nothing in the agreement specifically around that," Ballmer told a reporter from Reuters shortly after the June announcement. Rather, the company was pouring its resources into China's nascent proprietary software industry, knowing that it would be in China's long-term interest to secure "a good domestic market" for "intellectual property."

Although most news accounts depicted the Ballmer response as a cop-out, there's at least one other explanation for his comments -- and Microsoft's strategy. Between copyright battles at home and the challenge to conquer emerging markets abroad, the company may have good reasons to revamp its longtime hard-line stance on copyright enforcement. Indeed, there are some who make the case that, in a place like China where the competition in the software market features both state-backed companies and open-source software companies that allow public access to their code, a proprietary software company such as Microsoft might actually benefit from illegal copying. In other words, casting a blind eye toward piracy may simply be good business.

"It's ultimately a question of strategy," says Carlos A. Osorio, a Harvard researcher and author of a recent working paper examining the "Catch 22" facing proprietary software companies in developing markets. "For a closed-source company competing with open-source companies, the optimum strategy is often to use its illegal user base in addition to its legal user base."

Representatives of Microsoft and other leading American software vendors refused to discuss the Osorio paper with Salon. Still, the numbers coming out of China certainly make a case for strategic flexibility. The latest Five Year Plan put out by the Chinese government calls for a gradual investment shift from hardware to software. It also calls for a 30 percent annual growth rate in the overall IT sector, with an ultimate target of $20 billion in total sales by 2005. Chinese industry leaders are even more ambitious. According to a July 30 story in People's Daily, the China Software Industry Association hopes to control 3 percent of the global software marketplace by 2005 -- currently Chinese software accounts for 1.2 percent of market sales -- and 60 percent of the domestic marketplace. Factoring in growth, those two numbers translate to $30 billion in software sales and services by 2005. Throw in a recent well-publicized anti-piracy crackdown on the eve of China's admission to the World Trade Organization, and proprietary software companies have little reason to complain.

For Microsoft, a company that has taken on, and beaten, pirates in the Chinese courts -- in April, 2001, the company scored a $36,000 victory against one major counterfeiter -- the numbers offer two investment options: Hire more lawyers and hope for more nickel-and-dime settlements or invest in a new generation of companies willing to tame the Chinese software marketplace on Redmond's behalf. If the June agreement is any indication, the company, wisely, seems to be shifting its cash resources towards the latter.

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