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Restrictions of internet provided services in the People’s Republic of China Essays

Term Paper

Restrictions of internet provided services  in the People’s Republic of China

Table of Contents
                                                                                                                  Page

Table of Contents. 2
List of Illustrations. 3
List of Abbreviations. 4
1……. Introduction. 5
2……. Internet in the People’s Republic of China –  facts and figures. 5
3……. The Internet advertizing market 9
4……. The Golden Shield – ‘Censorship’ 9
5……. Blocked Internet services. 10
6……. Google vs. China – a battle on the e-platform.. 11
7……. Conclusion. 14
8……. Literature/Sources. 17

List of Illustrations

                                                                                                                  Page

Illustration 1 : Chinese Internet User Population. 6
Illustration 2 : Internet access growth rates by means for 2009. 7
Illustration 3 : Income structure of Internet users. 8
Illustration 4 : Age structure of Internet users (mobile and overall) 8
Illustration 5 : Censored keywords and websites. 11

List of Abbreviations

P.R.C.
People’s Republic of China
ICA Beijing
Institute of Computing Applications Beijing
CERN
Centre Européen pour la Recherche Nucléaire / European Organization for Nuclear Research
IHEP Beijing
Institute of High Energy Physics Beijing
e.g.
Exempli gratia
i.e.
Id est / means: ‘that is to say’
DSL
Digital Subscriber Line
*.cn
Chinese Internet Domain (http://(…).cn)

(* is a wild-card character)
CNNIC
Chinese Internet Network Information Center
3G-system
International Mobile Telecommunications-2000 (IMT-2000) – is a family of standards for mobile telecommunications fulfilling specifications by the International Telecommunication Union
RMB
Chinese currency – Renmin Bi, Yuan or ¥
B2C
Business to consumer (relationship)
ISP
Internet Service Provider
IP address
Internet Protocol address
Google’s IPO
SME
ICP
R&D
FDI

Google’s Initial Public Offering (stock)
Small and medium sized enterprises
Internet Content Provider (license)
Research and Development
Foreign Direct Investment

1.      Introduction
In China today the Internet is an important means for communication, information and advertisement. On the mainland of the People’s Republic of China the first Internet connection was established on September 20th 1987. This first step into a new era was realized between ICA Beijing and Karlsruhe University in Germany under the leadership of Professor Wang Yunfeng and the German Professor Werner Zorn. As in many countries these days connections were set up by a machine-to-machine link, that means with no direct access to the Internet as we know it today. Basically networking was exclusively used by academic institutions, for example the Institute of High Energy Physics (IHEP) in Beijing which in 1987 connected to the CERN, the European Organization for Nuclear Research in Geneva. Since then Internet networking emerged from the scientific and academic sector to a general access for private households[1].
Nowadays Internet is not only used at work, but more and more at home. As a utility for private life its’ value is increasing significantly since Chinese netizens (a portmanteau of Internet and citizen) have explored a new source for information, merchandizing and social communities. But along with this luxurious way of communication comes an option for the Chinese government to control its inhabitants wherever they move. Netizens have to take care of their behavior, as well as domestic or foreign companies when accessing the internet in China.. In the following chapters potential threats of failure which companies might be confronted with are analyzed in order to find a sustainable solution not to miss the access to one of the most prospective markets.

2.      Internet in the People’s Republic of China –
facts and figures
By December 2009 China had 384 million Internet users, representing 28.7% of the whole Chinese population and 21.3% of Internet users worldwide. North America for example had 259.5 million users by the end of 2009, which represents nearly 76.2% of its population (14.4% of Internet users worldwide)[2].
What is really interesting to see is that from the year 2000 to 2009, the number of Chinese Internet users has grown by 1,500%, in the same period the Northern American growth rate accounts for 140.1% and Germany with a total of 62 million users experienced a growth of 158.2%. This tremendous growth rate is based on increasing investments in infrastructure facilities in the last couple of years. Those investments are promoting steady growth in telecommunication network developments so that even rural areas are able to access the Internet.
One of the most recent and most important developments was the invention of mobile Internet accessibility, i.e., users of mobile telephone communication are able to connect to the internet via G3-systems which are provided by Chinese ISPs. This accessibility is possible, regardless of which province you are travelling to and whether fixed internet lines exist there or not. Still, fixed line dial-up connections (through wire) account for about 92% in China in 2009.
The majority of Internet connections in China are broadband, e.g. DSL with transfer rates of 1 megabyte or more per second, offered by companies like China Telecom and China Netcom. The 25th Statistical Survey Report on Internet Development in China released by the CNNIC provides an insight into how the Internet evolved.
Illustration 1 shows the continuous growth of Chinese Internet usage. From  December 2007 on it recognizes a slow semi-annual decrease from a peak of 29.6% to still enormous 13.4% in June 2009.

