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For:Prof. Bonnie Pierce

The George Washington University

Table of Contents

Introduction 3

Google Company Background 3

China Background 5

The Internet Search Engine and Advertising Industry in China 7

Google in China 9

Recommendations 14

Conclusion 15

Appendix 16

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Introduction

Google, Inc. is an internationally known business that has become the default provider for Internet services for many consumers. In a world where individuals can connect faster and across continents, Google has sought to provide its services in many countries. With varying political and cultural climates, Google has encountered challenges in offering its typical services, namely its search engine, in countries with stricter access rights. One such nation is China that imposes rigid Internet censorship within the country. This paper seeks to detail Google’s relationship with China and its efforts to offer its services in the Chinese Internet market.

The Internet is of top priority when it comes to they way people communicate and do business today. With Google being the largest search engine and one of the fastest growing companies in the United States, they are also highly involved in debates about international Internet Freedom. In February 2011, Secretary of State Hillary Rodham Clinton spoke at George Washington University about this topic:

The choices we make today will determine what the Internet looks like in the future. Businesses have to choose whether and how to enter markets where Internet freedom is limited. People have to choose how to act online, what information to share and with whom, which ideas to voice and how to voice them. Governments have to choose to live up to their commitments to protect free expression, assembly and association.1

Google’s mission is to organize the world‘s information and make it universally accessible and useful. Before going into the current state of Google and its international market choices, it’s important to go back to the beginning and see what the company was founded on and how it has grown.

Google Company Background

Google began as a search engine created by Larry Page and Sergey Brin while attending Stanford University. Originally created in 1986, the company stemmed from Backrub search engine, which operated on Stanford’s servers for more than a year. Later Page and Brin set up an office out of a garage in Menlo Park, CA, and Google Inc., was later incorporated in 1998 with a $100,000 investment check. The name Google comes from the word “googol,” a mathematical term for the number represented by the numeral 1 followed by 100 zeros, which is supposed to reflect their boundless amounts of information on the Internet. As the company grew, they eventually moved to Mountain View in 2000, which continues to be the corporate headquarters today.2

1 Openness Online. 15 February 2011. GW Today . Washington, DC: George Washington Univesity.2 Google Corporate. 2011. http://www.google.com/corporate/index.htm

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Management and Talent

Larry Page and Sergey Brin still play very active roles in the company as President of Products and President of Technology, respectively. Eric Schmidt joined Google as chairman and chief executive officer in 2001 after being Chairman and CEO of Novell and Chief Technology Officer at Sun Microsystems, Inc. In April 2011, Eric Schmidt will step down, as CEO, and Page will assume the position of CEO, with Brin will play a more active management role. Currently the company has over 100,000 employees with offices based all over the globe. Known as one of the top ten places to work, talent is recruited from the top universities and employment at Google is coveted. Despite recent cutbacks in budget like the employee amenity of an in-house gourmet Sushi bar, Google was Fortune Magazine's #4 on 100 Best Companies to Work For in the US in 2009 and 2010.3

Products and Service Lines

Google has several well-known services and applications. The search engine is the most popular and is fueled by one of their most well known revenue streams, AdWords. Google’s website details how AdWords works:

AdWords is the service where advertisers select words and phrases that are relevant to their business as keywords so that when people use Google to search for keywords, relevant ads may be displayed alongside the search results. We use an auction to price these ads, which runs automatically every time a user enters a query. Advertisers pay only when a user clicks on their ad, and our system guarantees that they pay the minimum amount necessary to maintain their ad position. They can also immediately track the results of their campaigns. We give marketers constant feedback. And in tough economic climates, when value matters more than ever, our measurement tools can help marketers allot their spending to the initiatives that have proven to be most effective. Hundreds of thousands of advertisers worldwide use AdWords to promote their products; hundreds of thousands of publishers take advantage of our AdSense program to deliver ads relevant to their site content.4

Some of Google’s other products include its email server, Gmail, which currently has over 190 million users worldwide. Google also maintains applications like Picasa, a photo storing and editing application, and Blogger, a way to share information online. With Google Checkout and Google Talk, the company is rapidly changing the way many do business online by enhancing the ability to communicate through different medium. Additionally, Google Earth allows users to see satellite images allover the world and played an integral part in the relief efforts of the earthquake in Haiti by pinpointing devastated areas.

3 CNN Money. 7 February 2011. http://money.cnn.com/magazines/fortune/bestcompanies/2011/snapshots/4.html

4Google Corporate. 2011. http://www.google.com/corporate/index.html

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In 2006 Google acquired the online video site YouTube for $1.65 billion in stock. YouTube, which was founded in February 2005, has quickly become the most well known online video site. More than 100 million videos, many of which are short videos created by the site's users, are downloaded a day on the site.5

Financial Performance

At the end of 2010, Google, Inc. declared revenues of $29.32 billion, with a net income of $8.50B resulting in an operating margin of 35.41%. From 2010 to the beginning of 2011, Google’s stock price (GOOG) has ranged from $433.63-642.96 with a one-year return of 16.175% according to Bloomberg.com. As of mid-February 2011, stock was priced at around $625, GOOG has continued on a positive growth trend as seen in Exhibit 1 and Exhibit 2.

