Marion Desmazires BUEC 646 Case Study: Google in China December 2nd, 2013

Google in China
A should I stay or should I go dilemma

Source: Nate Beeler (2010) Cagle Cartoons

BUEC 646: The Global Business Environment Case Study: Google in China Marion Desmazires December 2nd, 2013

Marion Desmazires BUEC 646 Case Study: Google in China December 2nd, 2013

Google, the leading search engine in the world

Are you looking for an information? Google it! Founded in 19981, the California-based company Google has been growing ever since but its core business is still its search engine, an internet service that allows people to make queries and search for information online. With more than 5 billion Google searches computed per day in 20122, Google has become the leading search engine in the world, before Microsofts Bing and Yahoo. Its use is so widespread that to google has now become a verb.

China, a booming market of internet users

According to an Internet World Stats survey [Exhibit 1], about 45% of the 2.4 billion Internet users worldwide are located in Asia, which makes the region extremely revenue generating for the search engine industry. More precisely, China is the most promising country for internet services in Asia and in the world, ranking first before the United States and India. A Nielsen study shows that the number of Chinese internet users has been growing exponentially from June 2004 (94 million) to June 2010 (420 million) [Exhibit 2]. In June 2013, the China Internet Network Information Center reported that China had reached 591 million Internet users3.

A competitive search industry in the worlds largest internet market

The Nielsen Company reported that more than 76% of Chinese internet users used search engines in 20104 [Exhibit 3], which made information acquisition via search engines one of the first activities in the Chinese online behavior. It is then no surprise that many local players launched their own websites in the 2000s to compete with American search engines. At the time, the leading providers were Yahoo, Baidu, Google, Sohu, Sogou, Sina, China Search and Netease. The leading search engine in China, Yahoo had acquired the Hong-Kong based 3721 software company in 20035 and launched Yisou, a dedicated search portal for China in 20046. Still, the Chinese player Baidu was gaining tremendous market share. An iResearch report from 2006

1 2

http://www.google.com/about/company/ ComScore Inc (June 2013). Retrieved from http://www.statisticbrain.com/google-searches/ 3 Michael Kan (June 2013). China now has 591M Internet users. Computer World. 4 Willis Wee (December 2010). Chinas Internet Growth, Statistics and Online Behavior. Tech In Asia. 5 Jim Hu (November 2003). Yahoo buys Chinese software firm. CNET News. 6 Janis Mara (June 2004). Yahoo! Launches Yisou. ClickZ.com.

Marion Desmazires BUEC 646 Case Study: Google in China December 2nd, 2013

shows that Baidus market share went from 10.34% in 2003 to 25 .96% in 2005, dangerously catching up with Yahoo (26.92%) [Exhibit 4]. Googles market share also increased during this period (3.45% to 14.42%) but the American company still ranked third in revenue.

Google needed to go local

One of the reasons why Google lagged behind was that the Chinese government often blocked access to google.com because Chinese internet users could get access to forbidden websites through the search engine.7 In addition, contrarily to Yahoo, Google did not adapt its branding to the Chinese market so, according to a survey by the China Internet Network Information Center (CNNIC), about half of the respondents misspelled Google8. Noticing the emergence of Baidu, Googles first strategy was to buy a 2.6% share in the Chinese search operator by making a $5million investment in June 20049. However, the CNNIC report also demonstrated that 41% of respondents used no more than two search engines, which meant that Google could be pushed out of the market if it did not make efforts to build a strong brand in China. Betting on Baidus success was a shy move considering that the revenue of search operators in China increased dramatically (by 81.9% from 2004 to 2005)10 and reached 1.04 billion RMB in 200511. Finally, in 2006, Google decided to change its strategy by selling its stake in Baidu (now valued at $63million) and to compete directly with the Chinese company by starting its own China-based portal google.cn. Hiring Chinese management and having China-based servers would allow Google to understand the Chinese search market better. However, launching a business in China meant that Google would have to compromise and abide by the Chinese censorship laws.

The Great Firewall of China: Chinese censorship policies

With only one party ruling the country, China has the most sophisticated censorship government in the world. The Chinese authorities oblige search engines to filter out keywords and images on several topics. Therefore, the search results are censored for any content mentioning democracy,
7 8

The Economist. (September 19, 2002). China and the Internet: The search goes on. China Daily (August 30, 2005). Baidu Gains Search Engine Market Share. 9 Andrew Orlowski (June 23, 2006). Google sheds China investment. The Register. 10 iResearch (November 2009). 2005 China Search Engine Market Report. 11 Lifang Zhang, Minghong Zhang, (2008) "Market structure of China's network industry", Journal of Chinese Economic and Foreign Trade Studies, Vol. 1 Iss: 1, pp.75 87.

