Case written by MBA Student
MBA 8111
S. Castleberry
11/15/06
Business or Personal?
Yahoo!’s Expansion into China
Forward
“Over the years, I have held and chaired 25 hearings on human rights abuses in China, and while China’s economy has improved somewhat, the human rights situation remains abysmal. So-called ‘‘economic reform’’ has utterly failed to result in the protection of freedom of speech, expression, or assembly. The Laogai system of forced labor camps is still full to capacity, with an estimated 6 million people; the Chinese Government which permits a horrifying trade in human organs continues unabated; the PRC’s draconian, one-child-per-couple policy has made brothers and sisters illegal and coerced abortion commonplace; and political and religious dissidents are systematically persecuted and tortured.
Similarly, while the Internet has opened up commercial opportunities and provided access to vast amounts of information for people the world over, the Internet has also become a malicious tool, a cyber-sledgehammer of repression of the Government of the People’s Republic of China. As soon as the promise of the Internet began to be fulfilled, when brave Chinese began to e-mail each other around the world about human rights issues and corruption by government leaders, the party cracked down. To date, an estimated 49 cyber-dissidents and some 32 journalists have been imprisoned by the PRC for merely posting information on the Internet critical of the regime. And, frankly, that is likely to be only the tip of the iceberg.”
House of Representatives Subcommittee meeting entitled: THE INTERNET IN CHINA: A TOOL FOR FREEDOM OR SUPPRESSION? Feb. 15, 2006
Speaker: Christopher H. Smith of New Jersey [Chairman of the Subcommittee on Africa, Global Human Rights and International Operations].
Background Information
Yahoo! was founded by two Stanford University doctoral students named David Filo and Jerry Yang to keep track of their personal interests on the internet. The Web site eventually received the moniker “Yahoo!,” an acronym for "Yet Another Hierarchical Officious Oracle." Yahoo! was born in 1994 and incorporated in 1995 soon after the torrent of new Yahoo’s resulted in the first “million hit day” for the start-up search engine. Yahoo! rapidly evolved into a global brand that has changed the way people communicate with each other, find and access information, and purchase things.[1]
By 2002, Yahoo! was the internet’s most widely used search engine.[2] Just a few years later however, Yahoo! had fallen to number two behind its primary competitor, Google. Yahoo! has experienced massive growth since its inception, reflected in the $35 billion total market value that Yahoo boasted in 2006[3]. Despite this, considerable pressure has been placed on Terry Semel, (Chairman and CEO of Yahoo! since 2001) to regain the market share he held in 2002 and to bring positive ROI to shareholders who have recently endured considerable losses. These losses culminated in a -35% pounding through the first three quarters of 2006[4].
Yahoo! has been considering a number of options for turning its momentum around including; strategic buyouts of companies like America Online, selling out, possibly to Microsoft,[5] and/or merging with a synergetic company like eBay.[6] However, for Semel, one of the most attractive venues for closing the gap with Google is in the burgeoning Chinese market.
Expansion into the Chinese Market
I. Attractiveness:
The most sought after market for internet service providers (ISP’s) is China [Note: Yahoo! could be classified a number of different ways, but for this report we shall refer to Yahoo! and similar internet search companies generally as “ISP’s”]. There were 12 million Chinese users in 2000 and 80 million by mid-2004[7]. Business Week projects that by the end of 2006 China will surpass the US market with about 153 million internet users.[8] Moreover, Chinese users may be more lucrative on a per capita basis than western users. Chinese users average 15.9 hours per week, while Yahoo!, one of the most popular internet sites in the U.S., can only get its users to stick around for about one hour per week (216.5 minutes per month according to ComScore Media Metrix). That's 1.765 billion hours per week online in China, compared with 129 million hours per week online in the U.S.[9]
Yahoo! embraced the increasingly attractive Chinese market when, in 2003, it acquired “3721” a Chinese search engine company. In June of 2004, it unveiled its own search engine tailored for the Chinese market called “Yisou.” Around the same time Google made its move into the Chinese market by investing in a Chinese search engine called “Baidu.”
