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
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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 20063. 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 20064.
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
1
Yahoo! Media Relations: “A History of Yahoo,” 2005. http://docs.yahoo.com/info/misc/history.html
"Information Retrieval Services." Encyclopedia of American Industries. Online Edition. Thomson Gale, 2006.
Reproduced in Business and Company Resource Center. Farmington Hills, Mich.:Gale Group. 2006.
http://galenet.galegroup.com/servlet/BCRC
2
Arango, Tim. Fortune v154 i10 p33, “Deal or No Deal?” Nov. 13, 2006
Arango, Tim. Fortune v154 i10 p33, “Deal or No Deal?” Nov. 13, 2006
5
Pallatto, John. E-Week.com, “Yahoo deal might Stymie Even Microsoft” Jan. 4, 2006
http://www.eweek.com/article2/0,1895,1908063,00.asp
6
Arango, Tim. Fortune v154 i10 p33, “Deal or No Deal?” Nov. 13, 2006
3
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to Yahoo! and similar internet search companies generally as “ISP’s”]. There were 12
million Chinese users in 2000 and 80 million by mid-20047. 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…
7
"Internet Services." Encyclopedia of Global Industries. Online Edition. Thomson Gale, 2006. Reproduced
in Business and Company Resource Center. Farmington Hills, Mich.:Gale Group. 2006.
http://galenet.galegroup.com/servlet/BCRC
8
Einhor, Bruce. Business Week, “China.Net” March 15, 2004
9
Forbes “China Surpasses US in Internet Use” April 3, 2006. http://www.forbes.com/2006/03/31/chinainternet-usage-cx_nwp_0403china.html
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“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…
10
US Dept of State “China” March 4, 2002 http://www.state.gov/g/drl/rls/hrrpt/2001/eap/8289.htm
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“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.
Yahoo! Media Relations “What We Value” 2004. http://docs.yahoo.com/info/values/
Internet Society of China, “Public Pledge of Self-Regulation” July 19, 2002
http://www.isc.org.cn/20020417/ca102762.htm
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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 users13.
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 impure14. 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 online16.
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
Human Rights Watch, “How Censorship Works in China,; A Brief Overview” Aug. 2006
http://www.hrw.org/reports/2006/china0806/3.htm#_Toc142395816
14
Hearing Before the US-China Economic Security and Review Commission, “China’s State Control
Mechanisms and Methods” April 14, 2005
http://www.uscc.gov/hearings/2005hearings/transcripts/05_04_14.pdf
15
Internet Filtering in China in 2004-2005, http://www.opennetinitiative.net/studies/china/#toc4e
16
US-China Economic Security Review Commission, “China State Control” April 14, 2005
http://www.uscc.gov/hearings/2005hearings/written_testimonies/05_04_14wrts/palfrey_john_wrts.php
17
Hearing Before the US-China Economic Security and Review Commission, “China’s State Control
Mechanisms and Methods” April 14, 2005
http://www.uscc.gov/hearings/2005hearings/transcripts/05_04_14.pdf
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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
18
"Internet Service Providers." Encyclopedia of Emerging Industries. Online Edition. Thomson Gale, 2005.
Reproduced in Business and Company Resource Center. Farmington Hills, Mich.:Gale Group. 2006.
http://galenet.galegroup.com/servlet/BCRC
19
Internet Society of China, “Public Pledge of Self-Regulation” July 19, 2002
http://www.isc.org.cn/20020417/ca102762.htm
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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
“Yahoo! Risks abusing human rights in China,” Human Rights Watch news release, August 9, 2002,
http://www.hrw.org/press/2002/08/yahoo080902.htm.
21
Jim Hu, “Yahoo yields to Chinese web laws,” CNet News.com.
22
China Rights Forum “Prisoner Profile: Shi Tao” Nov 2, 2005
http://hrichina.org/public/highlight/hric/profile.html
20
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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:
1) Use its influence to secure Mr. Shi’s release.
23
Peoples Court of Hunan Province Criminal Verdict “Trial Case No. 9, 2005, Shi Tao”
Reporters without Borders, “ Information supplied by Yahoo! helped journalist Shi Tao get 10 years in
prison” June 9, 2005
24
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2) Stop any actions that could undermine human rights in any country in which you
operate.
3) Take immediate steps to ensure that all your units (the parent corporation and
subsidiaries) uphold human rights responsibilities for companies as outlined by
the UN Norms for Business.
4) Develop an explicit human rights policy, ensuring that it complies with the UN
Norms for Business.25
-After receiving AI’s letter, Yahoo! issued the following reply.
“Yahoo! China received a valid and legal demand for information from PRC law
enforcement authorities according to applicable PRC laws and procedures we had
established with Chinese law enforcement officials. As in most jurisdictions, including
the US, the Government of China is not required to inform service providers why they
are seeking certain information and typically does not do so. In other words, we did
not know whether the demand for information focused on murder, kidnapping,
embezzlement, or some other crime. Yahoo! China responded to the information
demand as required by PRC law. Until we read the distressing facts about Shi Tao in
the news, we did not know the particular information about which Chinese authorities
issued a lawful demand from Yahoo China.”26
In its reply, Yahoo! refutes that it was Yahoo! Hong Kong which released the email
records even though this is what is stated in the court record. Instead Yahoo! claims that
it was Yahoo! China which actually released the search history. This is significant
because had the records been stored in Hong Kong and released by Yahoo! Hong Kong,
Yahoo!’s argument that they are only doing what is required of them under PRC law
would be completely hollow. The PRC has no jurisdiction in Hong Kong. Neither the
PRC nor Yahoo! has offered any explanation as to how the Hong Kong branch came to
be listed on the court documents as the supplier of the email records.
25
26
Letter to Terry Semel fro AI. http://web.amnesty.org/library/index/engpol300442005
Yahoo! Reply to Letter from AI http://www.amnesty.org/images/resources/ec/Yahoo_response.pdf
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It is suspected that Yahoo! has provided information leading to the arrests of many more
political dissidents than can be proven. However, since it is in the interest of neither the
CCP nor Yahoo! to have this information public, it is believed by some that they have
become more adept at concealing their actions. However, BBC News and Reporters
Without Borders asserts that it has information proving that Yahoo! aided in the
investigation and prosecution of at least three journalists considered by AI to be
“Prisoners of Conscience”. They are, Jiang Lijun, Li Zhi, and Shi Tao.27 Yahoo has not
responded to the claims.
27
BBC International “Cyber Dissident Convicted on Yahoo! Information is Freed” Nov. 9, 2006
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