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Following Google news, China tells world: Its Internet market jumped to 384 million

I thought that kicking off 2010 with a video of California jellyfish moving gracefully in the water would be a colorful, neutral and fun way to begin the New Year.

Well, the sound you heard emanating from China in recent days, including Monday, was the popping cork from the Google-Chinese government brouhaha getting louder and more dramatic – in numeric terms, words being used and ensuing actions.

The number of Internet users in China had rocketed to 384 million by the end of last year, an increase of 86 million people or 29 percent from 2008, according to a Xinhua news article from Friday.

If you’re any Internet or technology company thinking about China, your potential market just added tens of millions of people.

Not only does China have more Internet users than the total U.S. population of 308.5 million but it increased by about 28 percent of that number. China also has more Internet users than the combined populations of the United States and Canada.

Economies of scale – as well as population numbers – have benefits.

But I’m certain one thought floating in the minds of U.S. executives who do business in China is that even with an eye-popping increase, challenges remain in getting a share of China’s Internet market even with that dramatic growth.

Market entry is possible. Market access to please the home offices in the Silicon Valley suburbs of Mountain View or Sunnyvale becomes the question.

Take for example that Baidu remains China’s search engine king and that Google only has about 30 percent of the Chinese Internet market.

Still, I wouldn’t be surprised if U.S. technology executives caught the news about Internet users in China on their iPods or smart phones - especially if they were out of the office and enjoying the holiday weekend with their families.

They likely have been reading online articles that have been moving Monday.

Xinhua on Monday posted this article in which the message was this:

A split between Google and China will hurt both sides. And the Internet giant would lose further ground among its supporters if it is made a political football. Conciliatory negotiation may help in solving any issue. The West’s arrogance will not work.

So, Chinese leaders indicate they are willing to talk.

But have firm lines already been drawn? As I noted below, heat can return to any situation.

The Chinese news agency also posted an online article a few days ago with the title, “Inappropriate to play up Google China’s withdrawal threat.”

An article link remains on Xinhua’s site the last time I checked but it could not be accessed this weekend. According to a cached version on Google, the article shifted debate terms and included this passage:

There is no sense blowing things out of proportion and turning a business issue into a political or diplomatic dispute.

This article, intriguing for its posting and then apparently being removed, is another volley in this unfolding drama – that surpasses the tear-jerk factor of televised soap operas from Asia. And Asia has some great, epic soap operas.

But what Chinese government officials also are sticking to are ground rules for operating in their country: Obey the law.

Here are key passages from the article:

For overseas businesses, including Google, they should respect laws and regulations as well as relevant policies of their host countries, which is a standard international practice for multinational companies….The world Internet giant has been blamed by the Chinese government for showing too many links to pornographic contents in its search results and thus breaking the Chinese law. Currently, Google is also handling a case with Chinese writers over online books copyright disputes. According to a list provided by Google at the end of 2009, its on-line library involves some 80,000 categories of Chinese books, 10 percent of which were works of 2,600 members of the Chinese Writers Association. On the other hand, cyber attacks are a commonplace issue across the globe even if countries have been making every effort to combat hackers.

In debates, such as these, the issues can quickly and easily be reframed or pushed aside – particularly with the power and influence of online chatter.

So, a quick recap: Google on Tuesday publicly said they were victims of sophisticated cyber attacks, including attempts to access Gmail accounts held by activists critical of the Chinese government.

Google Chief Legal Officer David Drummond said the company wants to run an unfiltered Google.cn site for Chinese users. He also explained in a CNBC interview that revenues from Google’s China operations were “immaterial” to this position. 

The Xinhua statement employed a very nice editorial touch in this diplomatic-corporate round by arguing that the Google concern should not be blown out of proportion.

But yet, if you believe what Google is saying that these cyber attacks originated in China, breaking in and entering someone else’s property – even if it is virtual – is usually frowned upon no matter what part of the world in which you live.

When international powers used troops to occupy parts of China decades ago, especially in Shanghai, rage and anger erupted especially among scholars. A call for national strength in China is partially because of that country’s past.

I’m not privy to inside conversations at Google – which reportedly is looking at all aspects in the security breach, according to articles posted Monday on CNET and the Wall Street Journal.

