American Internet firms in Chinese peril

I like talking with journalists because, naturally, they have a way of asking interesting questions. The same journalist who got me thinking about corruption in PR hit me with a poser while we were talking:

“Name a successful American Internet firm in China,” he said.
“Well,” I answered, “there’s always…er.” And I thought about a bit.
“What about…nah, they’re not doing so hot.” And I thought about it a bit more.

Ok, so there isn’t one. American Internet firms are, by and large, doing badly in China. The whys and wherefores of this could fill a few posts, but a few reasons come to mind:

  • Arrogance
  • Poor communication
  • Lack of understanding of Chinese culture, reflected in interfaces, communication tools and services provided
  • A preference for local products among Chinese Internet users

The large portals are, of course, media firms, and they have also been victimized by many of the same things that have bedeviled traditional media firms coming into China, such as a strict regulatory regime and a sense that the services offered here are sanitized versions of the real thing. While local Internet firms are subject to the same restrictions, they seem to be able to manage appearances better. I think this is in part because they benefit from the (correct) perception that they serve the Chinese audience first. Every time a foreign Internet firm gets involved in a censorship or other scandal, it reinforces that perception. Plus, a little “root for the home team” nationalism goes a long way in China.

Two bits of recent corporate communication illustrate the problems of foreign Internet firms in China, in different ways. The first is a statement issued by Yahoo! Hong Kong (not China) in response to the controversy over the turning over of Chinese journalist Shi Tao’s e-mail to the Chinese police, and his subsequent arrest. Here it is:

Yahoo! Hong Kong Statement
18 October 2005

As a company operating in the jurisdiction of the Hong Kong Special Administration Region, Yahoo! Hong Kong adheres to all applicable local laws and regulations in Hong Kong and our privacy policy. The Chinese authorities have never contacted Yahoo! Hong Kong to request any of its user information.  Yahoo! Hong Kong and Yahoo! China are managed and operated separately and independently of one another.  As such, Yahoo! Hong Kong and Yahoo! China have never exchanged or revealed respective user information to one another.

This is really interesting for several reasons. First, its an attempt by Yahoo! Hong Kong to distance itself from Yahoo! China. Now, checking the bottom of the Yahoo! China website will show you that Yahoo! China is also operated out of Hong Kong, by Yahoo! Holdings, Hong Kong. So it is, indeed, a different operating company from Yahoo! Hong Kong.

There are a couple of legitimate reasons why Yahoo! Hong Kong would want to do this. First, they were probably getting a lot of misdirected media inquiries and hate mail. Second, as they serve the uppity and more democratically minded Hong Kong audience, the may wish to distance themselves from something they find unpalatable.

Nevertheless, from an International PR point of view, this makes no difference. The damage done to Yahoo! by the Shi Tao affair was at the international brand level. Yahoo! Hong Kong, Yahoo! China, or Yahoo! Upper Volta, it doesn’t make any difference. Especially to the liberal minded Americans and Europeans who are still Yahoo!’s bread-and-butter customers. And the continued woes in that department can be seen in this recent, very interesting article from the International Herald Tribune. As previously predicted in this space, the “just following local laws” excuse is now coming under wider scrutiny:

Yahoo, meanwhile, gets to keep its piece of the gigantic China pie, insisting like most Western companies doing business there that it must abide by the laws of countries in which it operates.

“What if local law required Yahoo to cooperate in strictly separating the races?” asked Max Boot, a senior fellow at the Council on Foreign Relations, in a widely circulated essay for The Los Angeles Times. “Or the rounding up and extermination of a certain race? Or the stoning of homosexuals?”

Jim Etchison, an information technology management consultant from Pomona, California, created BooYahoo, at, a site dedicated to urging “freedom-loving citizens of the Internet” to stop using Yahoo services “as a result of their oppressive policies.”

“I was a happy Yahoo user for about nine years and was so offended by the Shi Tao business that I boycotted them,” Etchison said in an e-mail message. “What begins in China will end where I live.”

Of course, nobody in China can see Jim’s site because it is on Blogspot and, therefore, blocked.

The Yahoo! Hong Kong statement is also interesting because it suggests that the legal obligations of Yahoo! Holdings, Hong Kong (operator of Yahoo! China) may be conflicted between Hong Kong’s privacy regulations and China’s demands for more-or-less complete fiat over all media firms operating within mainland borders or serving mainland audiences. But I am unschooled on such things, and this is just a wild hare.

The other interesting announcement was one from online auction juggernaut, eBay, in response to a zero-fee deal from pesky, Chinese competitor Taobao (part of Jack Ma’s Alibaba empire, recently sold to, whaddaya know, Yahoo!):

eBay (Nasdaq:EBAY)( today issued the following statement regarding Taobao’s pricing challenge:

“Free” is not a business model. It speaks volumes about the strength of eBay’s business in China that Taobao today announced that it is unable to charge for its products for the next three years.

We’re very proud that eBay is creating a sustainable business in China, while providing Chinese consumers and entrepreneurs with the safest, most professional, and most exciting global trading environment available today.

An interesting article in Red Herring looks at the competition between Taobao and eBay. It raises industry observers’ doubts about Taobao’s approach. But it also had this to say:

EachNet founder and Chairman Bo Shao once dismissed the Taobao approach, pronouncing, “Free is not a business model.” Free-at-first, however, does seem to have worked for Taobao’s parent company Alibaba, the business-to-business (B2B) portal Mr. Ma founded in 1999. Hangzhou-based Alibaba, which Mr. Ma claims is the largest global B2B site in the world, did not charge for its first three years, but Mr. Ma asserts that the company has been in the black since the third quarter of 2002. “We know the difference between investing money and burning it,” he says.

Jack Ma’s success in building Alibaba suggests that he has some idea what he is doing, so it will be interesting to watch how this unfolds. He also claims, in the Red Herring article, that Taobao can make money on advertising alone, although they plan to go to a fee model eventually. There is another issue with auction sites as well. Unlike a news site, the value of an auction site, and hence its power to attract and retain users, grows as the size of its community expands. The network effect creates a more interesting and liquid marketplace. So if you can afford to spend money to build a critical audience, why not? Indeed, as Red Herring points out, this tactic was used successfully against eBay in Japan already.

But beyond that, there is the tone of eBay’s press statement. This is the kind of thing that peaks a flack’s interest. If eBay’s plan was to project confidence, it failed. Instead, it projected defensiveness. I don’t think many people suspect that Taobao is “unable to charge”. I think most people suspect it simply doesn’t want to charge until it has to. And there is a strategic argument to be made for that. Free can be a business model…for a while. eBay could have found a more constructive way to make its argument.

If the ultimate test of a press statement is how journalists respond to it, this one didn’t pass muster. The journalist I was speaking to summed it up in one word:

“Snarky,” he said.

Note: Thanks to the journalist cited above for turning me on to both of these statements, and for talking through some of this with me.

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