Blog

Google “Re-Circling” the Great Fire Wall of China?

google

A corporate strategy article by Thunderbird students Eric Chown, Mike Grey, Nicholas Kincaid, Steve McCaa, Charles Midthun and Srikanth Venkatasubramanian

Mei Huang’s family has moved from Beijing to Shanghai and she misses her old friends. She had a great day in school today and has met a new boy — she is really excited and wants to share the news — what are they up to and wouldn’t it be nice to just chat real time, even if it was online — but the current service provider has strict limits on this capability. … Wen Li met with a group of friends last night and they know there is something wrong with the way people are being treated by the local businesses — the bosses seem to have no feeling or responsibility to the workers. This leads to thoughts about the Tiananmen Square uprising and the reasons for the demonstrations — but there is no way to search for anything related to this period, everything is censored. … Hui Zhong has been working on a report on the river systems in China, but the word for river “jiang” is the same as that of a former head of the communist party and searches for political information are taboo. (Ford) So she needs to be somewhat vague, and the information returned doesn’t meet her needs. There must be a better search engine that understands more than exactly what is typed, something that understands what she wants or is looking for.

GoogleA corporate strategy article by Thunderbird students Eric Chown, Mike Grey, Nicholas Kincaid, Steve McCaa, Charles Midthun and Srikanth Venkatasubramanian

Mei Huang’s family has moved from Beijing to Shanghai and she misses her old friends. She had a great day in school today and has met a new boy — she is really excited and wants to share the news — what are they up to and wouldn’t it be nice to just chat real time, even if it was online — but the current service provider has strict limits on this capability. … Wen Li met with a group of friends last night and they know there is something wrong with the way people are being treated by the local businesses — the bosses seem to have no feeling or responsibility to the workers. This leads to thoughts about the Tiananmen Square uprising and the reasons for the demonstrations — but there is no way to search for anything related to this period, everything is censored. … Hui Zhong has been working on a report on the river systems in China, but the word for river “jiang” is the same as that of a former head of the communist party and searches for political information are taboo. (Ford) So she needs to be somewhat vague, and the information returned doesn’t meet her needs. There must be a better search engine that understands more than exactly what is typed, something that understands what she wants or is looking for.

These are what Google brings — a social connection, a forum for those with similar concerns looking for a voice or trying to learn about both sides of history, a search engine that is built on understanding wants and needs, not just words. Half a world away, individuals watch pirated video of repression of a peaceful student demonstration. Google execs are stuck - they have the product that a 1.3 billion person market wants but they will need to find a way to work within a repressive culture or regime. How can they balance a business opportunity with what they profess “Don’t be Evil”? ….”

Internet Dilemma in China

Internet companies and search engines are offered two choices when entering the Chinese market, they can either self-censor or they can allow their content to be routed through the governmental censoring ministry. In a study conducted by Harvard Business School, nearly 10% of all searches were blocked by Chinese censorship laws – prohibitions relating to sexually explicit sites, sites relating to religion, gay/lesbian issues, police brutality, US defense sites, those specifically about education, entertainment, news, major world governments, and politics. While Google famously took the high road against China’s non-open, person-tracking “censornet” in 2010 and literally exited the search engine market in China by refusing to self-censor and moving its operations to Hong Kong, it cost Google significant market share in China – Baidu, a Chinese search engine, holds 78% of the market and Google provides services to just 16% of the market.

It is not without reason that China has strict policies on social media services and access to western media. In the 2011 Egyptian uprising social media and Internet services were widely reported as being an effective means of communication for the populist uprising. When Hosni Mubarak attempted to shut down access to the Internet from within Egypt to the outside world it proved too little too late, momentum had built and some of the companies involved delayed implementing the order. Bandwidth to Egypt dropped off, but data, and the message of the uprising, was not cut off (Howard). In fact, this action in Egypt fanned the flames of the revolt and increased the crowds of protesters. China too has disabled access to the Internet in response to uprisings. In 2006, there were ethnic uprisings in the Xinjiang region. Chinese officials responded by temporarily shutting down Internet access in the region and by permanently banning services like Twitter.