Challenges Facing Google

As Google continues to grow internationally, considerations must be made to accommodate the challenges faced with a global, online presence in multiple countries. Aside from the ongoing technology changes that are inevitable in the technology market, Google needs to be well prepared when entering new markets. With offices in dozens of countries, by maintaining more than 150 Internet domains in more than 110 languages, and serving more than half of their results to people living outside the United States, Google is bound to run into issues regarding privacy, security and freedom of speech.6 These issues have come to the forefront as Google has approached the online market in China.

China Background

The first dynasty of China dates back to 1600 B.C. and dynasties continued until 1912.7

Prior to 1900, China had shown success internationally through their growth in astronomy, mathematics, engineering and medicine. However, by 1900 they had started to grow weak compared to Britain, France and Japan. China began to experience economic difficulty and discontent. Therefore in 1912, in order to avoid a civil war, China transformed to a Constitutional Republic. In the early years of the Republic, the Communist Party formed; however, they lost power to the Kuomintang’s under the dictatorship of Chiang Kai-shek. In 1937, Japan invaded China and the two Chinese parties presented a united front to defeat Japan in 1945 in World War II. However, after World War II ended, the two parties broke into a civil war, which led to the resignation of Chiang and a victory by the Communists.

5 LaMonica, P. R. 9 October 2006. CNN Money. http://money.cnn.com/2006/10/09/technology/googleyoutube_deal 6 Times, T. N. 30 November 2010. Google Inc. http://topics.nytimes.com/top/news/business/companies/google_inc/index.html 7 History of China. 2007. http://www.history-of-china.com/qing-dynasty/

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In 1949, the People’s Republic of China was established and the new government worked to fix problems such as inflation and foreign relations.8 These changes did not last long and chaos broke out for nearly a decade. During this time the government controlled what information was relayed to the people of China. The resulting lack of information essentially isolated China from the rest of the world.9 Eventually new leadership took over and great improvements in the standard of living were made. These improvements were deemed a primary policy objective and the opening of the Chinese economy was deemed of central importance.10

Chinese Politics

The current Chinese government functions under the leadership of the Communist party.11 The power of the country belongs to the people who participate in elections for the local congresses. These members then elect the 3,000 delegates to the National People’s Congress. The National People’s Congress elect the rest of the state structure including President, Premier, Vice President and Chair of the Central Military Commission as well as the President of the Supreme People’s Court and the Procurator-General of the Supreme People’s Procuratorate.12

The Chinese government follows a Constitution that was written in 1982. The Constitution states that citizens of China have freedom of speech, press and assembly.13 However, this has not prevented the Chinese government from continually controlling what information citizens can obtain. The Chinese has done this through a variety of rules. One of these rules is the monitoring of the Internet by China’s Ministry of Public Security. The Chinese government blocks their citizens from seeing some overseas news reports and searching various words in search engines. The purpose of this is to keep China separate from the rest of the world. Over time, many of these rules have become less strict.

China Demographics

China has approximately 1.3 billion people living on the mainland making it the most populous country. The population is expected to continue to grow for the next few decades with the average birth rate being 1.7 children to every woman that gives birth. With 91 percent of the Chinese population Han, the government has tried to reduce the population by instating the One Child Policy for all Han Chinese living in urban areas. The most common languages spoken in China are Standard Chinese (Mandarin), Yue

8 Discovering China. 1999. Oracle ThinkQuest. http://library.thinkquest.org/26469/index2.html 9 Ickovic, Caleb, Cristina Lane and Martha Jones. 12 April 2006. “Censorship in China”. Duke University. http://www.duke.edu/~faq/eagate/reports/Censorship_In_China-Report.pdf 10 History of China. 2004. History of Nations. http://www.historyofnations.net/asia/china.html 11 China’s Political System. 2006. China Internet Information Center. http://www.china.org.cn/features/political/2006-11/08/content_1029034.htm 12 Chiu, Lisa. 2011. “China Basics”. http://chineseculture.about.com/od/thechinesegovernment/u/IntrotoChina.htm 13 Rosenberg, Matt. 2011. “China Population: The Population Growth of the World’s Largest Country”. http://geography.about.com/od/populationgeography/a/chinapopulation.htm

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(Cantonese), Wu (Shanghaiese), Minbei (Fuzhou), Minnan (Hokkien-Taiwanese), Xiang, Gan, and Hakka dialects.14 The religions of China include Confucianism, Daoism, Buddhism, Islam and Christianity.15