Illustration 1 : Chinese Internet User Population

(Source: CNNIC – Chinese Internet Network Information Center)

In addition the survey reveals that Internet usage at home accounts for
about 83.2% while usage at work only amounts to 30.2%.
Besides Internet usage is differentiated by means of access. Illustration 2 points out, that using mobile phones (with 3G-systems) nearly doubles in 2009 and the utilization of laptops increased by more than 40%. This means portability is a distinctive trend of accessing the internet and as we have seen primarily for private issues[3]. Despite experiencing a growth of 98.5% mobile-only Internet users are still a minority of only 8%.

Illustration 2 : Internet access growth rates by means for 2009

(Source: CNNIC – 25th Statistical Survey Report on Internet Development in China, January  2010)

The relatively high prices (compared to disposable income per capita) for broadband Internet connections vary in different provinces in China from RMB 80 to 150 per month for a 1 to 4 megabyte DSL connection with usually unlimited download traffic. This meets the income of the new urban working ‘Chinese Middle Class’ with an continuously growing average annual income of about RMB 25,000 to 30,000 in urban areas (data from 2007)[4].
Referring to illustration 3 a large number of citizens with no income (mainly former employed citizens) is accessing the internet.
The fact that most of the Chinese with a disposable income per month of RMB 3000 or less are accounting 85% of the total netizens is based on the large number of Chinese citizens that represent the new ‘Middle-class’.

Illustration 3 : Income structure of Internet users

(Source: CNNIC – 25th Statistical Survey Report on Internet Development in China, January  2010)

As depicted in illustration 4 the biggest group of citizens that is spending their time with the Internet is the younger generation between the ages of 10 and 29. They represent 73.2% of mobile internet users and 60.4% of the overall users.

Illustration 4 : Age structure of Internet users (mobile and overall)

(Source: CNNIC – 25th Statistical Survey Report on Internet Development in China, January  2010)

While paying a high price for Internet connections, users have to accept access problems and slow connections during peak times of usage. These bottlenecks happen when too many people are sharing one and the same line in the late afternoons and evenings.

3.      The Internet advertizing market
All in all the increasing number of Chinese citizens accessing the Internet mirrors the rapid economic growth in the last couple of years.
In this term paper we will have a look at the B2C relationship, which represents a very large sector in the Chinese advertizing market since consumers have access to the World Wide Web.
Companies in the industries of real estate, electronics, gaming and e-commerce are the biggest advertisers in the online advertizing market. Others like agricultural and manufacturing industries were slowly emerging in 2009[5]. Number one in the top ten of potential online advertizing platforms in 2009 is the search engine BAIDU[6] a Chinese equivalent to Google. Baidu has a market share of more than 63% among Internet search engines available in China. SINA Corporation[7], a leading online media company and provider of mobile value added services with nearly 95 million registered users worldwide is another website that offers advertizing space. Differentiations are made between key-word advertizing and online advertizing sites. Key-word advertizing is linked to specific phrases or words and has the highest rate of penetration with 43.8%. Online advertizing sites are using hyperlinks that are implemented into graphics or pop-ups that are displayed by ‘mouseover’ or hover box.
With regard to a predominant share of key-word advertizing in search engines, companies have enormous marketing opportunities within this sector. As social networks become more and more interesting for Chinese Internet users, advertizing offered by those websites also reaches a large number of potential consumers.