My quick reaction to these two articles: Ouch.

Some Google staff in China reportedly were transferred to other offices or temporarily cut off from the company’s main operations. 

In terms of days this week to watch: Keep an eye on Thursday when Wall Street analysts are scheduled to question Google executives. ZDNet reported Monday that meeting will take place.

Other media reports, including this article from the Los Angeles Times, said that Google co-founder Sergey Brin’s family is from the Soviet Union.

He reportedly had questions about entering the China Internet market, knowing that censorship was part of the business operation.

So, what’s the best way to think about the Xinhua articles and the unfolding events?

Here are some topics and thoughts that I think are worth considering:

1. WAS THE INTERNET NUMBER ENOUGH?

The underlying issue of the 384 million Internet users is how many of them can become true customers of international companies, such as Google, in China. The New York Times has an article with some reaction from Google users in China.

U.S. media companies and executives have talked about restrictions and the competitive nature of Baidu, China’s largest Internet search engine, can make for a rough go of it.

Yes, China has many bright and competitive people to participate in any market.

In September, Yahoo chief executive Carol Bartz gave an interview to CNBC. Her comments included the China market – in which Yahoo owns 40 percent of Alibaba – and are remarkable in hindsight given the Google news.

She became Yahoo’s top executive in 2009.

Her comments about China come around the 9-minute mark. The question was about whether Yahoo would sell its stake in Alibaba.

Her answer:

Alibaba is an investment. And frankly…when I first got here, I thought, ‘Oh, my gosh. We’re not in China…Everybody’s got to be in China.’ But you know, we all know that China is a tough market to be in, especially in media….My firm belief is the Chinese government is much more interested in media companies being Chinese media companies. And so I view this as a way to profit from the China Internet market through Alibaba. So, I view it, frankly, as a very good investment for the future….We have no running power in Alibaba….We have an investment only in them….I went from thinking, ‘Oh, my God. No Japan’ (sic) to saying, ‘Hey you know what, we can ride the Chinese Internet without the hassles of, um, operating in the country.’ 

2. FOLLOW THE LEADER

If you’re an international company that wants to do business in China and that 384 million usage number is convincing enough to enter or remain in the market, there are key questions you and other executives will certainly need to ask:

Who is leading here? Who is following?

Are you able to meet your revenue or market penetration goals even if you have to follow guidelines and laws with which you disagree?

If you’re a founder or president and chief executive of a U.S.-based company operating in China, what is your level of tolerance – in all aspects of the word?

Case in point: Look at the Reuters photograph that The New York Times reprinted in recent days of Yahoo co-founder Jerry Yang at a Congressional hearing in 2007.

The free market certainly breeds competition. Competition can breed innovation and revolutionary breakthroughs, which can lead to many rewards in life.

But how competitive are you? 

3. YAHOO IN THE GREATER CHINA MIX

Another twist in all of this is that Alibaba, Yahoo’s partner in China, issued a public rebuke after the Sunnyvale, Calif. company offered support of Google.

From The New York Times article:

John Spelich, a spokesman for Alibaba, said executives at the company were angry because Yahoo, which owns 40 percent of the Chinese Internet company, appeared to follow Google in suggesting the Chinese government was behind the cyberattacks. Alibaba’s statement reads: ‘Alibaba Group has communicated to Yahoo! that Yahoo’s statement that it is ‘aligned’ with the position Google took last week was reckless given the lack of facts in evidence. Alibaba doesn’t share this view.’

Read the entire article because it includes more details about Yahoo’s relationship with Alibaba.

It looks like – but is not clear to me – that there might have been updates in that relationship since Bartz’s CNBC interview in September.

The key part of that article that caught my attention:

In September, Yahoo cashed out its investment in Alibaba.com, the publicly traded e-commerce site which is partially owned by Alibaba Group.

Alibaba’s statement also shows that just because companies are business partners does not mean that they are automatic allies with the same views.

Now, did Google actually suggest or say publicly that the Chinese government was behind the cyber attacks on Gmail?

