Case analysis

Yahoo! and Customer Privacy (A)

In the summer of 2004, the People's Republic of China asked Yahoo!'s Chinese subsidiary for the name and address associated with username "[email protected]." The government gave no explanation of why it needed this information or what it intended to do with it. Yahoo!'s privacy policy stated it would not divulge a customer's personal

information unless officially requested via a court order or some other legal means. This was new and unexplored territory, however. U.5. customers were highly sensitive about privacy issues, but China was a far different environment politically and culturally. There was the potential for a seemingly small issue to become a bigger problem. Given the lack of

24 Part I • Ethics and Business

detail in the goverrunent's request, the imme­ diate question appeared to be whether to ask for further information to evaluate against Yahoo!'s privacy policy, or to simply hand over the information as requested.

Yahoo!

One of the Internet's earliest and biggest success stories, Yahoo! began in early 1994 as a side project of David Filo and Jerry Yang, two PhD students at Stanford. The Internet was just beginning to explode with Web sites on a seemingly infinite number of topics, so Filo and Yang cataloged the sites they liked and made the list available on their own Web page. Their well-organized directory was immensely popular, and in 1995 they incorporated their business as Yahoo!, took it public, and became multimillionaires.

From the beginning the founders had ambitious plans to harness and organize the still-developing Internet by creating "the only place in the world that anyone would have to go to find, and get connected to, any­ thing or anybody."l To this end they hired an experienced management team and set out on an aggressive campaign to grow the busi­ ness quickly. The company executed a series of acquisitions that expanded its service offerings to include Internet radio, e-mail, news, business-to-business commerce, auc­ tions, and more. Some acquisitions were quite large, including $3.7 billion to acquire GeoCities in 1998 and $5 billion to acquire Broadcast.com in 1999. The company also expanded geographically, starting with Yahoo! Japan and Yahoo! Europe in 1996, fol­ lowed by Yahoo! Korea in 1997.

Yahoo! also established a quirky cor­ porate image that reflected the personality of the founders and was typical of the "new business" Internet era. The theme was edgy and offbeat, as evidenced by its catchy and highly successful commercials with the tag line "Do you Yahoo!?" The management analysis section of the 1999 Annual Report was printed on postcards, seemingly empha­ sizing that shareholders had ventured into new frontiers and should tell others about it. The company also sought to preserve the original identity and creativity of its

founders by defining "what we value" and "what we don't value," complete with smi­ ley-face "emoticons" (Exhibit 1).

By 2003, the combination of experi­ enced management, avant-garde position­ ing, and an aggressive growth strategy had generated more than $1.6 billion in revenue (a 71% increase over 2002) and almost $238 million in profits, and company leaderShip was seeking ways to continue the trend. Its total number of users was approximately 263 million, 23% more than in 2002, with around 133 million registered users (log­ ging in with a user name and password at least once a month), a figure that was up more than 30% from the previous year.2

China

By the early 21st century, China had emerged as a highly lucrative, but unpre­ dictable and controversial, market. One of the world's oldest civilizations, mainland China had been a significant economic player in the 19th century, at one time repre­ senting 33% of global gross domestic prod­ uct (GDP); but political turmoil throughout much of the 20th century had reduced the economy to less than 2% global GDP by 1990.3 By 2004, however, that poor output

This case was prepared by Thomas A. Fruscello (MBA '06) and Senior Ethics Research Associate Jenny Mead under the direction of Andrew C. Wicks, Associate Professor of Business Administration, R. Edward Freeman, Elis and Signe Olsson Professor of Business Administration, and Patricia H. Werhane, Ruffin Professor of Business Ethics. It was written as a basis for class discussion rather than to illustrate effective or ineffective handling of an administrative situation. Copyright © 2007 by the University of Vrrginia Darden School Foundation, Charlottesville, VA. All rights reserved. To order copies, send a:n e-mail to sales @ darden­ businesspublishing.com. No part of this publication may be reproduced, stored in a retrieval system, usde in a spread­ sheet, or transmitted in any form or by means--electronic, mechanical, photocopying, recording, or otherwise-without the permission of the Darden School Foundation.

1 Yahoo! 1997 Annual Report, 9. 2 Yahoo! 2003 Annual Report, Chairman and CEO's Report, http://www.shareholder.com/shared/dyna­ micdoc/YHOO/626/YHOO_626.pdf (accessed 30 July 2007). 3 Mary Meeker, The Internet in China, Morgan Stanley.

Chapter 1 • The Language of Ethics 25

EXHIBIT 1 YAHOO! AND CUSTOMER PRIVACY (A)

Source: http://docs.yahoo.com/info/values (accessed 12 November 2007).

was a thing of the past, with vigorous eco­ nomic growth in 2003 and a GDP that had climbed to 9.1% in that year.4 This growth, coupled with a massive population and government signals of openness, created tremendous potential for the Chinese econ­ omy and for western companies.

