Google has become the Western media’s new Saint George.  With its pullout from China last week and its refusal to submit to the Chinese government, Google slew the dragon of censorship, or at least that is the story being marketed by the press.

But if we look back to Google’s announcement from January 12, 2010, the catalyst of Google’s troubles in Beijing had little to do with censorship.  Instead, what initiated Google’s eventual withdrawal from China was the hacking attack of its computer infrastructure and the theft of valuable intellectual property.  Absent this attack, would Google have left China?  How did we go from a cyber-attack to a principled stance on censorship and why?  And is relying on Google to promote human rights a good thing?

Don’t Be Evil….Unless it Doesn’t Correspond with Shareholders’ Interests

Google claims that its informal motto of “don’t be evil” is a central pillar of its corporate core values.  But in reality, its motto can only be applied to the extent that it does not conflict with shareholders’ interest.

Google is a publicly traded company and as such, its primary duty to is to its shareholders, usually achieved through the maximization of profits.  This isn’t just a precept of sound business; it is an actual requirement of the law.  In the U.S., directors and officers of a corporation have certain fiduciary duties toward the corporation’s shareholders; if an officer or director acts in a way that breaches these duties, shareholders may bring an action against the board of directors and the officers.   This is to guarantee that the directors and officers act in good faith toward a corporation’s shareholders and make decisions based upon reasonable business interests and not upon personal ones.

Before Google made its January 12 announcement, rest assured that it probably checked with legal counsel to guarantee that shareholders could not bring a suit against it for violating fiduciary duties.  Most likely someone wrote a memo analyzing the merits of shareholders’ potential claims against Google for pulling out of the largest internet market in the world.

The current China internet market totals around 348 million users, more than the population of the United States but less than a third of China’s potential internet population of 1.3 billion people.  With such an untapped potential, even if Google maintained its 33% market share of the Chinese search market, it could potentially reach 429 million people.

Can walking away from a market that potentially could be that big ever be justified to shareholders on the grounds of Google’s censorship?

Likely not.  A rational shareholder purchases shares of Google not because of its founders’ stance on censorship in China but more for high return on its equity investment; in other words, profits through increased share price.

So how does Google get away with avoiding a shareholder lawsuit?

First, Google’s foray into China resulted in marginal benefits for the company.  Google did not enter the Chinese market with its Chinese search engine google.cn until January 2006 (to understand the difference between google.cn and google.com see CL&P’s previous article).  However, prior to 2006, Chinese internet users were able to access the U.S.-based search engine, google.com.  At the end of 2005, just through the use of the U.S.-based google.com, Google already had 27% of the Chinese search engine market.  Fast-forward to 2010, four years after it launched its censored Chinese search engine, Google was only able to raise its market share six percentage points to 33%.  Even with its withdrawal from the Chinese mainland, Chinese internet users will still have access to Google either through its U.S.-based search engine, google.com, or its newly established Hong Kong-based search engine, google.com.hk.  Thus, Google’s market share in China will likely continue to hover around 30%.  So the impact of Google’s withdrawal on its profits is relatively small, staving off a shareholder lawsuit.  If profits in China were higher, would Google still have left?  Maybe not.

Furthermore, the initial reason behind Google’s departure – a cyber-attack – is likely sufficient to justify giving up the domestic China market and the meager increased profits.  Although the cyber-attack has been pushed to the background, it’s actually a pretty big deal.  The attack on Google, which was coordinated with an attack on over 30 other western high tech companies, resulted in the theft of proprietary source code and other intellectual property.  While Google hasn’t openly discussed the extent of the cyber-attack, Adam Segal of the Council on Foreign Relations and an expert on cyber-espionage, hypothesizes that the Chinese hackers made substantial inroads in obtaining some of Google’s core technologies, namely “how it collects information on users and how it uses it to exploit its [Google’s] market advantage.”  This is information that is core to Google’s success and not something that it wants hackers to be able to access.  Any gains from protecting this information far outweighs the losses of shutting down its Chinese search engine.

Why then the censorship angle?  First, companies don’t really like to announce their vulnerabilities to cyber-attacks.  It’s not surprising that not a single company out of the other 30 that were attacked has stepped forward.  But second, and perhaps slightly cynically, the censorship angle is a marketing bonanza for Google.  Google is the West’s white knight, and although its share price has dropped significantly since it first threatened to leave China, it could have fallen lower absent the positive press surrounding its departure.

