If you haven't heard the news, Google (GOOG) announced Tuesday that they're reviewing the "feasibility" of their business operations in China. Doing away with PR speak, Google is threatening to shut down their offices and get out of the search business in China altogether unless China makes concessions. Google's ultimatum stems from incidences of state-sanctioned cyber spying, and China's excessive censorship.
As Google's Chief Legal Officer explains;
We launched Google.cn in January 2006 in the belief that the benefits of increased access to information for people in China and a more open Internet outweighed our discomfort in agreeing to censor some results. At the time we made clear that "we will carefully monitor conditions in China, including new laws and other restrictions on our services. If we determine that we are unable to achieve the objectives outlined we will not hesitate to reconsider our approach to China."
After walking across the forbidden bridge, Google dowses it with gasoline and threatens to light a match ...
We have decided we are no longer willing to continue censoring our results on Google.cn, and so over the next few weeks we will be discussing with the Chinese government the basis on which we could operate an unfiltered search engine within the law, if at all. We recognize that this may well mean having to shut down Google.cn, and potentially our offices in China.
If you peel away a few layers, you'll find there is much more to this story. Google.cn has been steadily losing ground to China rival Biadu.com and there have been rumors for months about Google getting out of “search” (Google.cn) in China. This talk began after Dr. Kai-Fu Lee, formerly Google's top exec in China, left Google in September 2009. Then, a few weeks ago, there was a flurry of Tweets about a mass exodus of staff from Google China. Just a coincidence? I'd bet not.
Yet Google's China gambit may have been planned after Kai-Fu Lee's departure. Dr. Lee added a Tweet yesterday (see above) suggesting that he had no foreknowledge of the Google move. More from Google;
The decision to review our business operations in China has been incredibly hard, and we know that it will have potentially far-reaching consequences. We want to make clear that this move was driven by our executives in the United States, without the knowledge or involvement of our employees in China who have worked incredibly hard to make Google.cn the success it is today. We are committed to working responsibly to resolve the very difficult issues raised.
(Image: People leaving flowers outside Google HQ Beijing)
Google’s actions Tuesday appeared to be a rather abrupt response to the noted cyber espionage and upset over increasing pressures to censor search in China. The cyber spying reportedly included an attempt to gain access to the Gmail accounts of several activists who support human rights in China and this may have been the last straw and conveniently provided Google with good PR cover for this "we're outta here, unless" gambit. Is China guilty as charged? There is no smoking gun proof of China's involvement in these cyber attacks.
Nonetheless, Google must feel the evidence is compelling or they would not have been so bold to make this accusation. Google was careful to identify the cyber attackers as "third parties," yet this was clearly a finger pointed directly at China. I’m willing to side with Google on this part of the story.
Skeptics are not so quick to believe Google’s motive is wholly altruistic. Shaun Rein, Managing Director of China Market Research, points out that Google has been losing market share to China search competitor Baidu.com and may just be "looking for an excuse to get out." Rein continues … "I don't think human rights is the big issue here" … "If Google were making money, would they do it this way?"
I am frankly surprised by Google's bold, some might say audacious, gambit. They crossed the bridge via David Drummond’s (Google’s Chief Legal Officer)post, and then set fire to the bridge by removing all censorship filters on Google.cn. Confrontation is not the way you do business in China. Whether the filter removal smackdown was deserved or not (and it may well have been. Only a handful know what transpired in the last few days), Google caused China's central authorities to lose face -- a big “no no” in China. What was the cause of this embarrassment?
(Image: Tank Man)Last night, for several hours, China’s netizens could surf Google.cn and find heretofore forbidden content. Searches for “Tianamen” would bring up posts and photos of the brave and defiant “tank man.” A search for “Tibet” would generate photos of protesting Tibetan monks being clubbed by police. This freedom from censorship did not last long. On Wedneday morning the filters were restored and only sanitized searches will work on Google.cn. It is not clear whether Google blinked and restored their own self-imposed filters? It’s more likely that the 60,000+ Net vigilantes who compose China's “great firewall” (GFW), quickly blocked the offending links.
While Google stands to lose about $600 million from their China search business, the China market is not a major slice of Google’s overall revenues ($22 billion in projected in 2010). And while the monetary hit will be minimal, maintaining good relations in China may be crucial for Google’s services business. If Chinese authorities deem Google’s actions to be a violation of Chinese laws, then Google’s other business in China could be at risk or face reprisals. Gmail, Google Docs, Google Apps and Google hosting for business in China, could all be impacted by Google’s “defiance with compliance.”
Consider also that China’s big three carriers – China Mobile (CHL), China Unicom (CHU) and China Telecom (CHA), have all committed to develop Android-based mobile operating systems customized to support the carriers’ respective value-added services platforms. All three carriers are also moving forward with Android smartphones. China Mobile has the most at stake with Android and plans to launch at least a dozen OPhones* by different OEMs in 2010.
*NOTE: An OPhone is defined as a customized handset, running the China Mobile Android OS, supporting China Mobile’s TD-SCDMA 3G.
Beyond Android and Google Apps, there’s another matter for China Mobile to deal with. Google spent several years negotiating to become China Mobile’s default search engine on mobile. If Google is now deemed to be violating Chinese laws, that mobile search contract may not be worth the rice paper it’s written on.
Do I think Google’s Android plans in China are in immediate jeopardy? Probably not. But the dramatic moves Tuesday could have unknown and far reaching implications for Google. Does this give China Mobile new reason to do an iPhone deal? Let's just say it doesn't hurt Apple's (AAPL) negotiating position when a key rival in mobile (Google) runs afoul of China's authorities and by extension the centrally controlled telecom industry.
One final point. Wireless analyst and fellow China-watcher, Tom Limongello, poses an important question;
Is Google giving up the good fight? Will human rights be best served if mobile devices, already a great liberator of tyranny in Africa and the best hope for clearing up the opacity of governance in Iran, lose their default search and software provider, Google in China?
Disclosure: Author holds a long position in AAPL
