http://www.businessweek.com/globalbiz/content/jan2010/gb20100113_124533.htm

China

In China, Google Declares War


Isaac Mao saw this coming. In early 2007, just months after Google launched a China-based search engine that followed Beijing's strict censorship rules, the prominent Chinese blogger posted an open letter to Google's founders, Larry Page and Sergey Brin, imploring them not to cooperate with the country's Internet cops. "Dear Larry and Sergey," began Mao, who described the frustration he and other Chinese Google fans felt as a company with the informal motto "Don't Be Evil" obeyed policies forbidding access to sites deemed taboo by the government. Google's self-censorship "hurts those loyal users a lot," wrote Mao, who said it was "high time to change [Google policy] back to the right track."

Three years later, the 37-year-old Chinese blogger seems finally to be getting his wish. On Jan. 12, Google announced it will stop censoring search results on its Chinese site, Google.cn, in response to what the company calls "highly sophisticated" hacking of its Web site from China and infiltration of the Gmail accounts of human-rights activists in China and other countries (Google.cn is hosted inside China; English-speaking Chinese can read Google.com but the Chinese authorities censor it as well.) Soon after the Google announcement, Internet users in China could suddenly access searches for information on the 1989 Tiananmen Square crackdown and other banned topics. "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," David Drummond, Google's chief legal officer, wrote on the company's official blog.

an apology from google Mao is relieved Google has finally reversed course. "It's a smart move," he says. Google "compromised a lot but could not satisfy the government." Indeed, despite Google's censorship, the company suffered years of on-and-off criticism and harassment from the government and others in China. YouTube, Google's video-sharing service, is regularly blocked, for instance, and censors have sometimes restricted access to Google's search engine. Just three days before the stunning announcement, the company issued an apology to the China Writers Assn. for scanning their books without authorization.

Now Google, which has just 35.6% of the search market and trails far behind market leader Baidu (BIDU), seems to be throwing in the towel. Although the company has left the door open for a solution, Beijing is unlikely to make changes to accommodate the U.S. search giant. The aggressively worded statement from Drummond is a sign that "Google has declared an information war on China," says David Wolf, CEO of Beijing-based advisory firm Wolf Group Asia. By ending censorship of its Chinese site, Google is violating terms of conduct for doing business in China. "Google appears to be more interested in winning hearts and minds than in sustaining its business in China," Wolf says.

A Google retreat would mark the end of an era for U.S. Internet companies in China, the world's largest market with more than 330 million Chinese people online. Aiming to capitalize on China's Internet growth, many of the biggest names in the business tried to replicate their American success in China, but companies like eBay (EBAY), Yahoo (YHOO), and MSN (MSFT) found they couldn't go it alone against strong domestic rivals like Baidu, ecommerce leader Alibaba's (1688:HK) Taobao, and instant messaging powerhouse Tencent (700:HK). Even after the U.S. companies teamed up with local partners, the U.S. companies have been laggards. Exiting a doomed business Google was the last to try to succeed in China on its own. The company struggled from the get-go, however. It had to wage a bitter court battle before winning permission to hire Microsoft executive Kai-Fu Lee to head its China business. After the company announced it would alert Chinese users every time Google provided them with censored search results, the government-run media went after the company for allegedly operating without a license. Chinese Internet users even mocked Google's Chinese name, a transliteration of the word Google that translated inelegantly into Chinese as "Valley Song."

Lee quit in September and Google still languishes far behind Baidu, which controls 58.4% of the search market. That's why some people see Google's latest move to exit the market as a graceful way out of a doomed business. "Google is in a really tough spot in China," says Bill Bishop, a Beijing-based angel investor in Chinese startups who says Google China management has been "in turmoil" since Lee left. Given the challenges the company faces in China, "there is no long-term potential," adds Bishop. By leaving now and citing the hacking problems, Google can end its agony and repair its image. "They get this incredible lift in brand equity," he says. Google also won't lose much financially—its Chinese business, though never broken out in its financials, probably has sales of well under $1 billion.

Not everyone's happy about the news of a possible closure of Google.cn. "We hope this doesn't happen," says Victor Koo, CEO of Beijing-based video-sharing site Youku.com who says he uses both Baidu and Google for his searches. The news seems to have caught Beijing by surprise. The official Xinhua news agency on Jan. 13 quoted an unnamed official from the State Council Information Office saying "nobody knows" what Google's intentions are.

If the government decides to retaliate, it could target the company's main English-language site. However, Beijing-based analyst Duncan Clark says Google is probably betting that is a move Beijing won't dare to take. The main Google site, Google.com, is too popular with China's elite, he says, and local search engines are not global enough for them. People such as medical researchers depend on Google for cutting-edge information, says Clark, chairman of BDA China, an investment consulting firm in Beijing. "You don't get that stuff from Baidu. If Google.com gets blocked, that hits China also." In the battle between Google and China, the U.S. search engine seems to be betting that leadership like that gives the company the firepower it needs to stand up to Beijing.

— With Tom Giles in San Francisco
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Einhorn is Asia regional editor in Bloomberg Businessweek’s Hong Kong bureau. Follow him on Twitter @BruceEinhorn.

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