James S O’Rourke, Brynn Harris, Allison Ogilvy. The Journal of Business Strategy. Volume 28, Issue 3. 2007.
On January 25, 2006, Google, Inc. announced that it would provide access to the internet in China through a new portal: Google.cn. At the same time, Google executives agreed to censor all search results that included content considered objectionable by the Chinese Government. This decision was announced in the wake of Google’s recent refusal to provide user information to the US Government case against child pornography.
Wall Street’s response confirmed the profit potential of the venture, as the company’s share price rose 3.6 percent in just one day (Ottawa Citizen , 2006). However, the company’s announcement brought strong reaction from the press and human rights organizations as well. Within days, headlines across the USA and around the world accused Google of abandoning its principles in pursuit of profit.
Two Kids in a Sandbox
As a graduate student at Stanford University, Sergey Brin led a tour for a prospective classmate, Larry Page. Both were strong-willed and very opinionated and disliked each other immediately. Soon, however, they were practically inseparable because of a shared interest in technology. For years, the two PhD students in computer science worked to develop a search engine they believed would revolutionize the use of the internet. One of Page’s Stanford professors literally laughed at his assertion that he could change the way early search engines were working.
By 1998, the duo founded a company known as BackRub, a name meant to reflect the technology’s use of backward links to find useful websites. BackRub operated out of a dorm room until the duo received their first investment, a check for $100,000 from an angel investor. Within two weeks, they rented out space in a friend’s garage and officially founded Google, Inc. By definition, Google refers to the number one followed by 100 zeros and was meant to represent the vast amount of data available on the internet. The company was founded with a mission to “organize the world’s information and make it universally accessible and useable.”
By 1999, less than one year later, Page and Brin had secured more than $25 million in venture capital funds. Google had grown to just over 60 employees, and began to develop its own unique culture. During that same year, the company relocated to the “Googleplex,” an imposing office complex in Mountain View, California.
Page and Brin remained in executive roles, imparting their visions on the development of the company. They had successfully developed a business model that brought in large advertising revenues while maintaining a reputation as a free, user-friendly search engine. Programs such as AdWords and AdSense allowed Google advertisers to target users according to keywords used in searches. Although the company seemed highly successful, Page and Brin’s unusual management styles led to their reputation as two executives who were still just kids playing in a sand box. The long-term success of the company was widely doubted, both in the press and on Wall Street.
Don’t Be Evil
Over the next few years, Google continued to grow at a rapid pace. Although competitors such as Microsoft’s MSN relied on traditional advertising, Google grew solely by word of mouth. The search engine’s speed and ability to deliver highly accurate results drove its increasing popularity. The company developed multiple products meant to complement its search engine, including the Google Toolbar, GoogleImage Search, and Froogle, an internet shopping tool.
By 2001, Brin and Page sought outside industry experience to fill the role of CEO and found this expertise in Eric Schmidt. While Schmidt has taken official leadership of the company, the two founders remain in active roles as presidents. Decisions are made by committee, with all three participating.
In 2004, Brin and Page took the company public. The Initial Public Offering was controversial, due to its unorthodox style. Despite SEC investigations and negative attention on Wall Street, the offering was immensely successful and valued the company in excess of $100 billion. At the time of the IPO, the company released a letter from the founders. The public document reasserted the mission of the company: “We believe strongly that in the long term, we will be better served […] by a company that does good things for the world even if we forgo some short-term gains. We aspire to make Google an institution that makes the world a better place.” Google’s popularity and rapid growth are often attributed, in part, to the company motto: “Don’t Be Evil.”
Google has since grown to become the fifth most popular website in the world, with more than 380 million visitors per month. More than 50 percent of all users are international. Since the IPO, Google’s stock price has rocketed to an astounding price.
The company is continuing its tradition of branching out into multiple product lines. By 2006, they had projects in development that included programs to allow individuals to track DNA history for themselves online. Google believes this will give people the ability to take ownership of their own healthcare through identification of potential hereditary health risks.
