Google in China: What Would Disney Do?

Includes: BIDU, DIS, GOOG
by: Diane Mermigas

Google (NASDAQ:GOOG) could take a cue from Walt Disney (NYSE:DIS) about improving its dealings in China, where the Internet giant’s distress over hacking and censorship is being compounded by the glare of a new European antitrust review.

Disney has a hard-won track record over two decades in China, where it is constructing a second theme park, engaged in local production and jockeying for equity stakes in state media. Although it has taken tough stands on freedom of expression, Disney generally has accomplished a win-win with the Chinese.

As Google resumes its fragile talks with the Chinese government, it appears to be backing off of its threat to pull out of the country over serious censorship and hacking of its website it suspects were state-sanctioned. Google has secured the National Security Agency to help investigate January cyber attacks on Google and as many as 100 other company websites, resulting in intellectual property theft. Intel is among the latest US multinational to report being a victim of cyber attacks in China.

Despite the lingering corporate espionage, Google now is scrambling to hire dozens of new employees to replace those who defected to the dominant Chinese search engine Baidu (NASDAQ:BIDU) and other local competitors in the six weeks since announcing it would leave the country.

Capping years of cantankerous relations, Google should have known better than to call China’s bluff, particularly at a time when privacy, copyright protection and search engine monopoly issues have fueled its heated clashes with regulators, consumers and lawmakers across Western Europe. The European Union antitrust review announced last week is the first such scrutiny of Google’s conduct outside of a merger review.

The ability for Google, as well as other multinational Internet players, to conduct business has been further complicated by last week’s conviction of three Google executives for violating Italian privacy laws. The Italian verdict holds Google (and, possibly by implication, other Internet companies such as Facebook) responsible for third party posts. The EU also is focusing on what it considers invasion of privacy such as Google’s Street View maps. Until cloud computing is the norm, Google must find a constructive way to work with different ideological gatekeepers.

So, just maybe, it’s time for Google to ask: “What would Mickey do?”

The entertainment giant attributes much of its western business success to diligence, patience and consistency in dealing with a government and culture very different from its own — as Google is beginning to appreciate.

Harvard Business School Professor John Quelch warns that managing national and local government relations is paramount where government-controlled enterprises contribute a higher percentage of GDP and China generally is driven by its desire for economic growth.

Disney has hit its own speed bumps in China. Disney defied the Chinese government in 1997 by distributing the Martin Scorsese film Kundun, about Tibet’s exiled spiritual leader, the Dalai Lama. Disneyland Hong Kong, which was supposed to boost the company’s consumer products and films, has been hurt by the global recession and initially fumbling with its theme park representation of China’s highly fragmented culture. Disney experienced similarly painful learning curves and losses in Disneyland Paris - now a profitable European attraction.

Disney’s latest milestone is building a $4 billion theme park in Shanghai, in which is 43% equity stake will be matched by Chinese partners. It is one of the largest foreign investments ever in China despite mainlanders’ limited exposure to Disney franchise stories and TV channels.

As Disney is demonstrating, today’s good fight is all about tomorrow’s potential.

Today, China represents just 1% of Google’s annual revenues (about $250 million) from its 31% market share behind dominant search engine, whose profits are soaring on the meteoric growth of online advertising. It is bad business for advertising-supported Google to walk out on or try to bully a country morphing into the world’s largest market — especially as it prepares to sell online enterprise software and apps for its Android mobile smart devices.

Despite its newfound economic power, China’s government will continue exercising obsessive media control, severing Internet, text and international telephone connections in vast regions to quell rioting and controversy. That makes media different from any other business represented by companies such as IBM (NYSE:IBM), General Motors (GMGMQ.PK) and Caterpillar (NYSE:CAT), which are realizing double-digit revenue growth in China.

Google’s most effective weapon will be economic -not emotional.

Reuters recently reported that Google is part of a consortium led by Disney in advanced talks to pay about $100 million for as much as a 40% stake in China’s largest in-bus digital media and advertising company. Bus Online, which is a partner of China’s state operated broadcasting and news agency operations, has denied the report.

If it proves true, it could signal Google’s willingness to hitch a ride with Mickey for now.

Disclosure: None