Thursday, July 12, 2012

Eric Schmidt's Comments on China: The Risks for Google

In the previous post, I discussed recent comments made by U.S. Secretary of State Hillary Clinton and Google Chairman Eric Schmidt that link freedom of expression to economic strength. One could worry that Schmidt's claims, such as those about the inevitability of the "political and social liberalization that will fundamentally change the nature of the Chinese government's relationship to its citizenry", could be seen as threatening to the Chinese government and create more problems for Google (more on Schmidt's comments by Josh Rogin here). However, although the Chinese government is very unlikely to be pleased or respond positively, I am not convinced that Schmidt made a mistake in publicly expressing his views. The following provides some of the reasons I feel this way (not intended to be a full review of what is a complex situation with many layers).

What type of risks do Schmidt's comments present for Google?

Some of Google's major services, such as YouTube, are already blocked in China. Even many of Google's services that are "available" face regular interference from China's Great Firewall. Schmidt mentioned a reason he has little optimism for improvements in the near future:
"It's probably the case where the Chinese government will continue to make it difficult to use Google services," said Schmidt. "The conflict there is at some basic level: We want that information [flowing] into China, and at some basic level the government doesn't want that to happen."
Despite the challenges for their online services, according to Google it "continues to thrive" in China (video of Bloomberg interview with Daniel Alegre, president of Google's Asia-Pacific division, here). One of the brighter spots for Google in China is selling global ads to Chinese companies. It seems unlikely these sales would be impacted by Schmidt's comments (Bill Bishop has made this point as well). What happens to Google's services in China has no effect on its services elsewhere in the world. Chinese companies' desire for ad space in foreign markets will likely only increase. Similar to what I discussed in my post last year comparing Google Maps and Baidu Map, Google can offer a world's worth more than any Chinese online service.

Given the already existing problems for Google services in China, a bleak outlook in the near future for the change Google apparently awaits, and at least one of Google's key sources of revenue in China not likely being affected, Google does not have as much to lose in the short term as it could first seem.

The possible benefits to Google if China "strikes back"

Even if China decides to retaliate against Google's online services in China, it could still be to Google's net advantage, particularly in the long term. Some people will positively view Schmidt's comments as evidence that Google is willing to forsake profits in order to hold true to more idealistic aims. Such a view could be strengthened or further considered if China reacts in an obvious manner.

Although any immediate benefit may be most clearly seen in markets such as the U.S., where railing against China's censorship is well received by many, there could also be benefits in China. To be clear, many in China will never see Schmidt's comments. Regardless, the comments can serve as a reminder or signal to a valuable segment of Google's users (and potential users) in China who do hear them and are sympathetic to Schmidt's beliefs and hopes (see the previous post for how tying freedom of expression to China's economy could be relevant in this regards). Schmidt's comments can be yet another drop in the bucket to let people feel "Google still cares". If censorship eventually fails in China as Schmidt expects, Google's consistent strong voice on this topic could provide it with a core block of users/supporters serving as a valuable seed for future growth.

A long term evaluation required

As I wrote before, one of Schmidt's likely hopes is for Google to be prepared for the changes that he believes are inevitable but may not occur in the immediate future. His comments and Google's recent actions suggest they are thinking long term, particularly in regards to the online services they offer (or wish to offer) in China. Although there are other points to consider (for example, I have not touched on Android nor on other ways the Chinese government could respond), the above points suggest there is reason to believe that not only will Schmidt's comments not cause Google great harm, but they could even provide benefits.

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