BUSINESS COMMENTARY
Microsoft’s move to offer cloud computing services in China may have made a big splash in the media last week, but it also raises a troubling set of questions about corporate responsibility when dealing with a tyrannical regime.
Last week Reuters reported that Microsoft would hire 1,000 people in China as part of an operations push, with 600 of them to work at a “large cloud computing center in Shanghai.”
The Financial Times opined that Microsoft loses a ton of money in the Asian country due to piracy, stating that “the company’s total revenue in China didn’t even match that in the Netherlands, a country with a population just 1.3 percent that of China.”
The Financial Times also pointed out that “open and aggressive criticism is a tricky thing in China... Executives of American and European firms are extremely reluctant to go on the record blasting Beijing.”
Just a day after the announcement of the new Shanghai center, Bill Gates, co-founder of Microsoft, was nominated alongside Kofi Annan for China’s Confucius Peace Prize.
Last year the prize went to Russian president Vladmir Putin, who is currently facing international ire over Russia’s decision to jail three members of a rock band who were critical of him.
Microsoft’s push towards providing cloud computing services raises a troubling series of questions that should become obvious to anyone who understands how the larger Internet economy works today.
Where Others Fear to Tread
Even as Internet use in Asia, and China, increases rapidly, Internet operators, from cable and service operators like AT&T to web application providers like Facebook have tread carefully when it comes to providing networking or software services in China. Most ISPs and web companies maintain points of presence (POPs) in places like Taiwan, Japan, and Singapore, with a few brave ones establishing smaller operations in Hong Kong.
Most ISPs prefer to avoid China, but not due to a lack of economic excitement (although China’s economy is seen by many pundits as providing a false hope anyways). Hosting ongoing networking and software services inside China is fraught with a Pandora’s box full of policy problems, many closely related to the Chinese Communist Party regime’s practice of censorship and the brutal repercussions on citizens caught trying to break through that censorship.
“Western companies doing business in China are expected and requested to comply with Chinese ‘laws,’ including laws and regulations that restrict peoples’ rights to free speech and belief, to criticize government officials, and even to meditate in public spaces,” said Dr. Frank Tian Xie, Assistant Professor of Marketing at the University of South Carolina-Aiken’s School of Business Administration. “A while ago, foreign companies, like their Chinese counterparts, were asked to fire or not to hire practitioners of Falun Dafa, a spiritual practice based on the principles of truthfulness, compassion, tolerance. Unfortunately, some foreign companies followed that order, albeit it was against the law in their own countries.”
Due to various financial, market, and legal risks associated with operating within the confines of the Chinese market, Facebook has yet to establish operations in China, even though it has tested in the waters in a long on-and-off-again relationship with Chinese giant Baidu.
Twitter currently also has not, and its announcement that it could “selectively” censor tweets in certain countries in January 2012 was met with a huge online backlash as users wondered whether the microblog was planning to move into China with that feature.
Most famously, Google took the bravest step in January 2010 when it decided to exit the Chinese search engine business, following “Operation Aurora,” widely believed to be a Chinese state-sanctioned hacking attack against the search engine giant.
It is not only web application service providers that face this dilemma. Hardware service providers that provide long-term services, including global ISPs such as AT&T, also face this challenge. Any packet that transits its network in China is subject to the same policies that the Chinese regime uses for its internal political goals, to stifle discussions of certain topics, and arrest dissidents such as Falun Gong practitioners and human rights activists, for example.
While the smell of money may be enticing, most corporations in the West have been forced to think twice about providing such services in China.
If they do, and comply with the dictates of the Chinese regime, they could face a public backlash at home, run afoul of their home countries’ policies, and face heavy fines. For this reason, most corporations have steered clear of China and established operations in countries surrounding China, thus providing services to China and other Asian countries while steering clear of these knotty problems.
Now, this doesn’t pose a problem for wholesale resellers of hardware and software, such as Microsoft, Dell, and Cisco Systems, because they can continue to sell their hardware while denying responsibility for how it is used.
That tactic may absolve them of responsibility in some cases, but not all. A lawsuit filed in California last year by the Human Rights Legal Foundation on behalf of Falun Gong practitioners accused Cisco of having modified its products in order to track practitioners. The suit claimed practitioners were tortured and, in one case, beaten to death, as a result of Cisco’s aid to the regime.
The legal case shocked the tech industry and caused many large retail vendors to start re-thinking their China strategy.
Microsoft’s Faustian Deal in China
But none of this appears to have stopped Redmond, Wash.-based Microsoft. The software giant, which has been hit hard by a downturn in PC demand, has kept itself profitable through a series of measures that has some observers in a tizzy.
Shortly after Google exited China, Microsoft CEO Steve Ballmer was reported to have said delightedly that his company saw this as an opportunity to expand its search engine market share in China, even though it meant complying with China’s oppressive Internet rules.
Shortly after its $8.5 billion acquisition of Skype, the company filed a patent for “legal intercept” technology that was specifically designed to be used with VOIP services like Skype, and also further failed to respond to or deny reports of “Skype snooping.”
As early as 2008, a team of researchers found that Skype had aided the CCP in intercepting and monitoring sensitive information shared on Skype networks [http://www.theepochtimes.com/n2/china-news/skype-china-spying-anger-5180.html].
Microsoft’s cloud computing plans are a further cause for concern. Microsoft’s biggest competitor and the 800-pound gorilla in the cloud market, Amazon.com, has Asian POPs in Japan and Singapore and has not commented on any plans for moving into China.
With the growing demand for cloud computing services, coupled with Microsoft’s slow penetration into cloud computing in most markets, the company appears to be pushing the envelope by providing such services in China, a place where others have feared to tread.
The move will naturally mean that any services that Microsoft provides in China run the risk of being used by the regime for the purposes of repression. Microsoft may not intend for its cloud to make the police state in China more effective, but once Microsoft shows up, that is the risk it runs.
Perhaps Google co-founder Sergey Brin puts it best in an interview he gave shortly after Google exited China in 2010. Specifically singling out Microsoft, he said, “I would hope that larger companies would not put profit ahead of all else. Generally, companies should pay attention to how and where their products are used.”
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