Christopher S.

Bennett Szu-jung Chen Li-ting Yen MAR 6158 Summer 2012 Case Summary: Google in China (A)

At the center of the Google in China case is Googles confrontation with the critical question of whether or not to exit the Chinese market arising from a hacking incident. The assault on Googles computer system, and that of other companies, was of a very sophisticated nature and was shown to have originated from China. It appears from the evidence that the primary motivation for the assault was gaining access to the Gmail accounts of Chinese human rights activists. Of note, the attempt was largely unsuccessful. However, in the wake of the attack combined with the Chinas actions toward imposing further limits on free speech on the Web, Google resolved that it would no longer be willing to censor search results. Further, the company maintained that it would open a dialog with the Chinese government around Google being allowed to operate Google.cn free of censorship. Previously, Google had been tolerant of the idea of censorship of search results and other legal strictures in favor of increased access to information for the Chinese people. But now, Google was prepared to give the Chinese government an ultimatum: either China would accept Googles demands or risk its departure from the Chinese market. Google, the market leader in the search-engine space, was developed in 1998 by two young entrepreneurs, Larry Page and Sergey Brin, then graduate students at Stanford University. Googles business model is aimed at democratizing information on the Web; that is, to organize the worlds information and make it universally accessible and useful. One of the companys

core values is the idea that people should have the right to access information quickly, effective and without bias. Also important to Google is the core principle of Do no evil, which means that search results are displayed in order of estimated relevance to users instead of advertising payments. These basic tenets set Google apart from competing search providers. Google made its foray into the Chinese market in 2000 with the introduction of a Chinese-language version of Google.com, in the absence of a locally based operation or employees. From the moment Google entered China, it faced challenges. In a move that ran counter to Googles corporate philosophy, the Chinese government imposed tight restrictions on the flow of information on the internet and made strenuous effort to filter out information from search results that it deemed potentially offensive. But even in the face of these challenges, Google decided to bet on the citizens of China, maintaining that engagement was better than estrangement. Google registered its commitment to the Chinese market and people with several strategic investments. In 2005, the company established a R&G facility in China, the staffing of which was sourced locally from a pool of highly and skilled and high-earning software engineers through partnership with local universities and research institutes. In 2006, Google launched its China-based Website, Google.cn; and in January of 2007, the company entered into a revenuesharing cooperative agreement with China Mobile, the worlds largest mobile carrier, with a view to provide high-quality mobile search products and services. In 2009, Googles share of the Chinese workforce grew to around 700 people in absolute terms. In the same year, the companys revenues were estimated to be $300 million, approximately 1% of its corporate revenues. By the third quarter of 2009, Googles share of the search market was about 31%, compared with 64% for Baidu, the market leader in the Chinese

search-engine space, and less than 1% for each of the remaining competitors. As of June 2009, China boast around 338 million Internet users, 80 million or 24% of which were Google users. Notably, of the 1.3 billion Chinese population, there existed over 730 million mobile phone users and it was estimated that by 2010 around 7 million people per month would gain Internet access for the first time, mostly on mobile devices. Following the highly sophisticated and targeted cyber-attack on Googles corporate infrastructure, on January 12, 2010, the company released a statement indicating its unwillingness to tolerate censorship, which threatened to disrupt its operation as a going concern in China. The companys decision to potentially exit China received mixed reviews in the Western media, with some praising the search behemoth for standing up to the authoritarian Chinese government. Others, on the contrary, criticized Googles stance as foolhardy and out of alignment with the best interest of its employees, its shareholders and its loyal Chinese user base. Of interest, Googles stock price took a moderate hit following its January 12 announcement. The stock closed at $590.48 on January 12, 2010, and at $587.09 on the following day, plummeting to as low as $576.46. To add some perspective, on the day of Google IPO, its stock price had increased from $85 to a high of $714.87. This fallout transpired, as analysts speculated that Google would postpone or cancel the launches of two new phones, made by Motorola and Samsung, through China Unicom. These mobile phones were to use Googles Android operating platform, designed to facilitate easy access to the Google search engine and email. It was also rumored that Google would forsake its potential stake in Orca Digital, a Chinese company that distributed music free online based on an advertising revenue model in partnership with the major record companies like Warner and EMI.