359) Google vs China: shifting search engines to Hong Kong

Breaking News Alert
The New York Times
Mon, March 22, 2010 -- 3:34 PM ET
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Google Shifting China Search Engine to Hong Kong

Google said it will shift its search engine for China off the
mainland. Visitors to Google.cn were now being redirected to
Google's Chinese-language service based in Hong Kong.

Read More:
http://www.nytimes.com/2010/03/23/technology/23google.html?emc=na

Google Shuts China Site in Dispute Over Censorship
By MIGUEL HELFT and DAVID BARBOZA
The New York Times, March 22, 2010

SAN FRANCISCO — Just over two months after threatening to leave China because of censorship and intrusions by Chinese hackers, Google said Monday that it was closing its China-based Internet search service and instead directing Chinese users to a Hong Kong-based uncensored version of its search engine, which may get blocked in mainland China.

In a blog post, Google also said that it would retain much of its existing China operations, including its research and development team and its local sales force. The stunning move represents a powerful slap at Beijing regulators but also a risky ploy in which Google — one of the world’s technology powerhouses — will essentially turn its back on the world’s largest Internet market, with nearly 400 million Web users and growing quickly.

“Figuring out how to make good on our promise to stop censoring search on Google.cn has been hard,” David Drummond, Google’s chief legal officer, wrote in the blog post. “We want as many people in the world as possible to have access to our services, including users in mainland China, yet the Chinese government has been crystal clear throughout our discussions that self-censorship is a non-negotiable legal requirement.”

Mr. Drummond said that Google’s Hong Kong-based search engine would provide mainland China users results in simplified Chinese characters used on the mainland and was “entirely legal.”

“We very much hope that the Chinese government respects our decision,” Mr. Drummond said, “though we are well aware that it could at any time block access to our services.”

Google’s decision to scale back operations in China ends a nearly four-year bet by the company’s founders and top executives that Google’s search engine in China, even if censored, would help bring more information to Chinese citizens and loosen the government’s controls on the Internet.

Instead, specialists say, Chinese authorities have tightened their grip on the Internet in recent years. While other multinational companies are not expected to follow suit, some Western executives say Google’s decision is a symbol of a worsening business climate in China for foreign corporations and perhaps an indication that the Chinese government is favoring home-grown companies.

“It is certainly a historic moment,” said Xiao Qiang, director of the China Internet project at the University of California, Berkeley. “The Internet was seen as a catalyst for China being more integrated into the world. The fact that Google cannot exist in China, clearly indicates that China’s path as a rising power is going in a direction different from what the world expected and what many Chinese were hoping for.”

Despite its size and reputation for innovation, Google trails its main Chinese rival, Baidu.com, which was modeled on Google, with 33 percent market share to Baidu’s 63 percent.

The decision to shut down its China-based search engine will have a limited financial impact on Google, which is based in Mountain View, Calif. China accounted for a small fraction of Google’s $23.6 billion in global revenues last year. Still, abandoning a direct search engine presence in the largest Internet market in the world could have long-term repercussions and thwart Google’s ambitions to be a global superpower, analysts say.

Beijing has not yet responded to Google’s decision, which was announced around 3 a.m. Beijing time, but government officials have scolded Google in recent weeks insisting that the company must comply with the law.

Some Western analysts say Chinese regulators could retaliate against Google by blocking its Hong Kong or American search engines entirely, just as it blocks YouTube, Facebook and Twitter.

Supporters of Google have praised the company for taking a principled stand and effectively refusing to operate a censored Web site here, one that limits free speech and deletes information about democracy and human rights issues.

In a statement, Leslie Harris, chief executive of the Washington-based Center for Democracy and Technology, praised Google “for following through on its commitment to protect human rights and for its continued effort to enable China’s people with unfiltered access to robust sources of information from all over the world. Whether the Chinese people will be able to take advantage of Google search now rests squarely with the Chinese government.”