4.      The Golden Shield – ‘Censorship’
Internet censorship in the P.R.C. is conducted under a large variety of administrative regulations and laws[8] which allow a full screening of all individual communication activities.
The main reason of restricting Internet access is that the Chinese government seeks to block immediate access to politically sensitive information. In 1998 the Ministry of Public Security of
the People’s Republic of China started the ‘Golden Shield Project’ after several new regulations were issued and was first processed by the end of
2003.
Ever since the system of the ‘Golden Shield’ was implemented it is blocking content by limiting IP addresses inside ChinaThis shield consists of firewalls and proxy servers at different Internet gateways. Connection failures occur when trying to reach websites that users are not supposed to have access to. The Golden Shield is known as the Great Firewall of China, a mixture of firewall and the Great Wall in reference to their roles. This apparatus of Internet repressions is considered to be the most advanced and most extensive in the world. But what kind of service is blocked, or why does the Chinese government try to prevent its’ citizens to get in touch with certain Internet content? Are those measures of restrictiveness economic protectionist measures?

5.      Blocked Internet services
As already mentioned in chapter 2 and 4, Internet users face connection and speed problems while surfing the Internet. Furthermore one can observe that, while surfing Chinese-domain-websites (*.cn, *.com.cn, *.net.cn, *.org.cn), connections are relatively stable. Compared to those .cn-domains, international domains such as .com or .de are sometimes hard to access, leading to the assumption that there is a volitional prioritization established by internet providing companies.
Illustration 5 shows an sample of keywords and websites that are routinely blocked. Social networks like Facebook, Twitter or YouTube are entirely blocked. A lot of familiar websites such as Wikipedia remain, but with contentious pages or entire sections that disappear because of the Golden Shield. In the case of BBC News, the Chinese Wikipedia, Yahoo! Hong Kong and the Voice of America access has temporarily been enabled but blocked again after some time. Facebook and Twitter were blocked in the second half of 2009 because they were containing political commentaries based on Chinese incidents.
One of the most famous incidents that netizens have been commenting on is about the deadly riots in Xinjiang or the rioting in Urumqi in 2009. Another reason for blocking Twitter or Blog websites is that activists are able to organize themselves.
All things considered one can say that websites are restricted whenever their content endangers Chinese national security, is detrimental to the honor of the state, undermines social stability and the state’s policy towards religious beliefs or includes any other information that is prohibited by regulations or laws.

Illustration 5 : Censored keywords and websites

(Source: http://www.informationisbeautiful.net/2010/what-does-china-censor-online/)