Chinese Economy

China is currently the second largest economy in the world having a 2010 GDP of $5.8786 trillion. China is estimated to become the largest economy in the next twenty-five years.16 China’s economy is expected to continue to grow due to an increase in minimum wage and therefore an increase in household spending.17 China’s economy began to grow substantially when barriers where removed to international trade in the late 1970s. Since then, the Chinese economy has grown tenfold. The current Chinese economy is 43% agricultural, 25% industrial and 32% service.18 China continues to compete internationally as their goods are substantially cheaper to export than other countries making it more beneficial for other countries to conduct business with China.19

The Internet Search Engine and Advertising Industry in China

Porter’s Five Forces Industry Analysis

As one would expect, doing business in the Chinese markets is vastly different from doing so in many other countries around the world. Doing business in China has become easier in the past five years. In terms of ease of doing business, China is currently ranked 79th out of 183 economies. (See Exhibit 3) However, starting a business is China is more difficult than starting a business in most other countries. Additional layers of complexity in the Chinese Internet search engine and advertising industry require special consideration. Michael Porter’s Five Forces of Competition provides a conceptual framework to better understand the industry context in which these firms operate. (See Exhibit 4)

14 Chinese Government’s Official Web Portal. 2006. http://www.gov.cn/english/2005-08/05/content_20813.htm 15 Whyte, Bob. 2001. “Religion in China”. Society for Anglo-Chinese Understanding. http://www.sacu.org/religion.html 16 McCurry, Justin and Julia Kollewe. 14 February 2011. “China overtakes Japan as world’s second-largest economy”. The Guardian. http://www.guardian.co.uk/business/2011/feb/14/china-second-largest-economy 17 Shasha, Deng. 15 February 2011. “ABAC: Chinese economy expects strong growth due to increased inflation pressure”. Xinhua News Agency. http://news.xinhuanet.com/english2010/china/2011-02/15/c_13733602.htm 18 Briney, Amanda. 2011. “The Geography and Modern History of China”. http://geography.about.com/od/chinamaps/a/china.htm 19 “Doing Business 2011: China”. 2011. World Bank. http://www.doingbusiness.org/~/media/FPDKM/Doing%20Business/Documents/Profiles/Country/DB11/CHN.pdf 20 Ibid.

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Potential Entrants – Extremely Low

Three major elements must be taken into consideration when assessing the barriers at entry. First, The Chinese government follows a Constitution, which was written in 1982. The Chinese Constitution states that citizens have freedom of speech, press and assembly.7 However, this has not prevented the Chinese government from continually controlling what information citizens can obtain. The Chinese have done this through a variety of rules. One of these rules is the monitoring of the Internet by China’s Ministry of Public Security. The Chinese government blocks their citizens from seeing some overseas news reports and searching various words in search engines. The purpose of this is to keep China separate from the rest of the world. These rules have gradually become less strict but require constant relationship maintenance nonetheless.3 Second, starting a business in China is more difficult than in most other countries. There are 14 procedures that must be followed, and it takes an average of 38 days. Getting a loan in China is getting easier; however, they are ranked 65 th compared to other countries. They are expected to move up as their economy continues to grow. China is known for enforcing contracts in business as they were ranked 15 th in the world for enforcement of contracts. 13

Third, to run a competitive and successful online search engine or advertising firm in China requires a highly skilled and well-balanced assortment of professionals: well-connected businessmen, highly innovative computer programmers, software engineers etc. Although there are examples (Google and Apple) of mega-companies starting out of the garage, the ability to compete with existing businesses in this area is not the norm, as finding the qualified professional mix is both costly and difficult. Furthermore, current competitors have thousands of servers deployed in locations all over the world and have accumulated many years worth of data about user habits. A new entrant would need to provide better search results at very fast speeds to compete in this highly competitive market.

Bargaining Power of Suppliers – Low

All industries require inputs – which may include labor, components, and other raw materials. This requirement leads to buyer-supplier relationships between the industry and the firms that provide the inputs necessary to create their products. Suppliers, if powerful, can exert significant influence on a producing industry, such as selling inputs at a high price to capture some of the industry’s profits, establishing high switching costs etc. In terms of Internet search engines backward integration with webmasters is a very credible threat, which lowers the power of such suppliers. In advertising, the ad-making partner and ad-receiving individual are usually both customers of the firm and therefore supplier power is not a concern.

Bargaining Power of Consumers – Low-Medium

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The vast majority of revenues in this industry are derived from advertising. However, dispersion of revenues across consumers as well as concentration of revenue generation from network partners plays an important role in bargaining power. Dispersion means that no single buyer has a controlling interest. Although much like in the United States, many Chinese advertisers bid on keywords, popular keywords can also be sold for a higher value-per-click. This distribution attracts both large companies and small enterprises, keeping buyer power low.