Department of Justice Request
In December 2005, the Department of Justice requested all major search providers to submit user information in an effort to investigate the prevalence of child pornography on the internet. The ongoing investigation is an attempt to support the Child Online Protection Act, which imposes on all websites the legal responsibility of shielding minors from harmful materials.
The subpoena requested a sampling of one million searches initiated through Google within a one-week time frame. Competitors MSN and Yahoo were also subpoenaed for similar information and have complied with Department of Justice requests. Google refused to provide any information, citing the importance of user privacy, and has chosen to fight the subpoena in Federal Court (PRWeek , 2006).
The Chinese Market
With a population of 1.3 billion and a growing economy, China represents an enormous market for the future of US companies. The number of internet users in the country has grown substantially over the past few years and is currently estimated around 111 million regular users. China, in fact, is now ranked as the second largest internet market in the world. The Chinese Government, however, offers all internet search providers a difficult choice: either censor results or do not do business in China.
The primary internet search provider in China is Baidu.com, a Chinese company which owns approximately 48 percent of the search engine market. Baidu has been ranked with the fastest responsiveness rate by users in China. The site is accepted as a clear leader in the market for both brand recognition and usage rates.
A study by Keynote Customer Experience Rankings acknowledges that the competitive advantages maintained by Google in the USA would be easily transferable to the Chinese market. Chinese customers ranked Google first, beating Baidu, Yahoo, and MSN in categories such as search quality, image search, and reliability. According to the director of research and public services for Keynote, “we see that Chinese consumers really like the overall Google experience better. Eventually, this promises to translate into increased market share, particularly given Google’s strong resources and focus on the market” (Business Wire , 2006).
Google did have a presence in the Chinese market prior to the announcement on January 20, 2006. However, the company had been unwilling to censor information on behalf of the Chinese Government. A typical user search request initiated through the Google.com website would be filtered by the Chinese Government to remove objectionable material. This process slowed Google’s search results significantly, making it difficult for the company to compete in the market.
With the introduction of Google.cn, Chinese internet users could access the same search engine with a speed similar to that of Google.com in the USA. Instead of the Chinese Government filtering search results, Google now routes inquiries through their own servers and removes any officially banned content. Search results are typically returned within only a fraction of a second. Although Chinese users would have previously received the same limited results, Google had no role in the actual censorship of information until the debut of Google.cn.
The filtered search results remove any reference to a number of subjects deemed by the Chinese Government to be objectionable. Any content including mention of topics such as Tibet, Taiwan, Falun Gong, or the Dalai Lama is banned. A search on Google.cn for the phrase “Tiananmen Square” returns results showing a smiling couple in the square at spring, or the large photo of Chairman Mao, which is permanently displayed. Absent are any links to the massacre of 1989. The same search on Google.com would include pages showing the all too familiar image of a student standing in front of a line of tanks in protest (San Francisco Chronicle , 2006). See Appendix 1 for images.
The decision to censor their Chinese service turned Google, which had been heralded by an adoring press just months earlier for their exceptional stock performance, into the newest poster child for the more controversial elements of competing in the Chinese market. The fact that Google’s actions appeared to be completely at odds with their motto of “Don’t Be Evil” was an irony not lost on their critics, who quickly drew attention to the inconsistency. While a December 2005 issue of Business Week magazine had “Googling for Gold” as their cover story, February 2006 saw Time magazine with the less flattering headline, “Can we trust Google with our secrets?” (Ignatius, 2006; Farzad and Elgin, 2005). The situation escalated when Tom Lantos, a Congressional representative and a Holocaust survivor and human rights advocate, began to publicly speak out against the internet providers, comparing their actions to those of the US companies that collaborated with Nazis prior to the Second World War (Red Herring, 2006a).