Marion Desmazires BUEC 646 Case Study: Google in China December 2nd, 2013

human rights, the movement for Free Tibet or the Dalai Lama, the independence of Taiwan, the Tiananmen Square Massacre of 1989, and the Falun Gong meditation technique. 12

GuGe compromised its principles by complying with the Chinese law

In January 2006, as soon as Google launched the google.cn website , also called Gu Ge in Chinese, to establish its local presence in China, the company faced backlash from the press and NGOs. Microsofts MSN service already prohibited words like democracy in the headlines of its Chinese blogs and Yahoo filtered search results and even disclosed the identity of a Chinese email account owner to the authorities which sent him to jail13. Was it an excuse for Google to practice self-censorship? At least, Google had reached an agreement with the Chinese government that allowed it to disclose a warning message at the bottom of search pages when information had been restricted14. Still, this transparency measure was not enough for Reporters Without Borders that stated that Google's decision to "collaborate" with the Chinese government was "a real shame"15. Therefore, Andrew McLaughlin, senior policy counsel, published an official statement to admit that Google was not happy about the decision of filtering search results and applying censorship rules. Indeed, as stated on the companys About page, Googles mission is to organize the worlds information and make it universally accessible and useful16. Thus, Filtering our search results clearly compromises our mission said McLaughlin. Google definitely faced an ethical dilemma: the search engine had a responsibility to serve the Chinese market according to its The need for information crosses all border principle and the economic appeal was huge- but self-censorship was not really its thing. Indeed, some of its core values are You can make money without doing evil and Democracy on the web works. Nevertheless, this strategy of launching a mainland China-based portal did focus on the user first. "We felt that perhaps we could compromise our principles but provide ultimately more information for the Chinese and be a more effective service and perhaps make more of a

12 13

Linda Trevino (2012). Managing Business Ethics: Straight Talk about How to Do It Right, 5th edition. Wiley. The Economist (January 26, 2006). Google: Searching for integrity. 14 The Economist (January 26, 2006). Search engines: Here be dragons. 15 BBC News (January 25, 2006). Google censors itself for China. 16 Company overview, Google.com: http://www.google.com/about/company/

Marion Desmazires BUEC 646 Case Study: Google in China December 2nd, 2013

difference," stated Google co-founder Sergey Brin17. Wisely, Google did not open its Gmail service in China because it did not want to jeopardize the privacy of its users as the Chinese government had previously requested the identity of Yahoo email-account holders.

Still, Google struggles facing a harsh competition from Baidu and government backlash
Even with this local strategy, Googles market share in Beijing, Shanghai, and Guangzhou, the three largest Chinese cities, went down 8 percentage points to 25.3% in 2006 according to the China Internet Marketing Network Information Center. Meanwhile, Baidus market share made a giant leap to 62.1%.18 Baidu was definitely the first search operator of choice for most Chinese internet users. According to an iResearch report published in February 2007, Baidus total revenues increased by 162.5% in one year and amounted to RMB 837.8 million in December 2006, proving its growing brand recognition.19 On the other hand, Googles earnings missed its Q2 2007 estimates. You might wonder if George Reyes, chief financial officer, regretted or tried to justify the companys heavy investment in China when he told CNN Money: We are taking a careful look at investments and how we allocate resources around the world20. To add to Googles challenges, the Chinese government was throwing spanners in the works. In 2009, Beijing blocked YouTube, the video-sharing platform acquired by Google in 2006, because it was featuring footage showing Chinese police beating Tibetan protestors21. As a hint that Chinese managers were pushed over the edge by the hostile battle with the Beijing government, the head of Google China, US-raised Kai-Fu Lee, resigned unexpectedly in September 2009 and rekindled the debate on censorship in China. Indeed, Lee stated in his blog that he wanted to be "actively involved in the work and to have full control over it"22. This departure happened a couple of months after revived attacks against Google from state censors, although Google had carefully filtered results in June 2009, for the 20th anniversary of the Tiananmen Square massacre.

17 18

Ted Bridis (June 6, 2006). Google compromised its principles in China, founder says. USA Today. Gemme van Hasselt (September 21, 2006). Google Losing Market Share in China. Search Engine Journal. 19 iResearch China (February 15, 2007). Baidu Posts Quarterly Search Engine Revenue Increase. 20 Paul R. La Monica (July 19, 2007). Google is human, earnings miss. CNN Money. 21 Tania Branigan (March 25, 2009). China blocks YouTube. The Guardian. 22 Laura Donnelly, Peter Foster and Amanda Andrews (September 5, 2009). China Google boss departure reignites debate over censorship. The Telegraph.