And if this was really just about the censorship, why did it take over two months for Google to leave the mainland?  The Chinese government is not about to give up on censorship, as Google executives must be keenly aware of.  So why prolong it?  And if censorship is so abhorrent to Google’s mission, why continue to promote your Android technology on Chinese mobile networks?  Censorship in China is not limited to computers.  A tremendous amount of censorship and surveillance also occurs on mobile devices.

Google’s principle stance against censorship likely has merit and its belief in “don’t be evil” isn’t idle chatter.  But in regards to Google’s withdrawal from China, censorship was neither the only nor the primary reason for its departure.

What’s the Big Deal if Google wants to Say it Left because of the Censorship?

First, by relegating the cyber-attack aspect of the Google-China incident to the background, the press, U.S. government and corporate America avoid confronting what some call the greatest threat to U.S. prosperity.  Adam Segal – in an interview on Digital Age – offered a sobering account of cyber-espionage and the U.S.’ lack of preparation to deal with this increasingly sophisticated threat.  Although previously focused on military secrets, Mr. Segal argued that the threat is increasingly on corporate secrets.  One of the last vestiges of the U.S.’ success lies in its intellectual property.  But cyber-espionage, especially by the Chinese, puts this very much at risk.  Before, companies avoided intellectual property theft by not doing business in China or setting up an office there.  But now, with increasingly sophisticated hacking, companies can no longer avoid the risk that their research and development is vulnerable – the physical location of a company’s R&D does not matter.  According to Rahm Emanuel, “never let a serious crisis go to waste.”  But that is exactly what happened here.  Every discussion about Google – from the press to Capitol Hill to the Administration –  has been about censorship, not about the more serious threat to the U.S.’ national security, cyber-espionage.  Google should certainly be commended for being so open about the Chinese cyber-attack.  Such frankness and cooperation with the U.S. government is important in battling cyber-espionage.  But the U.S. government appears to have largely ignored this opportunity to create a structure or a defense to deal with this issue.

But perhaps more importantly, should we rely on Google, a publicly traded company, to serve as our proxy on issues

of human rights?  Google was not created to promote human rights; Google’s dual aims are technology innovation and profits.  And there is nothing wrong with that; it’s what corporations do.  But by focusing so much on Google’s decision to leave China and cloaking it in this narrative of a principled stance against censorship, are we excusing our own behavior and inaction?  While the press has focused on Google’s departure from China, a real human rights defender, GAO Zhisheng, has “disappeared” in China.  Detained by the Chinese police last year, Mr. Gao went missing a few months ago with Chinese officials stating that he was “where he should be.”  Only yesterday was he found, alive.  But this story has received little attention from mainstream press and scant consideration from the Administration (the Google incident inspired a speech from the Secretary of State).  What kind of emerging superpower says that one of its citizens is where he belongs?  And what kind of society that is considered a bastion of human rights allows this power to get away with it?

Google’s prolonged departure from China was finally completed on Monday with Google moving both its Chinese servers and search engine to Hong Kong.  Since first announcing that Chinese hackers attacked its computer systems and stole some of its source code back in January, Google has left the world in suspense, avowing to leave mainland China unless the Chinese government allowed it to operate an unfiltered search engine.

But asking the Chinese government to stop censoring the internet is like asking the human race to give up oxygen.  Internet censorship is the Chinese Communist Party’s (CCP) lifeline.  Spending vast amounts of resources on policing the internet, China has one of the world’s largest and most sophisticated internet filtering systems and has no intention of weakening this system.  If anything, 2009 – with its many politically-charged anniversaries including the 50^th anniversary of the Dalai Lama’s departure from Tibet, the 20^th anniversary of the Tiananmen Square crackdown, and the 60^th anniversary of the founding of the People’s Republic of China (PRC) – has only seen increased internet censorship. For the CCP, an uncensored internet could undermine its control and disrupt the fragile social stability that it works so hard to maintain.

Given the CCP’s fear and its desire to maintain its monopoly on power, it should come as no surprise that Google was not able to negotiate any kind of compromise on internet censorship.  On Monday, Google issued a statement saying that over the past two and a half months, in its discussion with the Chinese government, it has come to realize that “self-censorship is a non-negotiable legal requirement” for the Chinese government.