Drummond, the Google executive, said in a CNBC interview in response to whether the attacks were from the Chinese government:

I want to be very careful here and be very clear….We’re not saying one way or the other whether the attacks were state sponsored or done with any approval of the state. We can’t speculate on that at this point. What we do know is that they are highly organized.

4. CHANGING THE TOPIC

I expect the topic in this debate to be shifted to divert attention from what Google executives originally raised.

But people throughout the world – and especially in corporate and academic America – are smart and wise enough to know the meaning behind a statement and what signifies what.

5. MICROSOFT IN THE GOOGLE-CHINA MIX

Of course, corporate executives in the United States still have short- and long-term China objectives in mind. They’ll probably argue that there is an interest to remain engaged in the Chinese market to be part of the solution.

Upsetting the apple cart, as the saying goes, in China is really something that ought to be avoided, at least from a corporate perspective.

I don’t know if Microsoft public relations executives have seen the Xinhua article – the one that was posted and apparently removed. But it includes comments from Microsoft chief executive Steve Ballmer.

Here are his quotes with other paragraphs that the Xinhua writer used to frame the article:

On Tuesday, China’s largest Internet search engine Baidu, which is also Google’s major rival in the Chinese market, suffered an (sic) hacker attack that paralyzed its website for more than three hours. Microsoft’s CEO Steve Ballmer has said that ‘There are attacks every day …We’re attacked every day from all parts of the world and I think everybody else is too. We didn’t see anything out of the ordinary.’ So it’s far-fetched to blame China as a scapegoat for cyber attacks just because Google said something about that. In addition, it’s quite natural for a multinational company to shift its market strategy or even pull out business from a certain area.

So, victims of cyber attacks include: Google, Baidu and Microsoft.

Also: Here’s a definition of scapegoat.

6. PLACES WORTH BEING – AT LEAST AS AN OBSERVER

I doubt that the bright minds behind the cyber attacks on Google are welcoming any outside visitor right now to enter their nerve center to see how the action went down.

But I wonder whether any high-profile, highly-connected U.S. journalist, such as Ken Auletta, is trying to see – as an outsider – how Google’s smartest Internet security employees are now watching if any other, more sophisticated cyber attack hits the Internet giant.

Why do I say this?

Well, my sense is that hackers do what they do not only for the objective to extract information but also to find out whether they have the brain power to logistically pull off what nearly everyone else deems as impossible.

It’s the challenge factor.

If these hackers have managed to circumvent Google’s brightest employees and enhanced security firewalls, then the clear message to the Internet world in the West would be: “I’ve done it to you again.”

It’s the stuff out of movies.

My sense is that Google’s top minds are sitting in an office or complex that focuses on global security and watching anything out of the ordinary. 

Like I’ve said before: This entire incident far surpasses the dramatic plots that any writer of a soap opera out of Asia can come up with for mass audiences.

The big question mark that everyone is watching is whether Google will actually pull out of China.

If it doesn’t, it will be fascinating to see the explanations Google executives give that justify continuing their presence in China – given the facts that they’ve told the public.

Keep in mind that in any situation, there can be heat and fire, followed by a detente of sorts.

But after you think the detente is in effect, life can change and strategic moves can reappear. 

I’ll reiterate my position in all of this: I actually want warmer, improved relations between the United States and China.

Escalating economic tensions can lead to other types of conflict - conflict that I think business and government leaders in both countries will regret.

As we know, enhanced economic conflict can penalize large groups of innocent people on both sides of the Pacific Ocean.

But do you remember what your parents told you when you were a kid?

That you can’t always get what you want.

Also on the agenda: Chinese President Hu Jintao has accepted an invitation to meet this year with President Barack Obama in the United States.

They met last year in Beijing with what many people, including myself, believe were bolder actions and thinking on the part of Chinese leaders.

If the two leaders meet this year, the question of what exactly pops up in their private conversations, especially given the Google news, will be interesting to know – if its contents are ever made public.

Politics aside, what else can I say about this right now?

Well, if you’re a playwright or screen writer anywhere in the world, your new project is unfolding before your eyes.

Remember, you have creative license.

Just try and read as much history about China and Internet pioneers in the West for nuance and insight.

And if you’ve read to the bottom of this post, thank you.