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MENDOZA IN THE NEWS

The Google vs. China Censorship Battle

Publication: PBS Nightly Business Report

March 22, 2010

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SUSIE GHARIB: A new chapter in the showdown between Google and China. Google said today it will stop censoring search services on its Chinese site. It now is redirecting services to its Hong Kong site, which offers uncensored results. Joining us now to discuss what all this means, Scott Kessler. He's equity analyst at Standard & Poor's and John D'Arcy, assistant professor of information technology management at the University of Notre Dame. Gentlemen, thank you so much for joining us.

SCOTT KESSLER, EQUITY ANALYST, STANDARD & POOR'S: Thank you.

JOHN D'ARCY, ASST. PROFESSOR, UNIVERSITY OF NOTRE DAME: Thank you.

GHARIB: John, let me begin with you, the reaction from the White House was disappointment, stronger criticism from the Chinese government. Did Google do the right thing by shutting down this site in China?

D'ARCY: I believe they did. Ultimately they are saying, you know, we are going to promote net neutrality, so to speak, free and absolutely unrestricted use of the Internet. And the White House and Obama administration is certainly expressed a pro net neutrality stance all along. So Google is following suit here.

GHARIB: Scott what do you think? Does this make business sense? Isn't Google giving up a lot of potential growth?

KESSLER: Susie, I would have to disagree respectfully with the professor in that perhaps it was the right thing from say a moral or ethical perspective, but as a company presumably in the business of making money, we think that Google needs to be more open minded and perhaps sensitive to the laws of other lands like China which obviously has a different concept of information flow and censorship. I think that there is a way that they could have probably gone about this where they didn't necessarily have to exit the country which we think probably is going to happen sooner rather than later.

GHARIB: And Scott to that point, even though they have done this kind of first step by rerouting everything to the Hong Kong site, isn't the Chinese government still in a position that it could just shut off that connection anyway?

KESSLER: Absolutely. And the blog post that announced this change, Google seemed to make it pretty clear that this development, this decision was not necessarily made with the buy-in of the Chinese government. It wouldn't surprise us at all if the Chinese government essentially severed the access of Chinese citizenry to this particular web site as well.

GHARIB: So John, what does this mean for other companies doing business in China, particularly social networking sites like Twitter and Facebook which are also dealing with privacy issues?

D'ARCY: Well, I think Google is kind of with them taking a stand. It will be interesting. I think we are going to see other companies like Facebook and again as you mentioned some of these social networking sites saying we also are going to fight this censorship that the Chinese government is trying to enforce and basically Google has taken a first step. So I think we're going to see some other businesses follow suit as well and kind of take Google's lead.

GHARIB: But do you think John it is a losing battle against the powers of the Chinese government on this issue?

D'ARCY: I don't think so. I think ultimately Google obviously is a giant in the search engine business. And I think ultimately they have a little bit of muscle and they're trying to flex their muscle. So I think obviously they've got the whole, probably the whole U.S. web industry behind them as well, technology industry behind them as well so I don't think it's a losing battle. However this is kind of the first step, I think, of an ongoing battle we're going to see happening.

GHARIB: Scott, investors have been worried about this whole issue with China and Google for a while now. You're still recommending the stock. Tell us though what is the impact that this could have on the stock down the road.

KESSLER: Well, Susie, we actually upgraded the shares of Google earlier this year following some Q-4 results that we perceive to be pretty darn good. That was actually after news about the fact that Google is re- examining its concept of how they were going to operate in China. So honestly we look at what is going on here in the overhang related to the uncertainty as a buying opportunity. We think right now is a good time to get involved in the shares. And we think they are going to outperform the S&P 500 over the next 12 months. Our target price is $640 a share.

GHARIB: Just to wrap it up, I want to ask both of you what you think the next move is. John you intimated this is the beginning of a conversation and negotiations. Do you think it is possible for the Chinese and Google to come to some terms, maybe a truce down the road?

D'ARCY: I don't think so. I look at it definitely what Google did here as kind of a short-term fix but ultimately I think it's all or nothing. Either they are going to -- and they kind of made that statement. They are saying OK, we're not going to allow censorship in our search results and this is our stance. And they've even stated-- I'm sorry.

GHARIB: Go ahead, finish your thought, sorry to interrupt.

D'ARCY: They've even stated in their posting today that they expect that they fully expect that traffic will be filtered, that the Chinese government will do that. But this is their position right now to move it off the mainland China to Hong Kong.

GHARIB: Scott, do you think is an all or nothing situation or is there room for negotiation?

KESSLER: I don't think there is room for negotiation, Susie, but I think it's very important to understand that we think Google.cn and the search offering in China and maybe even in Hong Kong really will not over the long term be accessible to Chinese citizens. But it's very important to understand that we think what's even more important is the notion of what Google is doing in terms of sales of online advertising to Chinese companies on sites outside of China as well as their R&D efforts, both of which we think are strategically and from a revenue and expense perspective a lot more important than Google.cn.

GHARIB: All right, we're going to have to leave it there. Gentlemen, thank you so much for your thoughts and insight. We really appreciate it.

D'ARCY: Thanks a lot, Susie.

KESSLER: Thanks, Susie.

GHARIB: My guests tonight Scott Kessler of Standard & Poor's and John d'Arcy of the University of Notre Dame.