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If Google Leaves China, Will Microsoft Become Bejing's Favorite Capitalist Tool?

If Google leaves China, it will be opting to do so at a time when it is gaining scale in the largest and fastest-growing Internet market in the world. This is no minor matter even for a company of Google's size.
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Google and the Chinese government are headed for a showdown in the next few days, and the significance of this confrontation goes far beyond any one company's financial prospects. If Google leaves China because of human rights principles, it will be the first major global company to do since Levi Strauss temporarily ceased sourcing in China in the immediate aftermath of the 1989 Tiananmen Square massacre. The Google-China confrontation has vast implications for the vitality of a U.S. economy that is currently reeling; it's about jobs, and human rights, and the future of U.S.-China relations.

Late last year, a shadowy group who some say had ties to the Chinese government hacked into Google's computer network, compromising the data security and the identity of its users, including some human rights activists. Google announced the security breach in its official company blog on January 12, 2010, and sent shockwaves through both China and the technology community by announcing that it was reconsidering whether it made sense to do business in China at all.

There is one serious misconception about Google's actions: Google is not considering a withdrawal from China because of a weak market position there. According to web analytics company StatCounter, in July 2009 Google trailed Chinese search engine Baidu 30% to 68%;Yahoo and Bing combined had just over 1%. Just six months later, the numbers were 43% for Google vs. 56% for Baidu. If Google leaves China, it will be opting to do so at a time when it is gaining scale in the largest and fastest-growing Internet market in the world. This is no minor matter even for a company of Google's size.

Google is succeeding in China because it has worked hard to make a product that is better than Baidu. Google hired a large number of China's brightest technology grads, and has created a product that local consumers embrace. Its recent jump in market share tells you their strategy is working. And, in addition to being sensitive to local tastes, Google simply has the best technology.

The other reason that Google is rapidly growing its market share is that Chinese web surfers know that if they use Google they will turn up results that would be censored on Baidu -- and if a result has been censored, Google takes the unique step of disclosing that fact in the search results. One local Chinese newspaper reporter who was asked about the personal effect of Google's departure replied that she would be devastated; she would not be able to access the information she needs to do her work. She is articulating why, when Google announced that it was considering leaving China, hundreds of netizens left flowers at its Beijing headquarters.

So will Google take the dramatic step of exiting China? It looks that way, although given the huge economic stakes involved it's not certain that Google would actually go through with it.

Last week, after months of secret talks with Chinese regulators, Google President Eric Schmidt said that he hoped to announce soon the result of talks with Chinese authorities on offering an uncensored search engine in China. China's top Internet regulator shot back that Google is only welcome in China if it abides by its censorship laws. "If you don't respect Chinese laws, you are unfriendly and irresponsible, and the consequences will be on you," said China's Minister of Industry and Information Technology in answer to the question of what China will do if simply stops filtering search results.

So who stands to gain if Google leaves China? One obvious winner would be Chinese-owned and -operated Baidu, which has in the past been rumored to alert the government when competitors don't censor results.

The other possible winner? Microsoft. If Google leaves China, the battle over human rights vs. economic benefit will shift to Redmond, Washington. Right now the MSN/Yahoo/Bing search engine has less than 2% market share. If Google leaves, this could represent a tremendous growth opportunity for Microsoft. It would also play into the strategy of the Chinese government, enabling them to make the point that if Google doesn't want to play by their rules - and potentially make billions of dollars -- there are plenty of other companies who will.

The question then is whether Microsoft would make that choice -- opting to cooperate with China's censorship regime to gain the market share that it is trying to earn elsewhere in the world by designing a product that competes with Google in technological quality and user experience.

If Google leaves China on human rights principles, Microsoft should support Google's effort. By making it clear that the only way they choose to gain market share in China is by beating Google in open market conditions -- not because they were willing to cooperate with the Chinese government and compromise the cause of freedom and human rights -- Microsoft would both highlight its concern for human rights and provide another lever to advance the cause of free trade.

The U.S. government would then have another strong reason to step up efforts on these fronts as well. As we have argued previously in this space, the fight between Google and China is not only about human rights; it is about trade and economics. China makes tee shirts and shoes and other consumer goods and exports them to the U.S.; as a technology-based economy, the U.S. is fundamentally unable to compete fairly in China if companies like Google are not allowed to promote the kinds of technologically advanced products that meet the needs of increasingly sophisticated Internet users in China and elsewhere.

If Microsoft and the U.S. government join with Google, the United States can make clear that they are taking a stand in favor of strongly protecting American economic interests through all WTO rights and available trade laws. At a time when economics and jobs are at the forefront of concerns of all Americans, the government must protect our most vital and job- generating economic sector. Google's confrontation with China has again illuminated a crucial global challenge of the next decade: how America's economic future and China's political future remain inextricably intertwined.

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