Substitutes – None-Very low

At this juncture in history, there is no real substitute for search engines. The Internet is the primary mode chosen by people all over the world to request and retrieve information. Information can be organized in different ways including categories and sorted by date, but search engines provide tools to complete these tasks as well as conduct searches. A substitute product may be invented in the future, but there are no obvious substitutes to organizing information on the Internet.

Rivalry - Medium and Trending Upward

According to Porter’s theory, the intensity of the other forces at play will greatly affect the level of competition among existing players in the industry. In the sector there are currently a handful of major players of the size and depth of service that gainfully compete in China. (See Exhibit 5) As expected, comparable companies in the sector are large cap and reap sizable profit margins. (See Exhibit 6). However, Baidu is arguably the market leader because local companies may have a better grasp on the growth and development of the Chinese web resulting in crawls, indexes and better than Google – the distant second ranked engine. With few new kids on the block to shake up the establishment, the intensity of competition can easily be gauged by the volatility of market share among existing competitors.

Google in China

The Great Firewall of China

One of the most interesting facts involving the case of Google and China is its cross-cultural aspect. Google is an American corporation that crossed the ocean to do business in a different environment. Although globalization brought standardization in business practices, countries still have their peculiarities and laws may differ considerably. When the laws of the organization’s home country differ from those of the host country, there are no clear guidelines on how the organization should behave.

As an independent country, China is sovereign and self-governed. People are entitled to set their own laws and decide how to build their institutions. On the other hand, there are universal ideas of justice and fairness that are present regardless of political borders. Once Google went to China, unique features of the host country clashed with

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the company’s corporate culture. However, Google could not ignore a country with over 1 billion people and a fast growing economy. China could provide a huge boost to Google's bottom line as growth in Google businesses steady in the U.S. in and Europe.

Google’s rocky experience in China started in 2000 when Google began offering a Chinese language version of Google.com. The website was slow, unreliable and often inaccessible. These problems were due to extensive filtering performed by China’s licensed Internet service providers. For two weeks in the fall of 2002 and in December of 2003, Google.com became completely unavailable in China. Once the service was restored, the company claimed it had stood by its principles and had not subjected itself to Chinese censorship laws and regulations.

In July 2005, Kai-Fu Lee, a former Microsoft executive, joined Google as a global vice-president in charge of China and announced a plan to establish a research center in China. In January 2006, Google.cn was launched under widespread criticism because the company agreed to block certain websites in return for being able to run a local Chinese service. Additionally, Google promised to inform Chinese users when search results are censored and not to maintain any services that involve personal or confidential data, such as Gmail or Blogger, on the mainland. The unfiltered Chinese-language Google.com remained available.20

The widespread criticism against Google’s decision to run a local Chinese service is due to the disparity between China’s approach, and lack thereof, for human rights and Google’s corporate culture. China is widely known for monitoring the Internet, censoring speech and persecuting political dissents within its borders. This proactive limiting of information conflicts with Google’s motto, “do no evil”, and their corporate philosophy that “you can make money without doing evil.”21 Being based in the United States, Google is immersed in a culture of free speech—a right enshrined in the American Constitution and extremely valued by American citizens. By doing business in China, some critics accused Google of going against its corporate culture and being an accomplice to human rights violations. As an Internet search technology corporation, whose stated mission is to “organize the world's information and make it universally accessible and useful," Google found itself in a difficult situation.22 How could they explain its decision to found Google China and start censoring search results?

Google executives seemed to be aware of the ethical issues regarding the business move. According to Google Senior Policy Counsel Andrew McLaughlin, there were debates “whether entering the Chinese market at this point in history could be consistent with [Google’s] mission and values.”23 After consideration, Google found a moral justification for their actions and called it “evil scale”. “We actually did an evil

20Google China. 12 February 2011. Wikipedia. http://en.wikipedia.org/wiki/Google_China 21 Our Philosophy. 2011. Google. http://www.google.com/corporate/tenthings.html 21

2222 Ibid.

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scale and decided [that] not to serve at all was [a] worse evil,” said CEO Eric Schmidt.24 Since the Chinese government did not provide a list of words and websites that must be censored, Google would have some flexibility in deciding what to censor and what not to censor and possibly push the boundaries.

In June 2006, Google.com was again blocked in China while Google.cn continued to work. In April 2007, Schmidt gave an upbeat assessment of Google’s outlook in China, saying that that the company was on track to lead the country’s Internet market in spite of challenges including censorship issues and fierce competition from Baidu.com, its larger home-grown rival. It was not until September 2007 that Google.cn received a license from the Chinese government that officially allowed it to operate its website in China – more than 18 months after it set up Google.cn.