Reporters Without Borders (RWB)
RWB is a Paris-based public interest group that acts as a media watchdog on an international level, condemning any attacks on what it considers to be the rights and freedoms of the press. They quickly established themselves as the leading critic of those US search engines that agreed to censor their material in order to gain access to international markets, beginning back in 2004, by writing top US officials and pleading for a code of conduct regarding overseas internet filtering. They said in their letters that “[the US] places no restrictions on private-sector activity even when firms work with some of the world’s most repressive regimes” (Radio Free Asia, 2004). When Google decided to enter into the Chinese market two years later, the interest group was able to bring the issue more squarely into public attention, and Google became their top target.
“Google’s statements about respecting online privacy are the height of hypocrisy in view of its strategy in China,” said RWB in a January 25, 2006 press release issued in response to Google’s announcement regarding its upcoming Chinese operations (BBC News, 2006a). They argued that the censorship would result in China, which was already ranked 159th out of 167 counties in a 2005 RWB survey of press freedom, becoming even more isolated from the outside world (BBC News, 2006a; French, 2006). “When a search engine collaborates with the government like this, it makes it much easier for the Chinese government to control what is being said on the Internet,” said Julien Pain, head of RWB’s internet desk.
Human Rights Watch (HRW)
HRW is the largest human rights organization based in the USA, with offices in regions around the world. The group investigates key human rights abuses both within the USA and internationally and then publishes their findings in an effort to draw exposure to the issue. Their testimony before the Congressional Human Rights Caucus on February 1 made a compelling argument that the Chinese Government would be unable to carry out its censorship effectively without the cooperation of US search engines:
One lesson of China’s experience with the Internet is that repressive governments cannot exercise full control over this medium without the willing cooperation of the private sector companies that are leaders in the industry. […] China sought and received the cooperation of global Internet companies in limiting access to information (Malinowski, 2006).
HRW argued that the USA’s dominance in the search engine market gave them considerable leverage against any country that hopes to benefit from the information age. The group proposed that if all the search engines acted together in refusing to comply with Chinese censorship rules, they would be in a very strong position to push for free access (Malinowski, 2006). Despite their strong stance, the group has so far made no threat of a boycott. “How much choice do you have if all of these companies are doing this?” asked Mickey Spiegel, Senior Researcher at HRW. “We’re not going to stop using the Internet” (Kirby, 2005).
Top competitors Yahoo and Microsoft’s MSN pose tough competition for market share in China. Yahoo is placing very different bets on the future for search engines, and Microsoft has the resources to really challenge Google in search capability and advertising (Ignatius, 2006). Both companies were complying with Chinese censorship regulations before Google began to and have had their own negative publicity to manage.
Yahoo came under fire for giving the Chinese Government information that was used to convict Chinese internet journalists Shi Tao in 2004 and Li Zhi in 2003 (Delaney, 2006a). The company defended its actions by saying that it didn’t know how the information would be used. “I do not like the outcome of what happens with these things,” said Yahoo co-founder Jerry Yang. “But we have to follow the law” (Kirby, 2005). They also publicly encouraged the US Government to handle the issue although they stated that it was too early for them to recommend how (Delaney, 2006a).
In December 2004, Microsoft complied with an order from the Chinese Government to close a site belonging to Michael Anti, a Beijing-based employee of The New York Times and one of China’s most popular bloggers, which had been addressing sensitive political issues (French, 2006). Microsoft Chairman Bill Gates responded by stating that “The ability to really withhold information no longer exists,” and by outlining a policy in which sites blocked by government restrictions will still be available in all other parts of the world (McMahon, 2006).
While not a direct competitor for Chinese market share, the physical networking provider is one of the two US companies the Chinese Government relied on for the 2004 network upgrade that substantially improved their ability to track internet searches (McMahon, 2006).
Microsoft and Yahoo issued a joint statement on February 1, 2006 showing their support for collaboration with Google, Cisco, and the US Government in order to create industry guidelines for handling governmental restrictions (Associated Press, 2006).
Page, Brin, and CEO Eric Schmidt have been open in admitting that suppressing free speech for a totalitarian government is more than a little controversial. In this case, however, they argue the benefits outweighed the costs. Senior Policy Council Andrew McLaughlin issued a statement defending Google’s decision on the day of the announcement. “While removing search results is inconsistent with Google’s mission, providing no information—or a heavily degraded user experience that amounts to no information—is more inconsistent with our mission” (Yang, 2006).