Marion Desmazires BUEC 646 Case Study: Google in China December 2nd, 2013

A new approach to China in 2010

Although, in 2009, Eric Schmidt told The Telegraph, "China has 5,000 years of history and Google has 5,000 years of patience when it comes to China. We are in this for the long term.", it seems that the companys patience had limits. In 2010, Google changed its position after the cyber security company McAfee disclosed the Operation Aurora, a series of cyber-attacks targeting China-based IT companies including Google that were piloted by the Peoples Liberation Army between June and December 200923. It appears that the Beijing government intended to break into Googles servers to access the Gmail accounts of Chinese human rights activists24. Google reacted by publishing a long official statement on January 12, 2010. There, David Drummond, Googles Chief Legal Officer, announced a new approach to China in addition to improved security measures. We have decided we are no longer willing to continue censoring our results on Google.cn, and so 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. We recognize that this may well mean having to shut down Google.cn, and potentially our offices in China. stated Drummond.

In the absence of a compromise, Google moves to Hong-Kong

Nevertheless, the perspective of Google leaving the country did not sadden the Beijing authorities. In March 2010, despite the company's efforts to reach an agreement, Google faced media attacks from state-owned news agencies that jeopardized its brand reputation25. Si vis pacem para bellum or for the non-Latinists, If you want peace, prepare for war was replying the Chinese government. The control over free speech and the security and privacy concerns faced by the users of Google China justified a shutdown of google.cn but also few economic incentives urged Google to stay in China. Indeed, Google would miss its local access to the 420million Chinese Internet users and a $1.67 billion search market, but would Chinese people miss Google? Indeed, at the end of 2010, Google ranked second with a 26% revenue share among all Chinese online search engines [Exhibit 5].

23 24

Wikipedia. http://en.wikipedia.org/wiki/Operation_Aurora accessed on November 26. 2013. David Drummond (January 12, 2010). A new approach to China. Google official blog. 25 Reuters (March 22, 2010). Chinese media launches new attack on Google.

Marion Desmazires BUEC 646 Case Study: Google in China December 2nd, 2013

On the other hand, Baidu earned 71.6% of the revenues of the Chinese online search market, an industry that kept increasing steadily and more than doubled between Q2 2010 (RMB 2.69 billion) and Q3 2011 (RMB 5.51 billion) [Exhibit 6]26. Nevertheless, Google Chinas revenue in 2009 only amounted to $300 million, a small portion of its $22 billion in global sales. Additionally, few people in Wall Street feared that Google would suffer financially if it closed its Chinese portal 27. Therefore, in March 2010, when Google decided to redirect Chinese users to an unrestricted Hong-Kong based website, its shares did not drop much [Exhibit 7].

Was leaving Mainland China a bad strategy?

By redirecting its mainland China google.cn website and providing uncensored results in HongKong where Chinese laws do not apply, Google sent a strong message that powerful companies could stop cooperating with the Chinese censorship of the internet28. Because it abode by its Dont be evil motto, Google reinforced the trust of its global users and was praised by organizations like Human Rights Watch but it also provoked the ire of Beijing. Since the Chinese government did not appreciate the automatic redirection from google.cn to google.com.hk, Google decided to set up a landing page on the mainland Chinese website that would invite people to search on the Honk-Kong based portal. This compromise resulted from Googles need to renew its Internet Content Provider license to continue operating in China in June 201029. Was this two-click procedure one of the reasons of Googles decline in the Chinese online search market? Google Chinas market share kept decreasing, from 29.5% in Q1 2010 to 18.3% in Q3 2011, while Baidu kept soaring [Exhibit 8]. Google China still ranked second in revenue but was down to 15.6% market share in 2012 [Exhibit 9] and 12.2% in Q3 2013 [Exhibit 10]. However, it was not the second search engine of choice for Chinese internet users: Google ranked fourth in visits behind Baidu, 360, and Sogou now merged with Soso [Exhibit 11]. As the China search engine market is booming (RMB 11.28bn in Q3 2013), the competition is still fierce [Exhibit 12].30

26 27 28

iResearch Inc (December 2010). Revenue Share of Top Chinese Online Search Engines.

Miguel Helft (January 14, 2010). For Google, a Threat to China With Little Revenue at Stake. The New York Times. BBC News (March 23, 2010). China condemns decision by Google to lift censorship. 29 Stan Schroeder (July 9, 2010). China Renews Google's ICP License. 30 China Internet Watch (September 23, 2013). Chinas 3rd and 4th Largest Search Engine Joining Forces.