But other specialists said it was a foolish business decision that has unnecessarily embarrassed Beijing and one that could make it difficult for Google to continue operating other parts of its business in China.

In China, many students and professionals say they are extremely disappointed by Google’s decision to close its Chinese language Web site. They are about to lose access to the company’s vast resources, they say.

Last January, when Google initially threatened to leave China, many young people there placed wreaths at the company headquarters in Beijing as a sign of mourning.

At that time, Google said it had grown frustrated with complying with government censorship rules and that hackers based in China had stolen some of the company’s source code and even broken into the Gmail accounts of Chinese human rights advocates.

The attacks were aimed at Google and more than 20 other American companies, the company said. While Google did not say the attacks were government sponsored, the company said it had enough information about the attacks to justify its threat to leave China.

People, inside and outside of Google, investigating the attacks have since put the number of companies that were targets at more than 30, and have traced the attacks to two universities in China: Shanghai Jiao Tong University and the Lanxiang Vocational School.

The universities and the Chinese government have denied any involvement in the attacks.

At the time of its announcement, Google said that its decision might well result in its having to shut down its China-based search engine, Google.cn, or leaving the country. In subsequent days, however, Google said that it hoped to preserve as much of its business in China as possible. In addition to its search engine, the company has a staff of about 600 that includes highly paid engineers and sales people, and a fledgling mobile phone business.

After serving Chinese users through its search engine based in the United States, Google decided to enter the Chinese market in 2006 with a local search engine under an arrangement with the government that required it to purge search results on banned topics.

But since then, Google has struggled to comply with Chinese censorship rules and failed to gain significant market share from Baidu.com, a Chinese site that was modeled on Google.

The decision to enter China, was also hotly debated in the company, and Google has come under criticism for cooperating with China’s censors. Not surprisingly, when the company said it would no longer abide by China’s censorship rules, human rights groups hailed the announcement, saying that Google’s stand should be a model for other American companies.

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The decision to scale back its operations in China will have only a limited financial impact on Google in the short term. Google does not break down revenue by country, but people familiar with the company’s business in China said that its quarterly sales were in the vicinity of $150 million in the most recent quarter, which ended Dec. 31. Globally, it had $6.67 billion in revenue in the same period. Much of Google’s revenue in China comes from ads that Chinese companies place on Google’s sites in the United States and elsewhere. What’s more, ads that Google used to place on its China-based search engine will now be placed on the Hong Kong site, so as long as the site is unblocked in mainland China, Google will continue to earn revenue from them.

But the fallout from the decision could affect Google over the long term, as the Chinese Internet market continues to grow quickly.

Google is not the first American Internet company to stumble here. Nearly every major American brand has arrived with high hopes only to be stunted by government rules or fierce competition from Chinese rivals.

After struggling to compete in China, Yahoo sold its Chinese operations to Alibaba Group, a local company; Ebay and Amazon never got traction; and Microsoft’s MSN instant messaging service badly trails rival Tencent.

Google’s departure could present an opportunity for Baidu, whose stock has soared since the confrontation between Google and China began. It could also give a chance to Microsoft, a perennial underdog in Internet search, to make inroads into the Chinese market. Microsoft’s search engine, Bing, has a very small share of the market.

Many analysts say the government has favored and aided Chinese Internet start-ups, but that those businesses have also out maneuvered American companies.

Inside Google, the decision to pull out is widely believed to have been championed by Sergey Brin, a co-founder, who was born in the Soviet Union and is particularly sensitive to the issue of censorship. The decision by Google to enter China in 2006 was hotly debated internally, with Mr. Brin advising against it, while fellow co-founder, Larry Page, and chief executive, Eric E. Schmidt arguing for it.

Early this year, company executives acknowledged that their bet that Google could help open China had failed.

“We were looking at an environment that is more difficult than it was when we started,” David Drummond, Google’s chief legal officer said in January. “Far from our presence helping to open things up, it seems that things are getting tighter for open expression and freedom.”

David Barboza reported from Shanghai and Miguel Helft from San Francisco.