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What next for Google in China?

Maggie Shiels | 08:43 UK time, Wednesday, 20 January 2010

Tomorrow the search giant Google is expected to take the wraps off a healthy set of quarterly figures at its California HQ. But the numbers themselves will no doubt be overshadowed by events being played out on the other side of the world.

Google sing in ChinaWhile analysts and the money men smile over the expected sharp jump in fourth quarter earnings, it will be interesting to note their comments and questions over the company's decision to consider pulling out of China.

Google said the move was prompted by a "highly sophisticated and targeted attack on our corporate infrastructure from China that resulted in the theft of intellectual property.

While attacks on companies like Google are routine, industry experts have in the last few days said the scope of this one was fairly unprecedented in recent years.

"I believe this is the largest and most sophisticated cyber-attack we have seen in years targeted at specific corporations," said George Kurtz, chief technology officer of security vendor Mcafee which has been investigating the attacks they have dubbed Aurora.

"What really makes this a watershed moment in cyber-security is the targeted and co-ordinated nature of the attack with the main goal appearing to be to steal core intellectual property." said Mr Kurtz.

Industry sources say this attack to spy on human rights activists is the one that broke the proverbial camel's back and has now resulted in the present brinkmanship.

"I'm sure a number of people will at least want to know, or get a picture, of how Google expects this will affect their revenue in the next quarter," Whit Andrews, lead analyst on Google for Gartner Research told the BBC.

"We are being told initially that it might add up to a rounding error financially. That won't worry any analyst for the next several quarters or more. When it will factor in is when analysts decide if Google is vulnerable to competitors or if it has closed itself off from a key growth market. As of today, Google has plenty of room to grow its existing market," said Mr Andrews.

One of those key markets is the cellphone market.

Even though China is already the world's largest mobile phone market, with more than 700 million accounts, Google has upped the stakes in this battle by postponing the launch of two Android phones in China.

Would the company seriously risk potentially massive future growth and revenues this part of the world could offer? Doubtful, say many sources, which puts Google in an interesting and tricky position.

While most people might well believe this will all play out with Google exiting stage left from China, nothing is certain.

Sure the options seem to be pretty limited given that Google has said it wants to run a Chinese language search engine that is unfiltered.

That means when a user types in Tiananmen Square they will get previously blocked information about the 1989 protests alongside sanctioned information like tourist tips on the historical Gate of Heavenly Peace.

In all likelihood China is unlikely to bend and has already said that foreign internet firms are welcome to do business there "according to the law".

Besides, this very public debacle has put China in a difficult position and "it cannot afford to lose face" as one analyst told me. And neither can Google now it has thrown down the gauntlet.

A couple of compromise scenarios come to mind that could allow the company to remain in China in some shape or form and for China to come off as a friend to business.

If for example, China said it needed help tackling the issues of porn and child exploitation as it has in the past, then perhaps the search giant might consider filtering those search results. But China is hardly likely to trade that off against blocking what it sees as sensitive information around say the Dalai Lama, Tiananmen or Taiwan.

Google could of course close down its Google.cn business but keep a presence in the country through its research and development arm, its sales team and/or engineering operation.

This might be quite a canny move given that industry sources told the BBC that "the majority of revenue out of China is not from Adwords on Google.cn. The majority comes from sales to Chinese companies that are advertised on Google.com in the States."

Keeping a sales force on in China would enable Google to safeguard this part of the business, apparently a very good money earner.

"There is a very good chance that Chinese consumers and business will continue to consume Google.com even if Google.cn were to vanish," agreed Gartner's Mr Andrews.

But can China and Google really work something out?

Officially the company is prepared to go to the mat over this issue.

"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," spokesman Gabriel Stricker told BBC News.

"We recognize that this may well mean having to shut down Google.cn, and potentially our offices in China. We will be talking to the Chinese government over the next few weeks, and hope to reach a mutually constructive outcome."

At the Googleplex in Mountain View, employees and management are said to be "dismayed, but determined" about the whole affair.

