By Stephanie N. Mehta
January 13, 2010

Fortune’s man in Shanghai offers perspective on the online ad giant’s threat to end its China venture.

By Bill Powell, Senior writer

//Safari can’t open the page” because the server unexpectedly dropped the connection. This sometimes occurs when the server is busy. Wait for a few minutes, and then try again…//

You get used to seeing those words pop up on your computer screen when you live in China. Indeed, it happens so often that the word “unexpectedly” is entirely unnecessary.  The Great Red Firewall is a fact of life here, and it forces any Internet user who wants to get to a site that the Chinese government deems unworthy of your interest to do so via proxy servers or VPNs. Sometimes a pain, sure, but in the grand scheme of things,  you can usually work your way  around the censorship if you want to or need to.

But that message that flashed on my screen today — and on anyone else’s here trying to call up the astonishing statement from Google (GOOG) — was anything but routine. It was historic, because of what it was trying to prevent the average Chinese citizen (who doesn’t bother messing around with proxy servers)  from reading: a blog posting from Google’s chief legal officer, in effect telling the Chinese government: Enough.

David Drummond, on behalf of Google — in a detailed, nine-paragraph statement — does something that no other major multinational company I can think of has done since the massacres of Tiananmen Square. He pushes back, hard and in public, against the government in Beijing, and the price it exacts for doing business in the country with the most Internet users in the world.

Though Google says it will seek negotiations with Beijing in the weeks ahead,  Drummond says flatly the company is “no longer willing to censor its results on” — its Chinese search engine — and is ready to pull the plug on its operations in China, lock, stock, and barrel.

More sinister than mere censorship

The reason for this extraordinary announcement is not ordinary censorship. Google, Drummond says, has discovered after several weeks of investigation that its corporate servers have been hacked from China — assaults that resulted in the “theft of intellectual property,” Drummond says — and that the cyberattacks had a sinister intention: finding out the Gmail addresses of “Chinese human rights activists.”

That this is the case is not particularly shocking. China just recently sentenced Liu Xiaobo, author of the pro democracy Charter 08 statement in 2008, to 11 years in jail for his efforts. As a Chinese friend (who, for obvious reasons, needs to be nameless) said to me today, “This is what our security services do; they try to hunt down or at least monitor people they believe are enemies of the government.”

Exactly right. The news is the defiant Google pushback. In 2004, Yahoo (yhoo) gave up the e-mail address of a Chinese journalist the authorities were looking for, who was subsequently given a 10-year sentence for sending to foreign-based websites a copy of instructions from Beijing authorities on reporting about “sensitive issues.”

The poor guy got 10 years in jail for that. Yahoo claimed — accurately if depressingly — that it had to obey Chinese law and turn over the information the cybercops wanted. It later settled out of court a civil lawsuit brought in the U.S. by relatives of the journalist. Google had obviously made compromises to do business in China. I did a search here in Shanghai this evening on four hot-button issues — Free Tibet, the Dalai Lama, independent Taiwan, and the Falun Gong — and all that popped up was the usual one-sided drivel from mainland Chinese websites that toe the line.

Google: Still small in China. So what?

There are cynics who are already saying that Google can afford to be confrontational because it’s been getting its clock cleaned by Baidu (BIDU), the Chinese search engine. According to Analysys International, Baidu has 64% of the search engine market, compared to just 31.3% for Google. It makes only a tiny bit of its overall revenue in China.

But the argument that therefore the company can just move on is preposterous on its face. China already has the most Internet users in the world, and that number increases every single day. Google similarly had cuts deals with mobile device makers here  to sell its new Android operating system. China is to Google what it is to virtually every other major company on planet earth: the market of today but, much more importantly, the market of tomorrow.

That’s what makes Google’s public statement on China’s pursuit of human rights activists via a cyberattack so remarkable. It will, in no particularly order, anger the Chinese government,  privately infuriate other foreign Internet and Internet-infrastructure companies for raising this issue so publicly, raise legitimate questions among Google’s shareholders, and no doubt cause some discomfort in the Obama White House. (Obama, as Fortune has pointed out, loves Google and vice versa. Yet last year, Secretary of State Hillary Clinton quite publicly relegated human rights to the kid’s table when it came to Washington’s bilateral relationship to Beijing. Next week, Clinton gives a speech on Internet freedom in the 21st century — a speech that will now get a lot more attention than it otherwise would have.)

The fallout from this, should Google actually pull out of China, is unpredictable. But at least one thing is pretty certain: when Sergey Brin, the co-founder of Google, whose family grew up in the former Soviet Union, said his company’s unofficial motto was “Don’t be evil,” a lot of people snickered. Now, the biggest kid on the cyberblock has punched back — hard — against the very powerful Internet bully in Beijing.

Time to stifle the cynicism, and see where this goes.

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