Google’s Move Changes Nothing in Terms of Internet Censorship

So with its announcement on Monday, Google moved its Chinese search engine operations to Hong Kong.  Its Chinese

search engine, google.cn, now directs users to its new Chinese website, google.com.hk; additionally, Google moved its servers from the mainland to Hong Kong.[1]

So given all the hoopla surrounding Google’s departure from the mainland, the constant news reports and the heralding of Google as the David to China’s Goliath, Google now offers  uncensored search results on the mainland, right?

Wrong.  Little has changed in terms of censorship.

In order to understand how little Google’s move changes anything, it’s important to understand the two levels of censorship in China. A 2006 New York Times Magazine report on this issue gives a good background and is summarized below.

Chinese Law & Required Self-Censorship

Under Chinese law, any private company offering internet services in China must sign a licensing agreement that it will not circulate content on certain taboo subjects.  While the list of these subjects changes on a regular basis, usually included is information on the 1989 Tiananmen Square protests, the banned religious group Falun Gong, and any positive discussions of the Dalai Lama (negative ones are usually okay).

Restricting access to these sensitive subjects is the responsibility of the internet company, and often, to make sure that it is capturing everything and is not in violation of the Chinese government’s vague directives, the companies’ filtering is usually more inclusive than it needs to be.  Through this system, the Chinese government basically outsources its censorship responsibilities to entities that are doing a better job than they likely ever could.

In January 2006, Google, by setting up its Chinese search engine google.cn within China’s borders, became subject to Chinese law and thus signed a licensing agreement agreeing to self-censor.  Any searches performed on google.cn led to censored results.  For example, a search of “Tiananmen” on google.cn only pulled up tourist pictures of the Tiananmen Square; a search on google.com (the U.S.-based search engine) and conducted in the U.S. pulled up multiple images from the 1989 crackdown (see Prof. Don Clarke’s China Law Prof blog for a visual comparison).  This censorship was performed by Google.

The Great Firewall

But self-censoring only works on those companies that set up a server within China.  What about search engines with servers located outside of mainland China and thus not subject to its laws?

That’s where the Great Firewall comes into play.  The Great Firewall is essentially a protective shield that filters search results before they enter China.  Let’s say a Chinese citizen sitting in front of his computer in Beijing wants to read an article in the L.A. Times about the Academy Awards.  His computer reaches out to a server in L.A. to pull this information, but before it can show up on his computer screen in Beijing, it first must be filtered through the Chinese routers that control all information coming into China over the internet.

These routers are like custom officials – only websites permissible under Chinese law will be allowed entry into China and will show up on our Chinese friend’s computer screen.  The router goes through a series of steps.  First, it reads the address of the website – is this website a blacked out site that Chinese citizens can have no access to?  If yes, then the router does not allow our Chinese friend to access any portion of the L.A. Times and it is completely blocked.  Overtly political websites like Human Rights in China, Amnesty International, are completely blocked sites in China; type in the web address and nothing appears.  Also completely blocked are many social networking sites like Facebook and Twitter.

But if the site isn’t completely blacked out (and I don’t think the L.A. Times is a completely blocked site in China), then

the router reviews the article that our Chinese friend wants to read to see if it contains any blacklisted words.  If it does, the article will not be displayed on our friend’s computer in Beijing.  If it doesn’t contain any no-no terms, it will finally appear on his screen and our friend will be able to read the article.  For example, an article about Sandra Bullock winning the Academy Award will likely make it through the Great Firewall (no matter how offensive that might be to fans of Meryl Streep), but an article about the Academy nomination of the Chinese documentary about the Sichuan earthquake, China’s Unnatural Disaster: The Tears of Sichuan Province, will be blocked.

This is the situation that currently exists for google.com (the U.S.-based search engine) in China.  Google.com is an accessible site in China and can be used to run searches.  However, the searches, which access information on the servers located outside of China, must go through the Great Firewall.  Depending on the web addresses and the content of the web pages requested, some information will make it through the Great Firewall and some will not.  For example, a search of “Tiananmen” on google.com within China, will not produce the same results as a search of Tiananmen on google.com within the U.S.  The China search will pull up little to no information on the 1989 Tiananmen Square protests.  To the extent that websites discussing the Tiananmen Square protests appears in the search results, these sites are usually not accessible, and clicking on the result will likely produce an error message.