Controversies surrounding Google in China did not cease to appear. In February 2008, Guo Quan, a Chinese human rights activist, threatened to sue Yahoo and Google for excising his name from its local search results. Mr. Guo wrote that “to make money, Google has become a servile Pekinese dog wagging its tail at the heels of the Chinese Communists”. For his remarks, Mr. Guo was sentenced to 10 years in jail in 2009. In January and April of 2009, Chinese regulators criticized Google for making pornography available through its search engine. Later in June, Chinese regulators announced that they would “punish” Google China for failing to remove pornographic content from its search results. The punishment included a suspension of its ability to search foreign websites and its associative-word search function – a move that drove Google users away to rival Baidu.25 In the same month, Google’s global website was once again blocked in China and there were many reports in official media accusing Google of allowing pornography content.

In the second quarter of 2009, China Mobile launched customized smartphones based on Google’s Android operating system26. Although recent reports suggest that the Android is on a trajectory to become the dominant mobile operating system in China, this may not be a victory for Google. The Android is partly based on Linux open source software. It is possible for handset makers and mobile carriers to replace the parts that are controlled exclusively by Google and integrate their own alternatives—thus allowing them to adopt Android without having to make any concessions to the American search giant.27

23 “A History of Google in China”. 9 July 2010. Financial Times. http://www.ft.com/cms/s/0/faf86fbc-0009-11df-8626-00144feabdc0.html#axzz1Dt8mIdgv 24 Ibid.25 “China: Baidu’s Gain Tests Google” 1 February 2011. Financial Times. http://blogs.ft.com/beyondbrics/2011/02/01/china-baidus-gain-tests-google/ 26 China Mobile is the most valuable telecommunications company in the world. At the end of 2010, it had 584 million customers. 27 Paul, Ryan. July 2010. “Android’s Ascent in China might not elevate Google”. ars technica. http://arstechnica.com/gadgets/news/2010/07/androids-ascent-in-china-is-not-elevating-google.ars

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The last controversy in 2009 involved copyrights issues. A Chinese copyrights group demanded talks with Google over compensation for Chinese authors who had had their books scanned into the company’s electronic library. In December, a Chinese court agrees to hear a case brought by Mian Mian, a novelist, against Google for scanning her works, posing a fresh challenge to the company’s digital books project.28

Challenging the System

Soon after the copyright case, Google entered its worst period in Chinese soil. On January 12, 2010, Google posted in its Official Google Blog an entry entitled “A New Approach to China.” Google stated that it had suffered a sophisticated cyber attack originated within Chinese borders and that the Gmail accounts of dozens of human rights activists connected with China had been violated. As a consequence of that episode, Google took a hard stance against the Chinese government and on March 22 it had stopped censoring its search services—Google Search, Google News and Google Images—on Google.cn. Google stock price fell for the two days after the announcement and market analysts began to question what would be the long-term consequences of the decision. (See Exhibit 7)

Schmidt was very careful not to shut the door completely in China and, most important, not to lose “face.” Schmidt said that Google aimed to stay in China even if it was forced to close down its local search services as the company has a range of other business opportunities on the mainland. In a recent interview, Schmidt stated, “we love China and the Chinese people. This is not about them. It's about our unwillingness to participate in censorship.”29 The stakes were high and Google’s management would have to come up with a convincing strategy to deal with the problem. While some human rights activists and government officials were praising Google’s decision to stop censoring search results, business analysts asked if Google had chosen to engage in a “quixotic” fight for human rights in China rather then focusing strictly on business opportunities.

After March 2010, all search requests on Google.cn were being redirected to Google’s Hong Kong arm and were not being censored. The Chinese government started to threaten to shut Google down by the end of June. Google then placed a voluntary link to its Hong Kong site on the Google.cn home page, rather than automatically redirecting users, in a bid to appease the authorities ahead of a license renewal due at the end of the month. Surprisingly, the Chinese government renewed Google’s license to operate in the country, appearing to accept a compromise offered by the United States based search engine over Internet censorship.

The Implications of the Pull-Out and 2011 Perspectives

28 Lau, Justine. 9 July 2010. “A History of Google in China”. Financial Times. http://www.ft.com/cms/s/0/faf86fbc-0009-11df-8626-00144feabdc0.html#axzz1Dt8mIdgv 29 Zakaria, Fareed. 15 January 2010. “A Conversation with Google Chairman and CEO”. Newsweek. http://www.newsweek.com/2010/01/14/a-conversation-with-google-s-chairman-andceo.html

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Google lost market share in China after the clash with the government. According to Down Jones Newswires, in 2010, Baidu's share of China's online search market rose to 75.5% in the fourth quarter from 73% in the third quarter, while Google's share slipped two percentage points to 19.6%.30 (See Exhibit 8) Analysts expect Google to give up more ground in 2011, and many think that the return of Google's China market share to the level seen before the incident is very unlikely.