Vint Cerf, who serves as “Chief Internet Evangelist” at Google, further justified the move in an interview with Time magazine. “There’s a subtext to ‘Don’t Be Evil,’“ he explained, “and that is ‘Don’t be illegal’“ (Ignatius, 2006). McLaughlin (2006a) outlined the dilemma behind the decision in a Google Blog posted on January 27. See Appendix 2 for the full statement:
We ultimately reached our decision by asking ourselves which course would most effectively further Google’s mission to organize the world’s information and make it universally useful and accessible. Or, put simply: how can we provide the greatest access to information to the greatest number of people? (McLaughlin, 2006a).
Essentially, the Chinese market is simply too important for any major search engine to miss out on, regardless of the cost, and US companies point out that if they withhold their expertise, then firms from other countries will just step in (McMahon, 2006). Yahoo, MSN, and Google have also defended their actions by pointing out that the simple availability of the internet, even if limited in scope, is considered a powerful engine spurring democratization. The then President, Bill Clinton, observed in 2000 that “By letting our high-tech companies in to bring the Internet and the information revolution to China, we will be unleashing forces that no totalitarian operation rooted in the last century’s industrial society can control” (Ma, 2006).
Congressional Human Rights Caucus Briefing
The US Congressional Human Rights Caucus held a briefing on February 1, 2006 addressing “Human Rights and the Internet: The People’s Republic of China” in an effort to encourage policy discussion among internet companies. Attendance at the briefing was optional, and Yahoo, Google, MSN, and Cisco all chose not to attend (Associated Press, 2006; McLaughlin, 2006b). Google released a statement on the day of the briefing, thanking the Caucus for the invitation, and citing a previously scheduled commitment as their reason for not attending (McLaughlin, 2006b).
The statement also outlined Google’s strategy for its operation in China, emphasizing the protection features put in place in order to minimize the harmful effects their filtering system has on information seekers: First, Chinese users are notified when their search has been altered by the filtering system. Second, services such as GMail, chat rooms and blogging that involve users’ personal information will not yet be offered out of concern that the Chinese Government could demand such information, as they did from Yahoo in prior years. Third, large investments are to be made that encourage research and development within China (McLaughlin, 2006b; BBC News, 2006b). These features, when combined with Google’s decision to continue to provide users with the Chinese version of their unfiltered US site, were intended to minimize the backlash for the agreement to censor in the first place. For Representative Tom Lantos, head of the House International Relations Committee, this statement was not enough.
“These massively successful high-tech companies, which couldn’t bring themselves to send representatives to this meeting today, should be ashamed,” he said. “They caved in to Beijing for the sake of profits” (Associated Press, 2006). While attendance at this meeting was optional, a February 15, 2006 hearing was called by Representative Chris Smith for which subpoenas were threatened. All four major companies indicated their plans to attend.
Global Internet Freedom Act
On the day before the congressional hearing, February 14, 2006, Secretary of State Condoleezza Rice proposed the Global Internet Freedom Act. A resolution under this name has been proposed by Congress every year since 2002; this version would commit $50 million to the creation of a global internet freedom policy and a task force to fight internet-jamming by governments around the world (Ma, 2006).
A hearing called by Representative Smith, chairman of the House International Relations Subcommittee on Africa, Global Human Rights and International Operations, was held on February 15 to officially examine the operating procedures of US internet companies in China. Smith questioned representatives from Yahoo, Google, Microsoft, and Cisco, as well as State Department officials, and representatives of several human rights NGOs. The search engines faced harsh questioning and criticism in regard to their actions in China, and were even accused by Smith and Lantos of collaborating with persecutors who torture and imprison Chinese citizens, comparing the roles of US companies in China to the collaboration of American companies with the Nazis prior to the Second World War (Kirchgaessner, 2006).