The decision by founders Larry Page and Sergey Brin should not surprise anyone, regardless of Mr Brin's experience in fleeing a restrictive regime in the Soviet Union with his Jewish-Russian parents when he was six years old.

Back in 2004 when the company went public, these two founders gave fair warning that they would do things differently.

"Don't be evil. We believe strongly that in the long term, we will be better served - as shareholders and in all other ways - by a company that does good things for the world even if we forgo some short term gains. This is an important aspect of our culture and is broadly shared within the company."

Who could have foreseen that this tenet would be applied to these kinds of events?

Shares in Google have soared from $282.85 almost one year ago, but have slipped in recent weeks from $629.51 amid uncertainty over the Nexus One and the company's status in China. Shares were up 1.5% at $588.92 on Tuesday.

Comments

  • 1. At 10:41am on 20 Jan 2010, john essex wrote:

    I am not quite sure that standing up to China will redeem google of every sin. Google is just like Mircosoft in the last decade, clearly to large for any potential competitors to survive. A lean mean money making machine that pays little tax to build its massive fortune, that is why Google has been scrutinized by the French Authority and soon by others.

    The PR Stunt, as I see it, will just delay the inevitable.


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  • 2. At 11:10am on 20 Jan 2010, U9746596 wrote:

    @#1

    Microsoft has lost a lot of ground over the last 10 years mailny because of a competitor coming from nowhere. 10 years ago it was unthinkable that Microsoft could be overtaken but now due to their own arrogance they are loosing ground in all of their major markets, and are probably going to see even more shrinkage in the next few years

    Do really think that the same couldn't possibly happen to google? If their products become as poor as microsoft's surely there will be someone innovative looking to jump straight in the gap.


    Google's revenue means nothing to China but they are the poster boys of the internet...it would be a serious loss of face to China if the decide that the Chinese market isn't important enough for them to continue going against their principles.

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  • 3. At 12:21pm on 20 Jan 2010, mitty_w wrote:

    Most tech companies shine because they stay out of politics. Google's strength is the Web, and it should focus on that. It has problems even with hardware side of technology, as shown by the Nexus phone.

    Its high-faultin' ideology of 'Don't be evil' is already dead, because people don't trust it anymore. It has lost its innocence long ago, and people see it as a means to an end. If they want to be Obama's pawns against China, good luck to them. Personally, I think there is nothing to be gained from this standoff. China gonna get on its knees for a search engine? Ha!



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  • 4. At 12:43pm on 20 Jan 2010, Charlie wrote:

    As one of GOOGLE philosophy is "You can make money without doing evil" They should show this by example if they feel threatened by China IPR infringement.
    I think the best thing to do is to close their operations because its highly likely that this will never be the last time this will happen.
    Also,its very unlikely that the Chinese authorities will agree to Google new terms and conditions of operations.
    "A stitch in time saves nine"
    Other companies who wants to make money by all means should stay and get FAT.
    Its a tough decision for Google but it worth it for a change.There is nothing wrong about been special rather its honorable.
    I think GOOGLE is special.

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  • 5. At 2:00pm on 20 Jan 2010, Mike Zhang wrote:

    The whole story of hacking is very strange. Anyway, I don't think the Chinese government will talk to Google. A company made a claim it wants to leave, that's a business decision and what can the local government do.

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  • 6. At 2:31pm on 20 Jan 2010, vanzilar wrote:

    US and BBC media and google are missing three points. 1. The hackers are not yet PROVEN to be from China. They may be from somewhere else! 2. China does not tolerate being put down if it is not proven to be guilty!. 3. Google is about 20%-30% of the Chinese search engine market, so it will not be missed.
    Google should have got all their ammunition together before doing this, it looks like they will just be pushed out of China and lose some cash, and the hacker may turn out to be someone else entirely! I agree being good is essential but here they have been foolish, not wise and being wise is also essential to do good business.