II. Concerns
Despite encouraging economic growth indicators there are a number of concerns that ISP’s operating in China are faced with. The human rights situation and Yahoo!’s perceived complacency therein, has become the premier issues confounding the company’s efforts to expand in China. Here is what The US Dept. of State has to say about human rights in China…
“The People's Republic of China (PRC) is an authoritarian state in which the Chinese Communist Party (CCP) is the paramount source of power. At the national and regional levels, Party members hold almost all top Government, police, and military positions. Ultimate authority rests with members of the Politburo. Leaders stress the need to maintain stability and social order and are committed to perpetuating the rule of the CCP and its hierarchy. Citizens lack both the freedom peacefully to express opposition to the Party-led political system and the right to change their national leaders or form of government.
The Government's human rights record throughout the year remained poor and the Government continued to commit numerous and serious abuses. Authorities still were quick to suppress any person or group, whether religious, political, or social, that they perceived to be a threat to government power, or to national stability, and citizens who sought to express openly dissenting political and religious views continued to live in an environment filled with repression.[10]”
The report goes on to describe the repressive politics of China in stark terms; frequent reports of government sanctioned torture, forced abortion, forced labor camps, illicit human organs trade, arbitrary arrest, religious persecution, arbitrary death sentences, corrupt judicial proceedings directed by the CCP, domestic spying on perceived dissidents… The list goes on.
There is no doubt that China’s economy is growing at a staggering rate, creating attractive opportunities for thousands of US firms. However, to take advantage of this opportunity companies must successfully navigate the highly regulated, often corrupt and uncertain environment which generally characterizes business conditions in China. Nearly all international organizations face a vexing dilemma when expanding abroad: The degree to which the overseas operation will mirror the home country operation versus the degree to which it will adhere to local business customs and social mores.
Most organizations draft a mission statement which lays out core values to use as a guide when faced with difficult decisions that may challenge those core beliefs. The following is an excerpt from Yahoo!’s corporate mission statement…
“Our mission is to be the most essential global Internet service for consumers and businesses. How we pursue that mission is influenced by a set of core values - the standards that guide interactions with fellow Yahoos, the principles that direct how we service our customers, the ideals that drive what we do and how we do it… We are committed to winning with integrity. We know leadership is hard won and should never be taken for granted… We respect our customers above all else and never forget that they come to us by choice. We share a personal responsibility to maintain our customers' loyalty and trust.[11]”
China has been universally denounced by human rights watch groups as an authoritarian state. However, for US businesses, success in China can often hinge on government connections and cultivating a relationship of mutual good will with the CCP. In China’s highly regulated economy controlled by authoritarian elites, fortunes can come and go easily at the whim of CCP elites with no legal or political recourse available to the losers. However, because ISP’s have access to critical information, acquiring the good will of the CCP often involves not only complacency toward government oppression, but active participation in the effort. Pursuant to its policy of limiting the “production, posting or disseminating of pernicious information that may jeopardize state security and disrupt social stability, contravene laws and regulations and spread superstition and obscenity,[12]” China requires ISP’s that operate in China to submit to strict oversight by, and obedience to, the CCP.
Internet Censorship
Internet censorship in China is overseen by the Ministry of Information Industry. Physical access to the internet is provided by nine state-licensed Internet Access Providers (IAP’s). Each of these has a connection to the foreign internet backbone. IAP’s are the equivalent of an internet wholesaler. ISP’s buy internet access form the IAP’s and retail that access to the end users[13].
China’s internet censorship system is the most sophisticated in the world, and uses numerous techniques simultaneously to minimize Chinese citizens’ exposure to topics the CCP sees as threatening to its rule or as impure[14]. The system involves numerous state agencies and tens of thousands of public and private personnel. It censors a wide variety of content, including Web pages, Web logs, on-line discussion forums, university bulletin board systems, and e-mail messages.[15] A few of the topics known to be censored include; opposition political groups, independence movements, the Falun Gong spiritual movement, the Dalai Lama, and the Tiananmen Square Massacre, but there are many more. China’s system blocks virtually all BBC content and much CNN content online[16].