One of the fundamental differences between China and the west is the role that media plays in society. In western democracies, media has typically been used to reflect what is important in society, and the concerns of the masses. However in China mass media is very much a tool for directing society and helping to create opinion. Social media challenges the Chinese model because the source of media creation is society in and of itself.  (Tang). So the very nature of social media goes against how the Chinese government defines mass media. Interestingly in the West the traditional media has started to use social media networks as sources, creating an interesting interplay between the two mediums.

China has not taken a casual approach to the Internet. Unlike Egypt, which tired at the ninth hour to restrict the Net, China has a sophisticated filtering and blocking system that has proven to be fairly effective. In addition, they have repeatedly blocked western sites, while only filtering or altering content of local websites.

china-great-firewall-updatec_comThis has not, however, stopped people from engaging heavily in social media. It has instead changed the way most Chinese interact with social media.  Over 500 million Chinese are involved on the internet and 300 million in social media.  The social media trends in the West often revolve around news and events, but most of those aspects are restricted within Chinese Internet which has caused many to look for other options.  The conversation in China has shifted to “re-tweets of media content such as jokes, images and video.”  (Yu)  This drives a very user oriented and user driven social media experience as the content focus revolves around entertainment and friend circles.

Although Baidu dominates search, the social media market is extremely fragmented. This is driven by both the high number of offerings and the fact that most people split attention between a large multitude of social media sites. One prominent success story has been Sina Weibo.  It has evaluated the market and changed its general service offering to align with the patterns with Chinese social media.  The biggest shift is that they allow images and videos within their Twitter-like feed.  This ties in well with the media-focused nature of the general social media exchange.

Lessons from “Censorgate”

Google learnt a few valuable lessons from its wounds in the search engine wars with the Great Firewall of China: Given the political reality of high censorship and ever expansive information control, they thought they could negotiate or manage around the regulatory and institutional roadblocks in the right direction over time, lulled into complacency by believing focused execution can compensate for a “no-win” strategic position against the Chinese government. Although Google famously cites it took the high road against China’s censorship and exited the search engine market in China, it did learn that no foreign companies will be rarely be able to survive on their own in such government controlled oligopolies without an active local partner. A great proof point is its rival Yahoo’s experience in China: Perhaps Google should have turned over its business to local rival Baidu and let Baidu run with it as Jerry Yang had done for Yahoo in China in 2004. Yang handed the management reins to Jack Ma, the charismatic leader of China’s e-commerce powerhouse Alibaba, knowing fully well that Ma, thinking local, acting local, would have a better shot at getting the right formula for China, which turned out to be a prescient move. Subsequently, Yahoo sold its Chinese web properties to Alibaba in 2005 and converted its presence into a 40% minority ownership of Alibaba’s public and private shares - which has been incredibly lucrative (Oreskovic): Yahoo struck a deal with Alibaba in May 2012 to sell one-half of its 40 percent stake in the Chinese Internet company for at least $6.3 billion in cash and up to $800 million in new Alibaba preferred stock.  Recognizing they could not win the mainland, they sold to Alibaba while they were still in a position of strength, making Yahoo’s Alibaba holdings are likely one of its most valuable assets today. The lesson here is that you cannot win in a “market share for technology” joint venture if having and sustaining long-term market share is precluded by the political environment!  In 2004, Google invested $5 million in Baidu for a 2.6% stake but shifted strategy in mid-2006 by selling those shares for more than $60 million and rolling out Google.cn the same year. Given its bumpy history in China maybe Google should have pursued the “go-with-Baidu” strategy.