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  • 7. At 2:58pm on 20 Jan 2010, wedt wrote:

    The Chinese government has been censoring information for decades, and most Chinese people accept it without question; either thinking that they have no choice or believing that their government has their best interests at heart.
    The current generation of young Chinese are broadly apolitical, either having no opinion on contentious issues such as the Tiananmen square protests or believing the account that they are taught in schools.
    For many young Chinese, the censorship of sites such as Facebook, (which had been gaining popularity in China before it was blocked in major cities following protests in Xinjiang a few months ago) and now Google, are their first encounters with this side of their government.
    The Chinese government has previously only allowed foreign companies to work within its borders under it's own terms. Most companies, when they consider the prospects of a competitor taking advantage of the Chinese market, are willing to accept this. However, the Chinese government must be aware that if large companies such as Google start taking a stand against their policies and practices, Chinese people will want to know why, especially if it is a company or product that they have grown used to and trust.
    The Chinese government will not back down to Google, it would be too embarrassing for them, but they must be wondering if their actions towards it have been worth the effort.
    from Guangzhou (formerly Canton), China

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  • 8. At 6:22pm on 20 Jan 2010, vesic wrote:

    It is naive to believe that Chinese people would simply believe what their govn't tells them. The FACT is that it's actually quite the opposite of that. I think the trend is you should believe the OPPOSITE of what the govn't is telling you. The Chinese govn't has lost the trust of the people long ago.

    Plus it is the information age now. People can get information from various sources. I have relatives still in China. They usually get their news from Hong Kong channels and on the internet/blogs/forums. Yes, the Chinese govn't puts in much effort to block sensitive material. Many times, they can only do that after the info, such as breaking news and sensitive photos, is put on the web not by news organizations, but by individuals. It would take a couple hours even days for the cyber police to catch it and shut it down. By that time, everyone knows... And then the rumor mill begins to churn and all sorts of crazy stuff begins to spread. And we all know that peopl, no matter what the nationality is, tend to believe the worst of the worst. This is also true in China. So in the end, what people actually believe about some natural/man-made disaster may well be much worse than what it actually is. So the Chinese govn't actually got the opposite of what they want.

    Also I've heard of many tricks the Chinese people have been using to keep their stuff on the internet longer. One of them is to use Chinese characters that have different meaning than your intended choice of word, which might be sensitive, but have the same pronunciation. Example: let's assume an English word "their" is on the sensitive list. They would use "there" to substitute "their" in the blogs. Since "there" is not on the sensitive phrase list. The cyber police can't catch it until it's too late. So let's give the Chinese some credit. they are much more innovative than we give them credit for. And they know what's going on around the globe as we do...

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  • 9. At 8:14pm on 20 Jan 2010, James Baker wrote:

    @#6.

    1. The hackers are not yet PROVEN to be from China. They may be from somewhere else!

    Verisign (one of the largest security companies in America, when you shop online it's likely to be secured with a Verisign certificate) thinks it is. They claim that they've confirmed with two independent sources that both the source IPs and drop server (the server used to host malicious code and store the stolen files) of the attack correspond to a single foreign entity consisting of either agents of the Chinese state or those acting on their behalf.

    2. China does not tolerate being put down if it is not proven to be guilty!.

    Well no, Tienanmen Square is a good example of that. If I were Google and I had had some of my source code stolen by the Chinese government (that code is worth billions, obviously), I sure as hell would not want to play their game with them any more.

    3. Google is about 20%-30% of the Chinese search engine market, so it will not be missed.

    Apple is about 20-30% (on average) across the UK PC/Mobile/MP3 market, so it will not be missed if it decides to stop selling in the UK. Have you any idea how stupid that is? There are 350 million internet users in China, roughly. If on average each one of them goes on a search site each day, that means that (simple statistics) around 87.5 million unique people visit Google as their unique source at least once a day. That's not an insignificant amount, and it's more than the UK's population.

    Google should have got all their ammunition together before doing this, it looks like they will just be pushed out of China and lose some cash, and the hacker may turn out to be someone else entirely! I agree being good is essential but here they have been foolish, not wise and being wise is also essential to do good business.