The Peoplels Republic of China (PRC), in existence since 19491 had experienced several radical shifts in political, social, and economic policy in its brief history. After several infamous state-managed programs, including "The Great Leap Forward" and "The Cultural Revolution" under Chair­ man Mao Zedong, the PRC adopted a new approach in the late 1970s under Deng Xiaoping. After 30 years of tight control, the government focused on economic reforms using a pragmatic, experimental approach. Rather than implementing a massive nationwide policy such as "The Great Leap Forward," government would consider practical solutions, test them on a local level, and expand them if they worked. Under this incremental approach, which Deng labeled"socialism with Chinese char­ acteristics/I the PRC government slowly began releasing its grip on the economy by granting new freedoms in agriculture, trade, and foreign investment.

Although this incremental approach produced Significant improvements in China's economy, concerns about social freedoms and basic human rights remained.

These pressures, both within and outside China, strongly contributed to the unsta­ ble, uncertain, and risky environment exemplified by the April 1989 Tiananmen Square protests by students and workers critical of the government. The Chinese government's crackdown-declaring mar­ tiallaw on May 20 and resorting to military action in the square on June 4-was widely covered by the media, and many people worldwide blasted the Chinese government for its use of force on seemingly peaceful demonstrators. "Tiananmen Square," to many, became synonymous with lack of human rights in China.

In subsequent years, China cautiously continued economic reforms and its econ­ omy grew at an average rate of 10% annually, the highest in the world. Deng continued his socialism with Chinese characteristics with additional reforms, and by the late 1990s China was actively pursuing membership in the World Trade Organization (WTO). Membership would require China not only to lower the tariff and regulation trade barri­ ers, but also to force key trading partners to remove quotas on Chinese goods. China's slow, but steady, reform trend was making it more enticing for companies to test the

4 The GDP was (Chinese yuan) CNYU, 669.4 billion, the equivalent of apprOximately (U.S. dollars) USD 1.5 billion.

26 Part I • Ethics and Business

economic waters. Deng died in 1997 and was succeeded by Jiang Zemin, who immediately legalized private enterprise and unveiled a plan to privatize Communist China's state­ owned enterprises. In December 2001, after 15 years of diplomatic wrangling and negoti­ ating, China became the 143rd country to join the WTO.In return for its spot in the organi­ zation, China agreed that it would "under­ take a broad series of reforms that will open its market to multinational corporations and open many of its industries to foreign investment. The changes are expected to put increased pressure on already troubled sec­ tors of the economy, even as it draws foreign capital into the country."S

In 2002, Zemin resigned and Hu Jintao succeeded him in the first peaceful transition of power in China since 1949. Little known outside of China (and to a cer­ tain extent within the country), Hu Jintao was a fairly inexperienced politician and lacked both charisma and factional support but was known as a consensus-builder. Born in 1942, he had studied engineering at Qinghua University, worked his way up within the Communist Party's rank and file, and had an "urbane, unassuming, controlled ... and immaculate"6 personal style. Some believed, however, that, given his role in bringing reforms to the Commu­ nist Youth Corps, Jintao could possibly be China's Gorbachev and "finally free the world's next superpower from its Leninist strai~acket."7 By 2004, Jintao had defeated these expectations by pushing aside any rivals and cracking down on dissidents, activism, and criticism of the government. At the same time, Jintao showed a more compassionate side, promising to assist those whose lives had not been helped by economic advances and even journeying to the poorer areas of the country. He advo­ cated openness in the media when the SARS crisis hit, argued for "sustainable development," and began to reign in the frenzy of construction in China's larger towns and investigate alleged corruption.s

Particularly attractive to businesses both within and outside China was the bur­ geoning number of Internet users in the country. With a rapidly growing economy,

more people were able to buy computers and thus go online. Although the market was problematic in that it was highly frag­ mented and dominated by local companies, Internet usage was "mouth-wateringly high across the region," as one business reporter characterized it, and international heavy­ hitters such as Yahoo!, Google, and MSN were "understandably frantic to make an impression in Asia" and keep up with the "lift-off of the world's fastest-growing medium in the world's fastest-grOwing adver­ tising region."9 By 2004, China had 80 mil­ lion online users, 22 million of whom had emerged in 2003, making it second only to the United States in the number of users.1O

China was projected to surpass the United States in 2006, with 153 million users.ll The Internet also provided for many a way to skirt, with mixed results, the tight govern­ ment censorship of China. (See Exhibit 2 for Asian Internet statistics.)

