I Smell Something, and It is Not the Kampongs

The Silicon Hutong Suite
Royal Orchid Sheraton Bangkok
0915 hrs local

So, interesting news yesterday and today about His Global Diggerness Rupert Murdoch chatting with his old buddies at Phoenix about maybe, just maybe, dumping his shareholdings.

And then another interesting piece about Edward Tian possibly leaving China Netcom.

Okay, I know we’re still in rumor phase here, but let’s do some addition:

1. In September, Rupert tells an assembled crowd of industry people in New York that he’s hit a wall in China, following SARFT’s issuance of a series of circulars last summer that basically reminded all and sundry foreigners that they can’t do business in China the way they want to.

2. Not long later, in an unrelated move, Rupert signals his growing appreciation for things Online when he turns up the highest bidder for MySpace.com, a Web 2.0 play that is generating tons of buzz if not profits.

3. Rupert starts talking about dumping his major TV play in China, Phoenix.

4. The Edward Tian-leaving-Netcom Rumor Story on CNBC mentions Rupert’s name prominently as the financier of Tian’s new venture.

Is all of this starting to add up to a tectonic strategy shift for News Corp in China?

Stay tuned…

Mr. China’s Lessons

In the Hutong
Watching Almost Famous for the 40th time
0231 hrs.

After letting it sit on my shelf since getting back from Sydney three weeks ago, I finally picked up Tim Clissold’s Mr. China over the weekend. And couldn’t put it down.

I was more than a bit wary about even buying the book, much less actually reading it. History always needs to be read critically, histories of China even more so (due to the paucity of corroborating information,) and memoirs with greatest care of all, in that there is rarely a way of verifying the accuracy of the author’s contentions. China memoirs, needless to say, need to be taken with a shaker of salt.

There is no doubt in my mind that Clissold’s portrayal of his own role in the evaporation of his company’s capital probably cast more blame on others and less on himself than deserved, but this is a human failing, something we all do, and I’ll not hold that against him.

Even discounting for that, the book rings remarkably true.

I have three takeaways.

  1. Avoid self-righteousness. It would be incredibly easy to criticize Clissold and his employer. Hindsight is 20/20, folks, and these guys made some mistakes – some HUGE ones – but they are mistakes many others (including some of us) have made ourselves. The big difference here is scale.
  2. That leads to the second takeaway, which when coming into China, start small. The learning curve in China is steep and unforgiving, and for that reason it’s not a wise move to put all of your money on the table before you’ve really got the place figured out. Bet all of your chips up front, and you’re going home in a body bag.
  3. The third thing is that there is no substitute for microscope-up-the-tailpipe due diligence combined with deep, day-to-day involvement in the business by an executive you know you can trust implicitly. If you show up, kick the tires, not your head, sign the JV, and head off to drink bai jiu with the locals and then leave the venture in the hands of your partner, you deserve what you get.

It also takes me back to a point I have long made – from a management standpoint, the Sino-foreign joint venture is the single worst business structure ever invented.

Pick up Clissold’s book and read it. It’s an education for the uninitiated and a great reminder for those of us who should know better already.

I Don’t Understand How Congressional Leaders Sleep At Night

In the Hutong
2048 hrs.

Tom Lantos earns himself the sobriquet of Chief Demagogue of the Democratic Party with his much reported remark to representatives of Cisco, Yahoo!, Microsoft and Google about their operations in China:

“I do not understand how your corporate leadership sleeps at night.”

The executives look suitably chastened. My suggested response?

“Trust me, congressman. I make fewer ideological compromises in a year than you do in a day.”

Yes, this is one of those comebacks that will never get used, but it underscores an important point: we all find ideological compromises odious. But sometimes they must be made in order to reach your eventual goal.

Nobody should understand that better than a legislator like Mr. Lantos. And that makes his statement disturbingly hypocritical.

