Yahoo's China problem
There's no easy way for the search giant to fix the damage from its Chinese business. But it has missed at least one opportunity to mitigate it.
By Marc Gunther, FORTUNE senior writer

NEW YORK (FORTUNE) - One of China's most outspoken bloggers is a 30-year-old journalist named Zhao Jing. Zhao who blogs under the name of Michael Anti and works in the Beijing bureau of The New York Times, got a lot of attention when his blog was abruptly shuttered by Microsoft, at the behest of the Chinese government.

So you might think that Zhao would be unsparing in his criticism of Microsoft (Research). Not so. "Companies such as Microsoft and Google have provided Chinese netizens with much freedom of information," he wrote last week.

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Instead, Zhao's anger is targeted at Yahoo (Research). "A company such as Yahoo! which gives up information [about dissidents] is unforgivable," he says. "It would be for the good of the Chinese netizens if such a company could be shut down or get out of China forever."

As controversy heats up over the role of U.S. Internet companies in China, Yahoo finds itself in an unwelcome spotlight. The $5.3-billion-a-year company has been a darling of Silicon Valley, Wall Street, financial journalists and Internet users. But Yahoo has a China problem, and no easy way to solve it.

It's not just Zhao who is pointing fingers at Yahoo. Human rights activists, congressional critics and pundits, notably New York Times columnist Nicholas Kristof, who used to be based in China, say that of all the U.S. Internet firms, Yahoo is most vulnerable to the charge that it helps the Chinese government repress political dissidents.

Yahoo provided data that was used in the prosecution of at least three dissidents, according to The Washington Post. The best known is Shi Tao, a journalist serving a 10-year sentence for leaking a propaganda directive. (The Post has just published an excellent three-part series on China's Internet at www.washingtonpost.com/world).

Yahoo says it has to cooperate with the Chinese government. In part, that's because Yahoo merged its China business with a Chinese e-commerce company, Alibaba.com, last fall. It retains a 40 percent stake in Alibaba.com, and one of its co-founders, Jerry Yang, sits on the board of Alibaba.com.

The U.S. company "does not have day-to-day operational control" over Yahoo!China, which includes a search engine and e-mail services, according to Michael Callahan, Yahoo's general counsel. Testifying before Congress last week, Callahan said he could not even say how often Yahoo provides information about its users to the authorities.

In a letter to Amnesty International, Callahan wrote that "the facts surrounding the Shi Tao case are distressing to me and my colleagues." But under questioning last week, he admitted that Yahoo had not reached out to the family of Shi Tao after he was imprisoned. That didn't look good.

Yahoo will reap profits from China but "they are trying, more or less, to hide behind Alibaba," says Lucie Morillon of Reporters Without Borders, which exposed Yahoo's role in the Shi Tao case.

Google (Research) and Microsoft have taken a more calibrated approach. Neither locates e-mail servers inside China, as Yahoo does, so it should be easier for them to resist demands from the police to identify dissidents.

And, while Google has been criticized for launching a new, self-censored search engine, called google.cn, in China, its new offering notifies users when search results have been removed -- thereby alerting them to censorship. Neither Yahoo nor Baidu (Research), a Chinese firm that is the market leader for search, tells users when their searches have been censored. One sign that Google is pushing the envelope is that its approach has been criticized by the government-controlled press.

"Google really considered the ethical consequences of their actions in China," said Morillon.

Blair Levin, a Washington-based media and telecom analyst with Stifel Nicolaus, does not expect that Yahoo's China problem will damage the company on Capitol Hill. "The bigger problem is reputation in the Internet community," Levin says. "Brand really matters. It's very easy for Internet users to go somewhere else."

Along with the other U.S. Internet firms, Yahoo argues that even a limited Internet is better than no Internet in China. Says Callahan: "A growing Chinese middle class is benefiting greatly from more education, communication, technology and more independent sources of information."

Chinese activists, including Zhao, agree. Chinese censorship efforts are extensive and sophisticated but not nearly 100 percent effective, by all accounts. What's more, blogs have eroded the monopoly on news and opinion of the state-run press. Before it was taken down by Microsoft, Zhao's blog received about 15,000 visitors a day. China has about 110 million Internet users.

Zhao continues to post in Chinese at http://anti.blog-city.com, which is available overseas but blocked in China. Some of his recent posts can be read in English at http://rconversation.blogs.com, which is maintained by Rebecca MacKinnon, a research fellow at Harvard's Berkman Center for Internet and Society.

Ultimately, Zhao writes, it's up to the Chinese to unlock the Internet: "The only true way of solving the Internet blockage in China is this: every Chinese youth with conscience must practice and expand their freedom and oppose any blockage and suppression every day."

"China also needs these American companies," he adds. Just not Yahoo. Top of page

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Most stock quote data provided by BATS. Market indices are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer.

Morningstar: © 2014 Morningstar, Inc. All Rights Reserved.

Factset: FactSet Research Systems Inc. 2014. All rights reserved.

Chicago Mercantile Association: Certain market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved.

Dow Jones: The Dow Jones branded indices are proprietary to and are calculated, distributed and marketed by DJI Opco, a subsidiary of S&P Dow Jones Indices LLC and have been licensed for use to S&P Opco, LLC and CNN. Standard & Poor's and S&P are registered trademarks of Standard & Poor’s Financial Services LLC and Dow Jones is a registered trademark of Dow Jones Trademark Holdings LLC. All content of the Dow Jones branded indices © S&P Dow Jones Indices LLC 2014 and/or its affiliates.