The lost business in China does not reflect Google’s global performance. As noted earlier, Google reported profits of $8.5 billion, a 30 percent jump over 2009 profit. With the impending departure of Schmidt, a strong proponent of doing business in China, market analysts wondered if Google would distance itself from China. But just the opposite might happen. In an interview at the end of January, Schmidt indicated his enthusiasm to step up the company’s China game and affirmed that “between the three of us [Larry Page, Sergey Brin] I’ve always been the person who believe the most in expanding in China…over time, especially in my new role, I can try to get more [of] Google… into China.”31

Google is already changing focus in China. The company is targeting Chinese firms to advertise on its dominant overseas search market, a business which already constitutes about half of its China revenues, according to T.R. Harrington, chief executive of search marketing consultant, Darwin Marketing.32

The Moral Conundrum

There is more than commercial gain at stake in Google’s decision to expand into China. Co-founder Sergey Brin was born in the Soviet Union and stated that “having felt that kind of oppression [from authoritarian state], I would never have wanted to compromise in that direction [self-censor].” On the other hand, it is self-evident that while doing business abroad, we need to be responsive to local conditions. Schmidt said, “I think it’s arrogant for us to walk into a country where we are just beginning operations and tell that country how to run itself.”33

In the article Google, Human Rights, and Moral Compromise, George Brenkert argues that business in general might encounter situations where they have to compromise some of their important principles or values in order to protect other ones.34 To illustrate his point, Brenkert uses a metaphor of a son who “is torn between staying home to help

30 Fletcher, Owen and Joan E. Solsman. 31 January 2011. “Baidu Fourth-Quarter Net More than Doubles”. Wall Street Journal. http://online.wsj.com/article/BT-CO-20110131-720213.html 31 Fletcher, Owen. 28 January 2011. “Google’s Schmidt Still Chasing China Ambitions”. Wall Street Journal. http://blogs.wsj.com/chinarealtime/2011/01/28/googles-schmidt-still-chasing-china-ambitions/ 32 “Google Plots New China Growth Plan” 13 January 2011. Reuters. http://www.businessworld.in/bw/2011_01_13_Google_Plots_New_China_Growth_Plan.html 33 Ibid.34 Brenkert, George G. July 2008. “Google, Human Rights, and Moral Compromise”. Journal of Business Ethics Vol. 85.

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his mother during World War II or leaving her to join the French forces.” Whatever the decision is, the son will fail his mother or he will fail his country.

After careful analysis, Brenkert concludes that Google is right to engage in moral compromise and do business in China. He claims that we live in an immoral and imperfect world, and Google could not afford a “moral purity.” Although compelling, Brenkert’s moral compromise is also a slippery slope, and once the door to moral compromise is open, integrity will be at risk. Moreover, a moral compromise can set a dangerous precedent and the ability to bear the pressure for new compromises in the future will be diminished. Another problem with moral compromise is the loss of trust. Those affected by the moral compromise and the public in general will start to doubt the values and principles of the organization. This is seen in Internet’s users increased use not be perfect, but it is not an excuse for us to engage in selfish and destructive behavior.

Recommendations

Google is losing market share in China with its search engine and will likely continue to diminish its market presence with its refusal to censor. At present, the future of China censorship is unknown, but it is recommended that Google continue business within China. This recommendation stems from the consideration of two primary factors: investor confidence, ethics and Guanxi.

Investor confidence must be carefully considered, especially given the extraordinary size of the Chinese market – which rose to 338 million by the end of June 2009. 35 From the share price perspective, a pull-out from the world’s second largest economy would signal to market that the present value of the company’s future cash flows will be smaller than anticipated in the future. While the market does not look favorably upon the current tit-for-tat relationship between Google and the government, the full effect of a complete withdrawal from the company has not likely been captured yet in the share price. Consequently, with a full-scale withdrawal Google can expect to see its expected cash flows, share price and investor confidence plummet. Google should not forgo that its 21.6% stake in this still underdeveloped market in which only 40% of the population is connected to the internet. Although growth in market share may be slower than in other nations owing to regulations and other country characteristics, the upside potential in this two-horse race for new users is extremely attractive.

It is evident that leadership within Google has struggled with the moral conflict of operating their business within a more oppressive country. Google should not fully engage in a full-on moral battle with the Chinese government and its censorship. The debate over censorship in China is not new, and as noted earlier, it is presumptuous of a business to enter a country this powerful and assume its values upon the nation. Censorship is a debate that will certainly take more time to resolve and undoubtedly

35 AFP. 28 July 2009. “Discovery, Baidu launch website” http://www.google.com/hostednews/afp/article/ALeqM5j1ljoTEss5nUHSfKAFxGuQxxXLVA

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require a large role among governing bodies. However, Google can be vocal about its views on the matter given the nature of its business and philosophy.