American Companies and Net Censorship: Time for a Solution

Jingshun Road, Dodging the Random Lantern Festival High Explosives
Beijing
1625 hrs.

A reporter was asking me the other day whether the complicity of American Internet companies in helping China censor it’s Internet was right, and whether those companies are deserving of condemnation?

My answers? No, of course it’s not right. But no, they do not deserve condemnation.

(Full disclosure – I work with or for none of these companies, so my interests are not drawn either way)

I think it’s dead wrong that these companies should find themselves in the position of having to make a choice between their ideals and their share prices.

But condemning them? Condemnation gets headlines for congressmen and columnists as they wrap themselves in the American flag and Jeffersonian doctrine. But it doesn’t solve the fundamental problem: what should Internet executives do when faced with the Faustian choice twixt their high-minded goals and their fiduciary responsibilities?

The Problem

First, it is fair to say that Yahoo, MSN, Cisco, Google and their ilk need China a lot more than China needs them, at least in the eyes of a generation of policymakers who know even less about the Internet than the distinguished solons on Capitol Hill. Their roles are easily supplanted by home-grown heroes like Sina, Sohu, Baidu, and Huawei.

American companies recognize this, and accept it, and in so doing place their existence in China at the whim of officials for whom an arbitrary decision serves as due process. Not only do they need to operate in China according to the letter of the law, they feel the need to operate in a manner that avoids giving any of these bureaucrats the slightest irritation.

Second, each of them believes – with varying justification – that failure to operate in China will deprive them of significant revenues or otherwise damage their overall prospects as a business.

Third, each of them believes that they are faced with a simple choice – either play ball according to Chinese rules, or take their balls and go home.

Fourth – based purely on apocryphal knowledge and no systematic research – I give these executives the benefit of the doubt: I would wager that none of them feels especially comfortable with the choices they have made.

Fifth, because they feel uncomfortable with the situation they find themselves in, they do all they can to put it behind them – including not saying anything about it to their employees, their users, and their other stakeholders.

Denial is More than just a River in Egypt

There are two challenges here. The first is replacing the urge to bury the whole issue with proactive openness and transparency.

In nearly every major capital intensive business setting up shop in a foreign country, extensive time and effort is taken to anticipate, disclose, and mitigate every potential risk. This also happens in an IPO process (as mandated by securities regulators and exchange authorities).

Where this has not been happening is in the Internet industry, and in particular vis-a-vis China. And now that clearly has to change.

Anticipating, disclosing, and mitigating the risks of being in the Internet business in China is arguably part of a company’s fiduciary duty, but equally important it forces a company to deal with the problems before they come up in a very open, public way. It also provides shareholders and other constituencies the opportunity to weigh in on those risks and the issues they present, and gives the company a chance to engage in a discussion that may lead to unanticipated ways to mitigate the problems they face.

Not to mention, of course, it ensures that when stuff like this happens, the companies involved are actually ready for it.

Wow. Preparation. What a concept.

Engagement is More than just Being There

Several U.S. Internet companies make the argument that it is better for Chinese users if American Internet companies are actively operating in the market. Simply by being in the game, they suggest, they have a positive effect on the evolution of a freer China.

Most companies in China can make this claim with some justification purely on the basis of person-to-person interactions between Chinese and foreigners, and through the transfer of modern business practices.

But for Internet companies, experience is now proving that being here is not enough. Companies need to make engagement and “doing good by doing well” a stated, clear, and measurable part of their operational plans.

This does not mean defying the government, or even banding all of the foreign companies together to pressure the government. These are tactics that won’t work, and despite occasional claims to the contrary, have rarely (if ever) worked in the past.

But with a bit of sensitivity, creativity, and a willingness to put some time, money, and attention to the effort, there is a good deal that American Internet companies could do – and I would suggest, will do – (short of violating the law and upsetting officials) that will help improve the local operating environment, take the compliance pressure off of the companies, and widen the availability of information to Chinese citizens.