    They have their ammunition. They have been hacked by the Chinese government, apparently, and they are so sure of this that the US government is getting involved, with Hillary Clinton demanding an explanation. They have not been foolish, they have done the right thing.

    To give you an idea of how much source code is worth, Adobe was targeted. It's revenue is around $3.5 billion, much of it is due to the CS suite. If the CS source code was stolen and published online, Adobe would likely be subject to all kinds of scrutiny, and the people who downloaded the source code would likely be arrested for handling stolen items. Adobe's source code is literally worth more than the company's revenue. Google's is worth a helluva lot more, and that is what was attacked originally.

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  • 10. At 03:04am on 21 Jan 2010, Mudassar Majeed wrote:

    This comment was removed because the moderators found it broke the House Rules.

  • 11. At 09:54am on 21 Jan 2010, Tom wrote:

    Because of the hack, they no longer want to sensor their result? So, they mean if result are not sensor, it's harder to hack into? Why now and not a few years ago. I am pretty sure that if their marketshare is 90% at the moment, they wouldn't do a thing. Everyone say how much they will give up if google pull out of china. Look at what they are doing to make money. Buying up companies every week. Scanning books without permission. Now, by announcing that they will no longer sensor because of the attack. 1, they will look like a good guy doing something good. 2, if their result are unsensor. They could actually get more user using because it give user more than any other search engine. 3, The few delay of the android phone would not matter much since they want to have their nexus out their to make more money but at the moment there are more complains. A delay would give them time to fix it. 4, the more people talk about the issue, the more popular they will get. Google is not stupid. It doesn't cost them anything at the moment but it does get them lots of PR. It's almost a win-win for them with this announcement.

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  • 12. At 7:01pm on 21 Jan 2010, James Baker wrote:

    Tom, they're not uncensoring their results to make them more secure, they're uncensoring their results because they don't feel they can work on the same terms as a partner who actively tries to steal their intellectual property. I don't blame them.

    If they remove government mandated filterning, they will likely have to pull out of the whole People's Republic of China, which means that they will not be used more in China. It's not a win in that respect.

    Of course it costs Google to make this announcement, they will lose hundreds of millions of pages of advertising each day. That's a pretty big blow for any company, even Google. It gets them lots of positive PR in the West, but loses them their business in the East. It's a hard decision for Google, certainly.

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  • 13. At 02:13am on 22 Jan 2010, Tom wrote:

    James, even though they say they can't work with a partner that steals there code. But they are willing to stay in China if the government agrees to unsensor the result. Can't they still steal the code then? They are using one topic and blame it on another. Unless you mean when unsensor result are more easily tracked then sensor one. If it's a hacking problem. They should announce that China should to more to prevent or participate in hacking for them to continue to do business. Or is it because it cost money to hire people to sensor result and profit becomes lower. Without that, they can use the man power to do other thing to increase profit.

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  • 14. At 00:06am on 24 Jan 2010, Rajan wrote:

    Google presence in China (or any other market) is commercial and it is not a political issue worthy of this type of attention. If Google believes or has evidence that state sponsored hacking is the root cause then they should withdraw or way up the commercial risks of remaining in the market.

    It seems Google wants a no risk method of extending its profits whilst taking a competitive position in this major emerging market. Everyone knows that China, Russia, Brazil and India (to name a few) have some very sophisticated hackers, so enter these markets at your own commercial risk. Ultimately, it's all hot air and Google will do business in China.

    On a different note, the Chinese government like any government can choose to censor what it wishes across all areas of the media. We in the west may not like this, however our opinions are not being sought.

    We don't require a commercial incident about infringement of IPR to highlight China's human rights violations - it's insulting. I didn't see Google taking a human rights stand when China hosted the Olympics.

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  • 15. At 1:48pm on 22 Feb 2010, nonothing wrote:

    Google is doing a PR campaign to get something out of an underperformed business. No more no less.

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