Although the Asian Internet market was enormously attractive to outside com­ panies, not all Internet behemoths had nav­ igated their way in successfully, and some had chafed under tight restrictions when they did. Lycos had withdrawn from many of the Asian markets in 2003, and AOL struggled, somewhat unsuccessfully, to gain a foothold. Other companies such as

5 "China Joins WTO," New York Times, 12 December 2001. 6 TIm Luard, "China's Leader Shows His Stripes," BBe News, January 11,2005, http://news.bbc.co.uk/go/ prI fr I -12/hilasia-pacificI4165209.stm (accessed 25 Februarv 2008). 7 Luard: 8 Luard. 9 Rob Gray, "Pan-Asian Media-Asia Online," Special Report, Haymarket Publishing Services Ltd., 19 November 2004, 40, http://www.brandrepublic. com/News/228666 (accessed 8 August 2007). 10 Bruce Einhorn, "China.Net," Business Week (15 March 2004): 22. 11 This growth was even more astonishing in light of the 1999 Chinese Internet statistics, compiled by the China Internet Network Information Center: There were 4 million Internet users, representing a 240% increase over the previous year and a mere 0.3% pene­ tration of China's 1.2 billion population. Furthermore, more than 75% of users were under the age of 30, a highly attractive market.

Chapter 1 • The Language of Ethics 27

EXHIBIT 2 YAHOO! AND CUSTOMER PRIVACY (A)

Source: Rob Gray, Haymarket Publishing Services Ltd., "Pan-Asian Media-Asia Online," Special Report, 19 November 2004, http://www.brandrepublic.com/News/228666 (accessed 8 August 2007).

Time Warner had chosen to walk away from China altogether. In 2002, the com­ pany announced a $200 million joint ven­ ture with Chinese company Legend to set up AOL in China, but later abandoned the idea, in part out of concern over the govern­ ment's demands that AOL block certain content.12 AOL also had significant prob­ lems with software piracy that undermined its CD-ROM marketing campaign.

Yahoo! China

In September 1999, Yahoo! cofounder Jerry Yang had declared "I am Chinese" in Mandarin to announce a joint venture with Beijing Founder Electronics.13 The Taiwanese-born Yang caught industry ana­ lysts by surprise because his announcement came only one week after Wu Jiquan, head of China's Ministry of Information Industry, publicly stated that China's ban on foreign investment by Internet service providers also included search engines and Web portals such as Yahoo!. A few days later, ministry officials seemingly backtracked and stated more explicit regulations regarding Internet

investment could be written by year's end.14 Yahoo! opted to launch the new site from Hong Kong, allOwing the company to benefit from the 1/one country, two systems" policy crafted by Deng Xiaopeng. By doing so, Yahoo! would not necessarily have to follow the laws and regulations of mainland China, including those of the Ministry of Informa­ tion Industry. Yahoo! later opened an office in Beijing once regulations were clearly written and endorsed by the government.

China's regulation of Internet content presented a much bigger challenge (Exhi­ bit 3). The government introduced regula­ tions in 1995 and continuously added laws

12 Jason Dean and Kevin}. Delaney, "Limited Search: As Google Pushes Into China, It Faces Clashes With Censors; Executives Wrestled With Issue As Others Took the Lead; Now, It's Charging Ahead; What 'Don't Be Evil' Means," Wall Street Journal, 16 December 2005, A-l. 13 "Yahoo! hits China amid uncertainty," Advertising Age International, October 1999, 1­ 14 William}. McMahon, "Yahoo!'s Yang Walks Portal/ ICP Line in China," ChinaOnline News (29 September 1999).

28 Part I • Ethics and Business

EXHIBIT 3 YAHOO! AND CUSTOMER PRIVACY (A)

;;'~fi~~"~'6l'~~' o ) f' ~ ~ ~ ~ "

·,·<r.·--,: - . ~.,

-." 2):>~"~- .. ,"

. ", /?·as:to~~(rhterE!dtrriefe~~\t6;aU;~ne:.acttvjll~s;reIateo'Uflntsmet . . . '0 ;.., "i.-.'~ . ". ,i..:"':!' .'. _.~ ,:".~ ',/': ~. '.' .;:i.:', ,0 ::. ~':. , ,:>~; ;': l'.?:"'::':' '. '..:.:/ :: ~':"" '". : . 'J., '~,~::': .:;'\:; ... ""."'" v. -:., . ,- . ;, .

7'~f9irn~C'~·~~0~'~¢~~~~¢~~rk

~1~Si.