When Google was asked by Representative James Leach if they tried to negotiate at all with the Chinese Government, Elliot Schrage, Google’s Vice President for Corporate Communications and Public Affairs had to admit that they did not. “We did not have much of a negotiating position,” he began. “It was a condition of doing business. Lots of businesses in China perform filtering and censorship” (Red Herring, 2006b).
Representative Lantos was not impressed with the performance of the search engine representatives. “I believe their performance at the hearing was worse than dismal,” he said. “They were unprepared to admit to any mistake, to any shame, to any responsibilities for what their behavior had brought” (Red Herring, 2006a).
Representative Smith had already begun drafting legislation that would regulate the relationship between US companies and nations that place restrictions on the internet, though Representative Lantos admitted that the proposal’s chances of passing would be hurt by the controversial nature of the legislation (Red Herring, 2006a).
Global Online Freedom Act
Representative Smith’s legislation, titled the Global Online Freedom Act of 2006, was introduced on February 16. The act would forbid US internet companies from locating content servers inside China or any country that abuses human rights, and from cooperating with officials of such countries in effecting political censorship of online content (McMahon, 2006). Yahoo, Microsoft, and Google have all expressed support for the pending legislation.
In the weeks leading up to the release of its fourth-quarter earnings report, Google’s stock fell nearly 7.5 percent from its high of $471.63 on January 11, 2006 as a result of the controversy concerning their refusal to supply the Department of Justice with the user information it requested (Monica, 2006). The January 25 announcement on entering the Chinese market was met favorably by investors, with share price increasing 3.6 percent overnight. The stock price was at $432.66 when the market closed on Tuesday, January 31 prior to disappointing fourth quarter results: the 23 percent increase over the company’s third quarter revenue fell short of the 30 percent investors were expecting (Delaney, 2006b). The result was an Earning Per Share (EPS) figure of $1.54 instead of the estimated $1.76. It was the first time Google had missed its earnings expectations since going public in August 2004.
The stock dropped by more than 16 percent at one point in after-hours trading, and opened at $389.03 with a loss in value of nearly $15 billion on Wednesday morning, February 1, 2006. The stock rebounded modestly that day, closing at $401.78. Google blamed their disappointing figures on a higher effective tax rate than they had expected, but the market was not forgiving. The share price continued to fall as investors awaited the results of the Congressional Hearing on February 15. After hitting a low on the day of the hearing of $342.40, the stock began to improve, ending the week after the Congressional Hearing at $368.75. By early 2007, the stock had rocketed to nearly $500 a share and appeared to have considerable momentum.
Under Investigation in China
In addition to all the problems at home, Google has found itself facing trouble in China as well. A state-run newspaper called the Beijing News reported on Tuesday, February 21, 2006 that Google was under investigation by Chinese authorities for operating in China without a proper license (Pan, 2006). The ad ran alongside an editorial that harshly criticized the service provider for entering into the Chinese market only to complain about being required to follow Chinese law. Additionally, Chinese authorities had recently begun pressuring Google to remove the notification that appears on the bottom of every page (“filtered due to government regulation”), to cut off access in China to its regular, unfiltered search engine, and to offer GMail and blogging services (Pan, 2006). So far, Google has refused, but the fact that the license they use in China is standard for foreign internet firms has raised speculation that the Chinese Ministry of Information Industries only brought up the license issue in order to put pressure on Google to comply with the demands of the Chinese Government (Pan, 2006). If this is the case, Google’s legal issues in China will not be easily solved.
The image of Google in the media and among investors has been severely damaged. Their refusal to provide the US Justice Department with the user information it requested contrasts sharply with the perceived desertion of their principles that seemed to accompany their entry into the Chinese market. The combination of this inconsistency and the disappointing fourth quarter earnings results had many investors wondering if Google had finally lost its momentum, and if a company that prided itself on “not being evil” would be able to uphold their ideals while growing internationally. Brin, Page, and Schmidt knew they would have to develop a strategy that would convince the market that Google could handle the balancing act and re-establish themselves as the innovative leader with a conscience they had been in the past.