The Great Firewall is not perfect and sometimes information can sneak in.  To the extent that the Chinese government can have private internet companies conduct self-censorship, that is usually a more effective method as well as cheaper (for the Chinese government at least).

Is Google.com.hk Subject to the Great Firewall?

The Great Firewall applies to information coming from Hong Kong.  By directing people in China to its new website google.com.hk, with servers located in Hong Kong, all information attempting to come into China will be subject to the Great Firewall.  The results will still be censored.  It’s just that Google is no longer performing the censorship, instead the Great Firewall is.

Articles heralding that “google goes uncensored” are just plain inaccurate.  Google is uncensored to the extent that a search is performed outside of China; but that was the case before Google had its tiff with Beijing.  Any searches conducted on google.com.hk within China, will be filtered and it will likely produce the same filtered results that a search on google.com would produce if performed in China.  Anecdotal information currently coming from China confirms this.

So basically, the situation is the same; nothing has changed.  Perhaps Google’s culpability is less, but censored results in China are still par for the course.  And don’t expect that to change anytime soon.

---

[1] While a part of China, Hong Kong is not subject to PRC laws, at least in terms of political freedoms.  Instead, Hong Kong, under the arrangement of “One Country, Two Systems,” is governed by its own Basic Law which affords greater protection to freedom of speech

It is dangerous to use financial analogies to describe a non-financial event; the comparison usually misses the mark and often overly simplifies a complex issue.  Thomas Friedman fell into this trap last week when he recommended short selling the Chinese Communist Party (CCP) in his op-ed.  In attempting to predict the CCP’s fall, Friedman failed to do his due diligence and realize that like most things in China, it’s not all black and white.

First, the metaphor of “shorting” non-financial products has to stop.  Or at the very least be explained.   For readers of this blog and Friedman’s column who are not day-traders, “shorting” is a specific financial term.  When you “short” a stock, you borrow shares of the stock from a third party and sell these borrowed shares on the assumption that the price will decline in the near future.  When the stock is trading lower, you purchase it and return the shares borrowed, thus making a profit.   In essence, “shorting” implies that the product is presently overvalued and the value will decrease in the near future.

While you can’t actually “short” a country or a ruling party, Friedman uses the analogy to imply that the CCP is currently overvalued and its value, or in this case its power, will eventually decline.  According to Friedman, the CCP’s power will decrease because of its insistence on suppressing the Chinese public’s freedom to information, specifically over the internet.  For Friedman, this pits two different segments of Chinese society against each other: “Command China” which he defines as “traditional state-owned enterprises” and other extensions of the CCP and “Network China” which is made up of “highly entrepreneurial” companies that feed off of the creative energy of a free internet.

In drawing this distinction, Friedman paints with too wide a brush.  If the Chinese business world could easily be divided into decrepit, state-owned industries run by the Party and vibrant, Silicon Valley-like companies that are independent of the Party, the CCP’s demise likely would have already occurred.

Network China is not as independent of the CCP as Friedman makes it out to be.  A company’s success in China, even a

small technology company, is often dependent on the owners’ connections with government officials.  The companies of Network China are not outsiders to the system; they are very much insiders and largely profit from good relations with the CCP.  Take for example Baidu, China’s homegrown search engine.  Although Google’s search engine is at least as good as, if not better than Baidu’s, due to Baidu’s close relations with the government, it has a much larger share of the Chinese market.  Government and Party connections are important assets on a company’s balance sheet and, at times, are instrumental to a company’s success.  The companies of Network China continue to profit from their connections; it is unlikely that they will be the ones to seek change.

Furthermore, Command China and Network China are inextricably linked.  The Chinese banks that provide loans to the start-up companies of Network China are state-run and members of Friedman’s Command China.  When it comes to loaning money, the Chinese leadership has more than a bully pulpit; it can out right force its banks to provide these loans, as it did for much of 2009 while banks in other parts of the world constricted their lending.  In many ways, the government’s control of the state-run banks has been a boon for Network China.  Why change it?

The Chinese government’s increasing censorship of the internet is troubling, and not just for those of us abroad.  The Chinese people themselves have been in an uproar about Google’s threat to leave China and realize the damage that a censored internet can have on their development.  Just don’t expect change to come from Friedman’s Network China; these companies are already co-opted by the system.  If change is to come, expect it to come from average Chinese netizens and expect it to be a long process; not exactly ideal for short selling.