Another successful model for China is that of Japanese company Softbank which invested in Alibaba with a value-added venture capitalist approach. With the strategic goal not to capture the mainland market but to add value to Alibaba as a partner, they invested in Alibaba’s IPO while simultaneously launching a JV with Alibaba in Japan that focused on connecting Japan’s small and medium businesses with international suppliers. As Professors Tarun Khanna and Krishna Palerpu opine in their Harvard Business Review article on Emerging Giants, contracts are a weak hold on assets in emerging markets and will likely not protect partners from damages in case an emerging market partner does not will live up to its commitments to its business partners (Khanna) especially if the relationship with the partner (as it was in the case of Yahoo-Alibaba) remains acrimonious. This is the reason why the Softbank approach is a great model, providing it not only a strong business enabler but also an alternate line of control, albeit stronger, than any enforceable contracts for their stake in China’s Alibaba.

China represents a unique confluence of network economics with a politically created oligopoly leading to a deeply controlled market: it creates real challenges in terms of resource and market access and creating enforceable claims on assets, but also limits competition and makes foreign investments much more valuable as is it heavily sheltered which can translate into a unique competitive advantage with the right strategy! A Softbank-type combined approach is a smart model for Google to consider in such emerging markets and might be their best shot at winning back the elusive Chinese market share.

Google’s China 2.0 Strategy

Google can win back its position in China by capitalizing its strengths in Android mobile platform, Motorola mobility products (Motorola Mobility spreading presence in China market), and Google Plus (also known as g+ or Google+) social networking platform and linking these to its lucrative mobile search and advertising business.

With over 1 billion mobile phones in use in China (Muncaster), Google can use Android as a foundation to dominate the search ad market in China by leveraging its brand presence in China through the recently approved Motorola Mobility merger (Letzing). With 113 million smartphones sold in China first half of 2012 means China alone accounts for 36% of global smartphone market (of which 77% is Android!) (Hall) and 4% market share for Chinese mobile devices (6th largest in China (Chang)) Google can monetize its Android investments through its ads and mobile search. While Baidu, controls approximately 80% of the PC-based Internet search market, Google is still a force to reckon with in mobile web search engines in China. Such a strategy focused on mobile ads and mobile search can help it win the war for mobile search (ad dollars) in China and help it crawl back into China as Chinese market itself is rapidly moves from desktop search to mobile search.

In the long term, Chinese social media is one of the most politically sensitive areas as witnessed by the bans on YouTube, Twitter, and Facebook (Cindy Chiu). However, social networking represents a huge threat as well as immense revenue opportunity to Google in China for the following reasons:

  1. Google’s core products and services rely on a fragmented and “crawlable” web, if other (non-Google) Chinese social networks become the primary place web users hang out and create content, it would be a “dead zone” closed to Google’s crawlers which have already been already shut out from China
  2. Chinese social networks could take control of ad impressions and launch display ad networks to compete directly with Google’s display ad business which represents its largest cash cow. Display ads account for the vast majority of online advertising as more brand advertising moves online.  As Google’s real customers are advertisers (not Internet users which are the “supply” it sells to its advertisers) any channel that has the net effect of granting Google control of a greater share of the available supply, allows Google to set or control prices to their customers better!
  3. Collateral risks of Chinese social networks monetizing their users by taking revenues and market share away from Google  in payments, in mobile (threatening Android), and the lion’s share of intent harvesting through their own search and/or shopping engines or partnerships with Chinese competitors such as Baidu.

Therefore social networking access represents a bigger deal than Rupert Murdoch launching Chinese TV stations! Across the emerging markets foreign investment in traditional media and telecommunications industries, such as news stations and mobile networks, foreign ownership and control is strictly limited. No foreign company could have owned Saudi Arabia’s telecommunications network, STC just as we would not expect Russian billionaires to buy the BBC! Success with such a strategy in China would help Google develop capabilities to address other emerging markets which are subjected to similar restrictive governmental controls.