6.      Google vs. China – a battle on the e-platform
Google, the main competitor of Baidu, entered the Chinese Internet market in 2002. Baidu at that time was already well established to a degree Google could not match. One of the things Google had to deal with was to filter results that the Chinese government was pretending them to do[9].
In China there were few other choices of search engine and some Chinese advertisers were bidding for keywords on Google’s American website.
The early users of Google consisted of sophisticated citizens that had a high income and regular contact to foreign countries.
From 2002 to 2005 access to Google search engine was constantly blocked any time there was sensitive news about China.
Chinese netizens found themselves transferred to Baidu or other Chinese
search engines while trying to visit Google’s website. By mid 2005 the tables had been turned. Partly due to Baidu’s effort and partly due to government interference, Google’s market share was about 23%, lower than Baidu’s 37%. But still it was ahead of all other search engine providers in China. The only way of ensuring stable service in China and to reach more users and advertisers, Google had to establish a local presence. Meaning, Google had to set up servers and staff inside the country. This agency abroad and tailored service to Chinese law was necessary to join local competition. The tailored service to Chinese law requires a so called Internet Content Provider license (ICP) in order to launch a website in China. This ICP license needed for Google’s R&D center was hard to get because the Chinese government tightened approval processes for foreign companies. Google got its own license in 2007.
Despite the fact that Google was acting against its own’ stated mission of “(…) organizing the world’s information and make it universally accessible and useful (…)”[10] the potential of the Chinese market, bound to become the largest in the world, was too great for Google to ignore. By 2006, Google’s share again dropped to about 16%. Real work then started in 2006 when Google improved Chinese search which occupied most of the implementation process. At the same time they recognized that they had to broaden service supply, expanding services to mobile search and maps. Signing a deal with China Mobile in 2007 whose share of mobile phone users exceeded 70%, the new development plans became a major task for Google in the following years. Switching to the mobile sector offered new dimensions in the fast growing Chinese market. This new development in maps via communication technologies allowed users to find local businesses, to get driving directions and had an enormous social impact. If we take Chinese train stations during Chinese New Year holidays as an example people had the chance to have a real-time view on rail traffic when intending to traditionally return to their families.
Train stations these days are overcrowded making it rather impossible to catch a train.
Another improvement conducted by Google was music search which became quite popular by the end of 2008, beginning of 2009.
The music search project, competing with the controversial option of searching music that Baidu already offered, was formed by a joint venture with Top100, a legitimate music streaming service In China founded in 2006. The project was thought to be realized by ad-sponsoring (advertisement sponsoring by chosen advertisers) facilitating access to free music.
Compared to Baidu, Google has comparative advantages and one in particular is its’ advertizing platform. Due to more advanced technologies Google is able to match ads with keywords better than Baidu, which in the end leads to higher traffic-to-sales ratios. This means advertisers can place their ads more precisely on Google. Google’s global network in addition enables Chinese companies, mainly SMEs, to extend their own business across Chinese borders.
But why is the Google-China-relationship called a battle? This question has a very complex background but in a way is easy to answer: Google as a foreign owned company tried to penetrate a high potential and fast growing economy. Tightened approval processes and restrictions make it difficult to achieve market shares in China and Google had to find a way to harmonize both their aims: relying on their stated mission and meeting the requirements imposed by the Chinese government. In January 2010, David Drummond the senior vice president and chief legal officer of Google’s corporate development posted that Google is no longer willing to continue censoring their results on Google.cn[11]. As a presumptive consequence to his official announcement Google faced a wave of cyber attacks of varying degrees. This usually happens on a regular basis but this sophisticated and targeted attack involved a theft of intellectual property on Google’s corporate infrastructure originating from China. That was the point at which Google said it is no longer hesitating to reconsider their approach to China and as an ultimate consequence will be leaving the Chinese market.
As already mentioned, the Chinese market is too great for Google to ignore and they again will render a resort to not be driven off this place of high potential economy.

7.      Conclusion
The Chinese market, including the Internet advertizing market, is a continuously above-average growing market and offers valuable opportunities for foreign investors. Its younger generation that is open to any kind of innovation and searching for global networks and social satisfaction represents a high potential group of consumers. No longer willing to just follow traditional values the young Chinese citizens are seeking for participation in a global development.
However, before investors can benefit from the characteristics of this inexhaustible market they will be challenged by a large number of difficulties. The greater a foreign company is the greater are the difficulties it is confronted with. Let’s take the example of Google which has a high global influence with the number of services it provides. High influences are, from Chinas point of view, threatening Chinese society and need to be delimitated. China opened its market and borders to FDIs from abroad accompanied by the implication of giving up some of the state control that has been mandatory for decades. Google’s attempt of providing a wide range of information to Chinese Internet users failed due to government restrictions. And it’s not just providing information to the public that Google does, it’s also gathering information on user or consumer behavior and sharing it with several institutions making profit out of private data. There is no secret behind the departments that are working for the Google Cloud Panopticon. Some of the departments are led by former intelligence agency officials and have to take care of “total information awareness” [12].
Companies have to ask themselves if they were a government and foreign forces were trying to build up infrastructure harming their own infrastructure, how they would act in this context. Would they really allow the foreign company doing business that way without any restriction? I guess they would not.
They would restrict and observe actions that this foreign company is willing to transpose. Let’s apply the scenario mentioned above to the Chinese ideals and think about a Chinese company establishing its business in Germany without adhering to German laws. If the Chinese company tries to assign its ideals and business behavior to the German market, the German government would certainly intervene and advise the Chinese businessmen to act according to German directives.
What we have to take into consideration is that foreign SMEs, extending their business of tangible or intangible goods to China, restrictions are not that comprehensive. As long as they are following state policies regulating business behavior minor limitations of doing business will occur.
By experience I can say, that China and especially Chinese businessmen are open-minded about doing global business. In the end it’s a win-win-situation for both parties that lead to mutual satisfaction as long as certain issues are respected. SMEs that intend to launch an online-presence in China should keep in mind that they need an ICP license and it is recommended that morally objectionable contents does not show up. Foreign companies advertizing tangible goods that are matching Chinese guidelines and do stay out-of-focus will not have problems entering the Chinese market. Others that are offering services or intangible goods containing social networking, blogging or impartial news will have problems to place them on the Chinese market.
Another important point for foreign owned companies expanding is, that they will have to decide extremely cautious where to place advertizing. It is strongly recommended not to choose websites that are observed by government institutions, or are blacklisted due to engaging in misconduct.
Furthermore the companies’ website contents should meet mobile formats because of the significant increasing Internet access via mobile telecommunication devices.
The conclusion that can be drawn is, that foreign companies following the economic ‘rules of engagement’ in China will not face severe problems or even threats in establishing business. Rather, they will be able to jump at the opportunity of sales increases in a really interesting market that maintains continuous growth.
Once well-established by complying with the external circumstances and the interpersonal networking and relationship (pinyin: guan xi – simplified Chinese: 关系) will experience the advantages of the Chinese market.