Moreover, it is understood that censorship does not coincide with the beliefs of Google. Indeed, recent world events (ie Egypt) have demonstrated the vitality of information, and no doubt that censoring would make Google subject to much scrutiny. However, by working under China’s censorship conditions, Google is able to connect millions and afford them many opportunities otherwise impossible. In this situation, it is recommended that complying with China’s censors would be the lesser of two evils. It is better to provide as much connectivity and information as possible to the Chinese people, than none at all.

Finally, Google must consider Guanxi, a core concept that is rooted in thousands of years of Chinese ethics and business. Guanxi literally means “relationships” and is critical to business relationships within China. Google’s decision to defy censorship was damaging to the relationship Google had with the Chinese government and business community. It is imperative that Google seek to bolster and renew its fragile working relationship within China. Without Guanxi, Google cannot operate within China.

Conclusion

While Google has very successful business operations in most of the world, it is clear that special consideration must be taken when operating in China. Having relatively limited resistance thus far, providing services in China present new challenges for Google, particularly with its most prevalent search engine. A thorough study of the market climate and the unique aspects of China demonstrate that many obstacles remain. Yet, it is also evident that Google can play a role in the current and future market, and ethically should continue operating in China.

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Exhibit 1

Yahoo. 17 February 2011. Google Inc. http://finance.yahoo.com/q?s=GOOG

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Exhibit 2

Income Statement

View: Annual Data | Quarterly Data All numbers in thousands

Period Ending Dec 31, 2010 Dec 31, 2009 Dec 31, 2008

Total Revenue 29,321,000   23,651,000   21,795,550  

Cost of Revenue 10,417,000   8,844,000   8,621,506  

Gross Profit 18,904,000   14,807,000   13,174,044  

Operating Expenses

Research Development 3,762,000   2,843,000   2,793,192  

Selling General and Administrative 4,761,000   3,652,000   3,748,883  

Non Recurring -   -   -  

Others -   -   -  

Total Operating Expenses -   -   -  

Operating Income or Loss 10,381,000   8,312,000   6,631,969  

Income from Continuing Operations

Total Other Income/Expenses Net -   -   (778,373)

Earnings Before Interest And Taxes 10,796,000   8,381,000   5,853,596  

Interest Expense -   -   -  

Income Before Tax 10,796,000   8,381,000   5,853,596  

Income Tax Expense 2,291,000   1,861,000   1,626,738  

Minority Interest -   -   -  

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Net Income From Continuing Ops 8,505,000   6,520,000   4,226,858  

Non-recurring Events

Discontinued Operations -   -   -  

Extraordinary Items -   -   -  

Effect Of Accounting Changes -   -   -  

Other Items -   -   -  

Net Income 8,505,000   6,520,000   4,226,858  

Preferred Stock And Other Adjustments -   -   -  

Net Income Applicable To Common Shares

8,505,000   6,520,000   4,226,858  

Yahoo. 17 February 2011. Google Inc. http://finance.yahoo.com/q?s=GOOG

Exhibit 3

“Doing Business 2011: China”. 2011. World Bank. http://www.doingbusiness.org/~/media/FPDKM/ Doing%20Business/Documents/Profiles/Country/DB11/CHN.pdf

Exhibit 4

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Michael Porters’ Five Forces of Competition

Exhibit 5COMPARABLE PUBLIC COMPANIES DESCRIPTIONS

Google Inc. maintains an index of Websites and other online content, and makes this information freely available through its search engine to anyone with an Internet connection. Its automated search technology helps people obtain nearly instant access to relevant information from its online index. It generates revenue primarily by delivering online advertising. Businesses use its AdWords program to promote their products and services with targeted advertising. In addition, the thousands of third-party Websites that comprise the Google Network use its AdSense program to deliver relevant ads that generate revenue and enhance the user experience. In September 2009, the Company acquired ReCAPTCHA Inc., a spin-off of Carnegie Mellon University's Computer Science Department. In February 2010, it acquired Aardvark. In February 2010, it acquired On2 Technologies, Inc. In August 2010, it acquired Slide, a social technology company. In August 2010, it acquired Angstro.

Baidu, Inc. (Baidu) is a Chinese-language Internet search provider. The Company conducts its operations in China principally through Baidu Online Network Technology (Beijing) Co., Ltd., its wholly owned subsidiary in Beijing, China. It also conducts its operations in China through Baidu Netcom Science Technology Co., Ltd., which holds the licenses and approvals necessary to operate the Company’s Websites and provide

Threat of New Entrants

Threat of New Entrants

Bargaining Power of Suppliers

Bargaining Power of Suppliers

Threat of Substitute

Products or Services

Threat of Substitute

Products or Services

Bargaining Power of Buyers

Bargaining Power of Buyers

Rivalry Among Existing

Competitors

Rivalry Among Existing

Competitors

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online advertising services. The Company has launched a Japanese search service at www.baidu.jp, run by Baidu Japan. Its Japanese search services enable users to find relevant information online, including Web pages, images, multimedia files and blogs, through links provided on its Websites. Baidu offers a Chinese-language search platform on its Website www.baidu.com. It provides Chinese-language Internet search services to enable users to find relevant information online, including Web pages, news, images and multimedia files, through links provided on its Websites.