So how can Google use g+ as a catalyst in its China 2.0 strategy? By targeting users of any Google products and services (such as Android users, mobile device users, Gmail  etc.) with g+ to gain more information from users to direct revenues to other platforms (AdSense primarily) to stave off competition. By registering as many users as possible through these channels and letting them create their own circles and allowing them to increase sharing within Google+, Google can create a reasonably sized social graph. If even half of the users upload a pic, fill out their profile, and add people to their circles, Google will have huge social graph (who likes what and who knows whom). Thereby, Google can mine the social signals (such as +1) to capture user interests and monetize them to increase the click through rate on search ads. Even modest activity on Google+ can dramatically increase Google’s ad revenues in China when social signals are used in paid search ads. Additionally, building developer ecosystems that will enable entrepreneurs to deliver products and services based on g+ to massive user bases in China, bringing it other channels to monetize users. Google is already taking steps in this direction with enhanced g+ APIs and furthermore, can build partnerships with key Chinese players such as Sina (largest Chinese portal) to strengthen its position in the Chinese market.

The next time Mei Huang buys a cell phone, she might be able to purchase a Motorola smartphone that connects comes pre-installed with Google Android applications on the device. This will allow her to connect with and share information real-time with her friends and family circle on g+ using the same devices hundreds of miles away.  The next time Wen Li considers doing business with a local firm, Google applications on a Motorola smartphone might include user reviews of local establishments.  When friends meet to discuss what needs changing in their society, Wen Li can share facts accessible through her via a Motorola smartphone.  Hui Zhong, meanwhile, along with myriad other students can use a Google Search application on their Motorola smartphone to search for relevant information on their school assignment, without having to be exact or careful about their search terms just to yield the relevant results they want.  Utilizing such technologies, Google may be able to offer world-class tools for social networking, user forums, and Internet search behind the Great Fire Wall of China.

Bibliography

Chang, Chris. “Apple Falls Out of Top Five in China’s 3G Smartphone Market.” 22 05 2012. http://micgadget.com. <http://micgadget.com/26354/apple-falls-out-of-top-five-in-chinas-3g-smar….

Cindy Chiu, Chris Ip, and Ari Silverman. “Understanding Social Media in China.” McKinsey Quarterly April 2012. <http://www.mckinseyquarterly.com/Understanding_social_media_in_China_2961>.

Empirical Analysis of Internet Filtering in China: How Multinational Internet Companies assist Government Censorship in China. Boston, n.d. <http://www.hrw.org/reports/2006/china0806/5.htm>.

Ford, Peter. Sly Google Yields the Knife in Chinese Internet Censorship Tussle. 01 06 2012. <http://www.csmonitor.com/World/Global-News/2012/06/01/>.

Hall, Brian S. Is the entire purpose of Android so Google can win the China web market? 16 July 2012. Blog. <http://brianshall.com/node/10243>.

Howard, Philip N., Sheetal D. Agarwal and Muzammil M. Hussain. “Twitter Revolutions? Addressing Social Media and Dissent.” The Communication Review (2011): 216-232.

Khanna, Tarun, and Krishna Palerpu. “Emerging Giants: Building World-Class Companies in Developing Countries.” Harvard Business Review September 2006: pp.1-11.

Letzing, John and Paul Mozur. “China Clears Google to Buy Motorola Mobility.” 20 05 2012. Wall Street Journal Online. <http://online.wsj.com/article/SB1000142405270230336050457741428041492395….

Motorola Mobility spreading presence in China market. 27 07 2012. 08 08 2012. <http://www.cn-c114.net/583/a706011.html>.

Muncaster, Phil. “Chinese smartphone shipments outstripping feature phones.” 2012 07 2012. The Register Co. (UK). <http://www.theregister.co.uk/2012/07/10/china_smartphones_outsell_featur….

Oreskovic, Alexei. Reuters. 10 08 2012. Document. 10 08 2012. <http://in.reuters.com/article/2012/08/10/idINL2E8JAANG20120810>.

Tang, Lijun and Helen Sampson. “The interaction between mass media and the internet in non-democratic states: The case of China.” Media Culture Society (2012): pp.457-471.

Yu, Louis, Sitaram Asur, and Bernardo A. Huberman. “What Trends in Chinese Social Media.” SNA–KDD ’11: Proceedings of the 5th SNA–KDD Workshop. San Diego: ACM Press, 2011. < http://www.hpl.hp.com/research/scl/papers/chinatrends/china_trends.pdf>.

Picture Credits