Is Google’s China Problem a Groundswell of the Closed Internet?

As the Federal Communications Commission this week starts combing through the more than 10,000 public comments filed in its net neutrality proceeding, the U.S. government’s concern with maintaining a free and open Internet is beginning to look like a global anomaly.

Around the world, governments both authoritarian and democratic are taking ever-more aggressive steps to regulate Internet and online service providers and to monitor what their citizens do online. While those measures have provoked fierce political battles in many of the countries where they’ve been introduced or proposed, they also threaten to complicate the investment environment for companies offering consumer-facing web services.

The most notable recent case is the dispute that erupted this month between Google and the People’s Republic of China. Though China has long maintained strict controls over Internet access, recent Gmail hacks apparently originating from China and aimed at human rights activists have prompted Google to consider withdrawing from the country altogether. While Google’s business in China is tiny — no more than a few percent of total revenue, according to analysts’ estimates — its search engine has recently gained substantial market share there, suggesting potentially significant future upside. But only if it stays.

China is hardly the only country where Google is facing challenges, however. In South Korea last year, Google blocked some users from uploading content to the local version of YouTube after the government imposed a rule requiring contributors to register using their real names, a move many saw as aimed at political dissidents.

Just before Christmas last year, the Italian government issued new rules that take effect later this month that will regulate online service providers much the way TV networks are regulated. Unless blocked by the courts, the new rules will make OSPs and ISPs legally liable for any infringing or illegal content on their networks, and give Italy’s communications regulator oversight of any web site that streams video on a daily basis.

Four Google employees in Italy have also been charged with violating privacy laws there in connection with a video posted on YouTube showing schoolchildren bullying an autistic classmate. Google has said that a guilty verdict would make it extremely difficult to continue operating in Italy.

The French government recently enacted rules imposing an affirmative burden on ISPs to monitor what their users do online and to cooperate with content owners and the government in barring repeat copyright infringers from accessing the Internet. Britain is considering similar rules, while the Australian government is considering rules requiring ISPs to filter infringing content from their networks. And those are only some of the measures being contemplated around the world.

Like the Internet itself, many global web-based services like YouTube originated in the United States, where the Digital Millennium Copyright Act and other laws have provided investors and entrepreneurs with the legal certainty and limited liability needed to spur such innovation. As those services have moved overseas, however, they have increasingly encountered different, and often changing legal and regulatory systems that are not as open to business models shaped by the U.S. system.

Now that international growth is becoming a material part of their business, those same service providers find themselves facing an increasingly uncertain investment environment. Notwithstanding the political risks of operating in China and other authoritarian countries, the risk of legal liability that web services could face in Europe, Australia and elsewhere in the democratic world greatly increases the financial risks of operating in those territories.

While those effects are only beginning to be felt, the trend toward greater and stricter regulations of web services is gaining momentum around the world. Eventually, it could make the debate in the U.S. over P2P throttling look quaint.

Question of the week

How should Google and other service providers respond to growing Internet regulation?
Relevant Analyst

Paul Sweeting

Principal Concurrent Media Strategies

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