Sohu.com Inc. (Sohu) is an Internet company in China, providing Chinese with news, information, entertainment and communication. The Company’s business consists of advertising, online game and wireless business. The Company’s advertising business, including brand advertising services and sponsored search services, offers various products and services to its users (such as free-of-charge content, interactive community, integration search and other competitive Internet services), and provides advertising services to advertisers on its matrices of Chinese language Web properties consisting of www.sohu.com, a mass portal and online media destination; www.17173.com, a games information portal; www.focus.cn, a real estate Website; www.chinaren.com, an online alumni club, and www.sogou.com, an interactive search engine. The Company operates two massively multi-player online role-playing games (MMORPG games), Tian Long Ba Bu (TLBB) and Blade Online (BO).

SINA Corporation (SINA) is an online media company and MVAS provider in the People’s Republic of China (PRC) and the global Chinese communities. The Company provides services through five business lines, including SINA.com (online news and content), SINA Mobile (MVAS), SINA Community (Web 2.0 and social networking-based services and games), SINA.net (search and enterprise services), and SINA E-Commerce (online shopping). These business lines provide an array of services, including region-focused online portals, MVAS, social networking service (SNS), such as micro-blog and album, blog, audio and video streaming, album, online games, e-mail, search, classified listings, fee-based services, e-commerce and enterprise e-solutions.

NetEase.com, Inc., through it s subsidiaries and contracts with its affiliates Guangzhou NetEase, Guangyitong Advertising and Shanghai EaseNet, operates an interactive online community in China and is a provider of Chinese language content and services through its online games, Internet portal and wireless value-added services businesses. The Company conducts its business in People’s Republic of China through its subsidiaries, NetEase Information Technology (Beijing) Co., Ltd. (NetEase Beijing), Guangzhou NetEase Interactive Entertainment Limited (Guangzhou Interactive), Guangzhou Boguan Telecommunication Limited (Boguan), NetEase (Hangzhou)

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Network Co., Ltd. (NetEase Hangzhou), Guangzhou Information Technology and NetEase Youdao Information Technology (Beijing) Limited (Youdao Information).

Source: Yahoo! Finance

Exhibit 6

Comparable Public CompaniesChinese Internet Search and Advertising Market

  Google Baidu SOHU SINA NTES

Valuation Multiples  

Enterprise Value/Revenue (ttm)3: 5.9x 35.8x 4.0x 11.9x 5.7x

Enterprise Value/EBITDA (ttm)3: 14.7x 66.2x 9.7x 53.3x 11.3x

Valuation Measures Market Cap (intraday)5: 202.58B 44.19B 3.18B 5.24B 5.78B

Enterprise Value (Feb 20, 2011)3: 173.44B 42.96B 2.47B 4.64B 4.45B

Price/Sales (ttm): 6.86 37.3 5.26 13.81 7.44

Price/Book (mrq): 4.34 35.12 4.05 4.06 4.23

Profitability Profit Margin (ttm): 29.01% 44.54% 24.26% 115.90% 40.89%

Operating Margin (ttm): 35.41% 50.02% 37.62% 16.83% 46.04%

Management Effectiveness Return on Assets (ttm): 13.19% 28.76% 14.30% 3.23% 15.83%

Return on Equity (ttm): 20.68% 53.58% 23.99% 46.18% 26.11%

Sources: SEC.gov, Yahoo! Finance

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Exhibit 7

Date Open Close Date Open Close31-Mar-10 565.05 567.12 19-Mar-10 566.23 56030-Mar-10 562.83 566.71 18-Mar-10 564.72 566.429-Mar-10 563 562.45 17-Mar-10 568.3 565.5626-Mar-10 565.27 562.69 16-Mar-10 561.83 565.225-Mar-10 559.02 562.88 15-Mar-10 566.68 563.1824-Mar-10 545.51 557.33 12-Mar-10 588.14 579.5423-Mar-10 557.04 549 11-Mar-10 574.26 581.1422-Mar-10 556.11 557.5 10-Mar-10 563.76 576.45Source: Google Finance

Table 1. Google Historical Stock Price

Google Finance. 2011. http://www.google.com/finance/historical?q=NASDAQ%3AGOOG&start= 0&num=30

Exhibit 8

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Analysys International. 2010. Analysys. http://english.analysys.com.cn/article.php?aid=92795

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