Marion Desmazires BUEC 646 Case Study: Google in China December 2nd, 2013

The future seems bleak for Google China

Google China seems to surrender and bows down before Chinas censorship policies: in January 2013, it finally removed the warning function that notified Chinese search users of restricted results31. As the company gives up its fight to promote free access to information to the 600million Chinese internet users32 and does not have much financial incentives to stay in the search market, it is hard to find reasons for Google China to persevere, at least for its internet services. Last week, it was extremely surprising to see The Guardian urging Google to encrypt its Chinese search pages, stating Google is too big for China to block.33. No, it is not and they do not see the big picture: 1) Google is far behind its Chinese counterparts, 2) as shown by Googles 2006 and 2010 unsuccessful strategies, the main threat is that Beijing shuts down google.cn completely. It makes us wonder if Google should not have proceeded differently to enter China. Google probably should have kept its stake in Baidu. Its minor $5million investment could have been worth much more than the $60million it got back when it sold its stake in 2006. Given the alarming decrease of Yahoos market share in the early 2000s, Google should have anticipated failure opposite local players that did not mind the censorship rules. Another strategy would have been entering the Chinese market before Baidu built brand recognition in 2000. Rather than focusing on internet services that are doomed to be blocked or to compete with long-standing counterparts (YouTube Vs. Youku, Google+ Vs. Sina Weibo, GChat Vs. QQ, etc.), Google should find a blue ocean34 and invest in untapped markets. There are opportunities in the mobile and hardware industries where Google could market its Android phones and tablets or in the online music industry where Google Play could promote its wide selection of international hits hardware sales unless the Chinese government decides to restrict access to foreign culture.

31 32

Josh Halliday (2013). Google's dropped anti-censorship warning marks quiet defeat in China. The Guardian. The Economist (March 11, 2013). Censorship in China Shifting dynamics of control. 33 Charlie Smith (November 22, 2013). Google could end China's web censorship in 10 days. The Guardian. 34 W. Chan Kim and Rene Mauborgne (2004). Blue Ocean Strategy. Harvard Business Review.

Marion Desmazires BUEC 646 Case Study: Google in China December 2nd, 2013

Appendices
Exhibit 1: Internet users distributed by world regions in Q2 2012

Exhibit 2: Internet users in China from December 2004 to June 2010

Source: The Nielsen Company (June 2010). Internet users in China. Retrieved from http://www.techinasia.com/china-internet-growth-and-online-behavior/

Marion Desmazires BUEC 646 Case Study: Google in China December 2nd, 2013

Exhibit 3: Internet behavior in China in 2010

Source: Willis Wee (2010). Chinas Internet Growth, Statistics and Online Behavior. Tech In Asia.

Exhibit 4: Income and market share of internet search engine from 2003-2005

Source: Lifang Zhang, Minghong Zhang, (2008) "Market structure of China's network industry", Journal of Chinese Economic and Foreign Trade Studies, Vol. 1 Iss: 1, pp.75 87. Retrieved from http://www.emeraldinsight.com/journals.htm?articleid=1714209&show=html

10

Marion Desmazires BUEC 646 Case Study: Google in China December 2nd, 2013

Exhibit 5: Revenue Share of Top Chinese Online Search Engines (FY 2010)

Source: iResearch Inc (December 2010). Revenue Share of Top Chinese Online Search Engines. Retrieved from http://www.techinasia.com/baidu-china-revenue/

Exhibit 6: China Search Engine Market in Q3 2011

Source: iResearch Inc (November 2011). Retrieved from http://www.chinainternetwatch.com/1304/search-engine-q3-2011/ 11

Marion Desmazires BUEC 646 Case Study: Google in China December 2nd, 2013

Exhibit 7: Evolution of Google Inc. stocks (NASDAQ:GOOG) between January and March 2010

Screenshot from https://www.google.com/finance?q=NASDAQ:GOOG retrieved on November 27, 2013.

Exhibit 8: China Search Engine Market Share by Revenue in Q3 2011

Source: IResearch Inc. (November 2011). China Search Engine Market Share Q3 2011. Retrieved from http://www.chinainternetwatch.com/1304/search-engine-q3-2011/ 12

Marion Desmazires BUEC 646 Case Study: Google in China December 2nd, 2013

Exhibit 9: China Search Engine Market Share in 2012

Source: EnfoDesk (2012). Chinese Search Engine Market Share [by Revenue] in 2012. Retrieved from http://www.chinainternetwatch.com/category/search-engine/.

Exhibit 10: China Search Engine Market Share by Revenue in Q3 2013

Source: China Internet Watch (October 2013). China Search Engine Market Share by Revenue in Q3 2013 (channel revenue included). Retrieved from http://www.chinainternetwatch.com/4371/search-enginemarket-update-q3-2013/

13

Marion Desmazires BUEC 646 Case Study: Google in China December 2nd, 2013

Exhibit 11: China Search Engine Market Share by Visits in Q3 2012 Q1 2013

Source: EnfoDesk (March 2013). China Search Engine Market Share by Visits in Q1 2013. Retrieved from http://www.chinainternetwatch.com/2192/search-engine-market-share-2013q1/

Exhibit 12: China Search Engine Market Scale from Q3 2011 Q3 2013

Source: EnfoDesk (October 2013). China Search Engine Market Scale from Q3 2011-Q3 2013. Retrieved from http://www.chinainternetwatch.com/4371/search-engine-market-update-q3-2013/ 14