8.    Literature/Sources

[1] Wikipedia: Internet in the People’s Republic of China http://en.wikipedia.org/wiki/Internet_in_the_People%27s_Republic_of_
China
2 Internet World Stats: Internet usage in Asia, the United States and Europe (http://www.internetworldstats.com)
3 China Internet Network Information Center: http://www.cnnic.cn/en/index/ or http://www.cnnic.cn/en/index/0O/02/index.htm
4 China Internet Information Center: ‘Average salary increase of urban workers rises to six-year high’ –
http://www.china.org.cn/government/central_government/2008-04/02/content_14111192.htm
5 China Online Marketing: Top ten online advertizing platforms in China – http://www.china-online-marketing.com/news/marketing/10-online-advertising-trends-in-china-in-2010/
6 BAIDU Incorporation – http://www. baidu.com
7 SINA Corporation – http://www.sina.com.cn
8 Wikipedia: Internet Censorship in the P.R.C. – http://en.wikipedia.org/wiki/Internet_censorship_in_the_People%27s_Republic_of_China
9 Sherman So, J. Christopher Westland, ‘Red Wired‘, 2010
10 Google’s IPO prospectus (in detail: http://www.sec.gov/Archives/edgar/data/1288776/000119312504073639/ds1.htm)
11 The official Google Blog – http://googleblog.blogspot.com/2010/01/new-approach-to-china.html
12 CounterPunch, edited by Alexander Cockburn and Jeffrey St. Clair: “Google, Cloud Computing and the Surveillance-Industrial Complex” April 1-15, 2010 (http://www.counterpunch.org

[1] Compare: http://en.wikipedia.org/wiki/Internet_in_the_People%27s_Republic_of_China
[2] Compare: Internet usage in Asia, the United States and Europe (http://www.internetworldstats.com)
[3] Compare: http://www.cnnic.cn/en/index/ or http://www.cnnic.cn/en/index/0O/02/index.htm
[4] Compare: http://www.china.org.cn/government/central_government/2008-04/02/content_14111192.htm
[5] Compare: http://www.china-online-marketing.com/news/marketing/10-online-advertising-trends-in-china-in-2010/
[6] See: http://www. baidu.com
[7] See: http://www.sina.com.cn
[8] Compare: http://en.wikipedia.org/wiki/Internet_censorship_in_the_People%27s_Republic_of_China
[9] Compare: S. So, J.C. Westland, ‘Red Wired‘, 2010
[10] See: Google’s IPO prospectus
[11] Compare: http://googleblog.blogspot.com/2010/01/new-approach-to-china.html
[12] Counter Punch, ‘The Cloud Panopticon’, April 1-15, 2010

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