China’s censorship effort implements both hard and soft techniques for limiting access to content. Hard techniques include routers that disrupt access to sensitive websites, software that detects key words and prevents user connections to these sources, and programs to block internet discussion board and chat room postings.[17] Soft methods includes tactics like burdensome licensing requirements (every internet user in the PRC must be licensed through the state) and dual responsibility for items posted online (two registered users must both agree to be responsible for posted content).[18]
The final leg of the PRC censorship effort includes creating tangible disincentives for its citizens to attempt to circumvent the censorship effort or to post or transmit “pernicious” information to their own websites already inside the system. For help in censoring incoming information the Chinese government tries to enlist the ISP’s, but it can achieve most of its goals at the IAP level and through the use of soft methods. However, the ISP information is useful for creating person-specific disincentives to disobeying internet laws and for tracking the activities of perceived dissidents. It is to this end that the PRC seeks to obtain various types of individual internet usage information. To help in identifying and prosecuting citizens who violate internet laws.
The PRC and Yahoo: A Relationship Develops
When Yahoo! expanded into China it was asked by the PRC to sign the “Public Pledge of Self-Regulation and Professional Ethics for China Internet Industry.” The pledge states that the goal of its signers should be to “establish a self-regulating mechanism for China's internet industry, improve the conduct of internet industry participants, and promote and ensure the sound development of the internet industry consistent with the law.”[19] Yahoo! signed the pledge in August of 2002. Human Rights Watch Executive Director Kenneth Roth argued that by signing the pledge Yahoo! would “switch from being an information gateway to an information gatekeeper.”[20] Yahoo! associate senior counsel Greg Wrenn argued that “the restrictions on content contained in the pledge impose no greater obligation than already exists in laws in China.”[21]
No other American-based ISP’s are known to have signed the pledge, but they still operate within the Chinese law, so the difference in their actual service may not be discernable. Opponents of Yahoo!’s actions argue that by signing the pledge they coddle the CCP and legitimize their oppressive policies. They accuse Yahoo! of developing a cozy relationship with an oppressive regime in exchange for economic advantage.
Shi Tao
Just how cozy that relationship had become was not fully evident until a relatively unknown, innocuous journalist named Shi Tao was arrested by PRC Police officers and placed in jail. Shi had long been opposed to CCP rule. As a university student he took part in the 1989 Beijing demonstrations which would eventually culminate in the Tiananmen Square Massacre. Shi further distanced himself from the CCP when he converted to Catholicism in 1998.[22] After college he became a journalist and wrote a number of critical articles which antagonized the CCP, but had so far not prompted a harsh government response.
On April 20, 2004 the CCP Central Propaganda Bureau called a meeting of all local journalists. The bureau expressed concern that the upcoming anniversary of the Tiananmen Square Massacre might prompt additional protests and social destabilization. The Bureau ordered the journalists not to disseminate any inflammatory material that might further destabilize the situation. That evening Shi used his Yahoo! e-mail account to contact the New York-based democracy forum website. In the email Shi described the content of the meeting with the Central Propaganda Bureau. Shi used a pseudonym and a fake email account, but the Chinese filtering system was able to identify him anyway.
Shi was detained on November 24, 2004 when police came to his house, placed a hood over his head, and brought him to jail. On April 27, 2005 Shi Tao was sentenced to 10 years in prison for "illegally providing state secrets to foreign entities"[23] (the Central Propaganda Bureau meeting was considered a state secret).
Yahoo!’s Role
After the trial, the case was reviewed by Reporters without Borders an organization which advocates for the rights and safety of journalists around the world. In the court papers they saw that the primary piece of evidence against Shi Tao was his Yahoo! email account history. They soon published an article criticizing Yahoo! for what they called “collaboration in Chinese government abuses”.[24] Various human rights and news organizations soon picked up the story. Amnesty International (AI) has since taken a leading role in the fight to free Shi Tao and stop Yahoo! and from continuing to provide user information to the PRC. To this end, AI drafted a letter to Yahoo! urging the company to: