Reports broke earlier in the week that Google might exit the Chinese market.
Yesterday, Google turned the matter into a political drama with its official explanation. In a post entitled "A new approach to China" on the Official Google Blog, Google's Chief Legal Officer David Drummond details why his company is considering leaving: it stumbled onto and was the victim of a "highly sophisticated and targeted attack" that resulted in the theft of intellectual property.
Google believes that the attack's purpose was to access Gmail accounts of Chinese human rights activists. It claims that "twenty other large companies from a wide range of businesses" were targeted and says it is working with the United States government. While Drummond doesn't directly accuse the Chinese government of being behind the attacks, that accusation is pretty clear if you read between the lines.
The story reads like something out of a Hollywood political thriller and while Google deserves some respect for standing up to the Chinese government, as with any good political thriller, I think there's far more to the story than meets the eye. After all, up until this point Google willingly complied with the Chinese government to protect its interests in China. Now, however, it wants us to believe that a hacker attack with the "primary goal" of accessing Gmail accounts of human rights activists in China has led it to conclude that a Chinese business may be untenable. Right.
Plenty of people buy the story and are praising Google. But praise requires some form of amnesia. That's because no matter how much "discomfort" Google felt when it agreed to censor search results in China, it knew what the implications of that censorship were and it knew who the censorship would hurt (hint: the same people this attack reportedly targeted). There was plenty of outrage when Google made its censorship decision but clearly the Chinese market was more important to Google at the time than its "do no evil" mantra, and its decision to censor reflects that.
So what gives now? It's hard to buy that this attack, however disturbing, is driving Google to rethink censorship and stand up for human rights. No, it's my opinion that Google may be using the attack as an excuse to set the stage for an exit from the Chinese market that doesn't require admitting what amounts to defeat. While JPMorgan estimates that closing up shop in China could cost Google up to $600m/year in revenue, that's a drop in the bucket for Google overall. And when you look at Google market share in China, where it trails Baidu in paid search by a hefty margin, it's pretty clear that Google is far from the 800 pound gorilla that it's used to being elsewhere in the world.
The problem for Google, of course, is that this says more about Google than it does about the Chinese market. We're talking about what will eventually be the largest consumer market in the world here. Google may not yet dominate search in China and will probably never dominate it, but make no mistake about it: China is really important to Google, as it is to so many large global companies. As JPMorgan analyst Imran Khan has noted, "If Google is not allowed to operate in China this could potentially have a far-reaching impact on the company’s overall long-term growth rate".
That statement is spot on, but if Google management lacks confidence in the company's ability to make greater inroads in China, pulling out of the country on moral grounds might be an easier way to let shareholders down than "Sorry! We just can't compete in China." So far, Google shareholders don't seem concerned. Yesterday, Google stock dropped by a little more than half a percent. Baidu's stock, on the other hand, soared more than 13%. A clear reflection that Google's move is probably more important to Baidu than Google in the immediate term.
It would be unwise to assume, however, that Google is simply throwing in the towel on China so abruptly. It appears that by publicly revealing the information it has in the way it has, Google is hoping it can pressure the Chinese government to renegotiate the rules of the game. Indeed, Drummond writes in his post that "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". The question is whether Google is delusional or devilishly brilliant.
While it would be a major shocker if the Chinese government agreed to let it run an unfiltered search engine, that's probably not Google's real goal. Realistically, Google is probably hoping to win some concessions that can help it compete more effectively in the Chinese market. If the political fallout is strong enough, there's a long-shot chance that the Chinese government will give in some due to the scrutiny and pressure. Again, this is a long shot by any stretch of the imagination but if it happened, Google will have pulled off a real coup d’état. If the Chinese government stands firm, as it is likely to do, Google can follow through with its threat to leave China while saving face with shareholders and consumers who still believe "do no evil" holds some meaning. Win-win for Google management perhaps.
This will be an interesting story to watch on multiple levels. But don't be fooled by the political and moral overtones. Just as Google's original agreement to censor search results for the Chinese government was a calculated business decision, its decision to now turn on the Chinese government is a calculated business decision too. Whether it has calculated correctly remains to be seen.
Photo credit: peruisay via Flickr.