Regulation as a Last Resort, Not a First Step

The gut reaction of the election-minded congressman is to pass legislation that requires American Internet companies to take all kinds of steps. Republican Chris Smith of New Jersey wants to propose a bill that will not only require Internet companies to move their e-mail servers offshore, it will also give foreign nationals the right to sue U.S. companies who violate their privacy.

With respect to Rep. Smith (and other solons proposing similar legislation), this is a misguided idea for all kinds of reasons (unless you’re a personal injury attorney, in which case you will look at this as a windfall courtesy of Uncle Sam), not least of which being that it is unlikely to change much for your average Internet user in China.

Congress sees this problem as a nail and legislation as a hammer. That’s a bad thing, but it will serve as a wake-up call to companies that they need to take the lead on this issue, or they will find their China businesses legislated into a corner.

The Choogle Solution

In the Hutong
Procrastinating
0948hrs

I just got done reading the umpteenth commentary about how bad Google is for its decision to block certain sites on its Google.cn searches. In this case, it was Jon Carroll’s chest-thumping diatribe in the San Francisco Chronicle (aka Pravda-by-the-Bay). While I recognize that Mr. Carroll is playing to his audience, arguably the largest geographic agglomeration of extreme viewpoints on the planet, I find his comments naive and uninformed.

But now Google has decided to close one whole floor of the marketplace of ideas. Chinese citizens who want to find out about their own country can’t. They can’t even read opinions about what is going on. Farmers in violent confrontations with police? Never heard of it. Whole rivers polluted with poisons? Nothing here, boss. Preventable industrial accidents? Doesn’t happen.
Anyone using the Net in China who wants this kind of information knows better than to rely on any search engine, whether it’s Baidu, Sohu, Sina, Yahoo!, Netease, or any other engine. Know why? Because those search engines block the same searches, AND because there are thousands of such sites that are blocked at China’s gateway anyway. Anyone in China seeking access to such information either learns English, or they learn a single English word: “proxy.”

The suggestion that Google is closing some door to information that isn’t already double-bolted by other means only reflects how Mr. Carroll and his fellow travelers suffer from sufficient misinformation about China that one must question their qualifications to intelligently comment on the matter.

He also goes on to say:
The more plugged-in Chinese citizens already know about this, and so they know Google isn’t trustworthy, and that’s not exactly a smart way to build a brand.
I would venture to suggest that Mr. Carroll knows nothing about what it takes to build a brand in China. Sohu, Sina, Baidu and a half dozen other search sites have done brilliantly building their brands in China, all without providing Chinese citizens with access to sites and information that the government blocks. Unlike in the U.S., or specifically in San Francisco, you do not need to flip Big Brother the double-bird to get yourself noticed and build cred with the locals. Frankly, if the global press weren’t making such a big deal about this, it wouldn’t even be noticed in China, and frankly nobody here I speak to even gives a damn.

Google is doing its fiduciary duty to shareholders by taking whatever actions necessary to ensure it’s future revenues. I’m sure somebody at Google HQ feels an obligation to all of the individuals whose future depends in part on its share price and its revenues. And so they decide to bend to the rules in China. I’m sure it galled the company’s founders to the core to do so.

For those who have an issue with that, may I offer two choices to solve this problem.
  1. Invest. Put your money where your mouth is, buy a share or two or more in Google and make your voice heard as a shareholder. “As a shareholder I am willing to forego any potential benefits – and suffer the potential costs – of Google’s refusal to play by the rules of the Chinese government.” If every individual who is pissed off at Google for this were to take this action, it would make quite a block. Of course, get ready for the stock to take a hit when your words are heard and Google makes public its decision to give up on the potential upside China represents.
  2. Divest. If you have a pension fund, get together with your fellow pensioners and demand that your fund divest its Google shares.
In the meantime, try to spend some time and learn a bit more about how China’s market and Internet really work. Because all of this well-intentioned hand-wringing is starting to reek of paternalism.