'I~\~ :,' :'",' ..t :~.,:.~: ','

t,

:t~~i~i~~~~!~~~:=:::e7:~~~;~~=~~:~~~1~~~:/~~y ;" .... tVf ·~tG'l~;;aM·r;y{)t~thflOfdgy,:;~r:lmyPther;:ad'laf1tage:may be

.~ '.tls~dt'anet~iote~s,f,)fttre~oo~met1i;,or D$ers~···· ";/J,,ijJdeJ '~p1~~ers¢ ..... ......... '.e .fe'gu«afiOns'on

:1;.I......;.:e.•. .~lIif<>t:t'!n::':"'~t "llIisliall 'fu!l!lli_foII<iWfugolS<ipHnary....~'~~~ . 'k' •..... ,"9"Posti~~l",lc9~f~serrn~rt8:imgptkt'lii(:itmSmfOrma.tionth~tmay

.,.,' "1~ ·,,~"nd·cfi5rupt'sQ,tj~l·stabi1tj;y;:~q,*~aV'e~A~vvsaI1:4 reg.~l~tionst and

... ,.;2;irfi~.E~~~.E:;;=2::: ,. '3"Qbs~' .. . . '.'~ 'il~o're9~1~~lans c<)1l£emihg in~l'te<!ttt~J,':pl7OpertyirJghts, rn:the cour:seof

:··'······~~:.I~Naai$;;:~~:e:::nits Article 1DWe li1tetllef atl=E$5 sew.rce providet'S· ple~ejtG i:ns~.arlC:f iJfIoni:!iof:'mfor:r:nation on

, clom~r~~~' ·,,sites. When it proliid:es a~ to lh~JSEf5lt.aSand. refuse access to those 'Web~~it~~~hatqi~mjne~fiirfu{rnfurrnatibn~

< -, '< ~:'i' ":"",1' ;'. '

Chapter 1 • The Language of Ethics 29

Article'.(3~Wne.f~vtoJiitigPs~f havea.r:legative·irrtP<i!!'ttR~fl •...• organi?atlpms;'ht'adtl.tlQn'tq¢;a~hirnfsteFiP9ag:enC}'·'·lT:laY·feV~~{:ti:!~} .'. Ught of~pedfk dr<Llm~~es... .,~_ . ";;.'''.:':,:';L' ..

(continued)

30 Part I • Ethics and Business

Source: http://www.isc.org.cn/20020417/ca102762.htm (accessed 12 November 2007).

as Internet usage increased. But the rules were very broad and vague:

Yr:its and .individuals engaging m mtemational networking shall observe relevant state laws and administrative rules and regula­ tions, and strictly implement a security and classified informa­ tion protection system; they are not allowed to use international networking to harm national security, leak state secrets, and engage in law-breaking cri­ minal activities; and they are not allowed to produce, read, duplicate, or circulate infor­ mation hampering public secu­ rity and obscene pornographic information.1S

Although general categories were clearly unlawful, such as transmitting state secrets, there was no clear definition of how to identify unlawful content-for example, what was and was not a state secret.

In 2002, Yahoo! and 120 other compa­ nies signed a Public Pledge of Self-Regulation and Pr~fessional ~thics, created by the Inter­ net SOCIety of China. The pledge carried no legal weight and listed no specific require­ ments not already defined by law. Even so, Yahoo! drew sharp criticism from human rights activists, such as Kenneth Roth, execu­ ~ve director of Human Rights Watch: "ll it Implements the pledge, Yahoo! will become

15 State Council Decree No. 195 of the People's Republic of China, Article 13.

an agent of Chinese law enforcement. It will switch from being an information gateway to an information gatekeeper.,,16

Competition

Despite the risks and difficulties of working in China, other major companies such as Microsoft, Cisco, and Coogle had also set their sights on Asia. The "first mover advan­ tage"17 was significant in the YOilllg Internet industry and the thought of gaining a foothold in China shuck both excitement and fear in the hearts of executives. But they were also finding challenges in the Chinese mar­ ket. In August 2002, Coogle's search engine stopped working for Chinese Internet surfers and remained unavailable for two weeks. Even after the site was restored Internet users found certain search topics no longer pro­ duced results. Google denied making any changes, creating speculation that the gov­ ernment was actively blocking content. By 2004, Coogle took an active role when it lailllched a Chinese news service and volun­ tarily excluded information from sites the government considered subversive.18 Still, the company was unsure how to proceed in the precarious Chinese market without going against its "do no evil" philosophy.

Nonetheless, Yahoo! China was feeling the pressure from its competitors, primarily Coogle. In early 2004, Yahoo!, in an effort to build its profile, launched a Chinese Internet search Web site modeled on that of Google. Called Yisou, or "one search," this site used the "uncluttered and simpler user search interface" that Coogle had created and that had been imitated by Baidu, China's largest Internet search provider. The competitive threat had only increased the previous year, when Google had moved closer to taking a minority stake in Baidu. The seriousness of Yahoo!' s efforts to dominate the market was underscored by Yahoo!'s decision not to use paid advertising or links on the site. The company's ultimate plan was to have a search engine that was not only more "inter­ national" than Baidu's, but also "better adapted to the local market" than Google's.19

In 2003, Yahoo! had acquired 3721 Network

Chapter 1 • The Language of Ethics

Software, a Chinese language search devel­ oper, for $120 million.

Yahoo!'s Experience with Privacy

The laws and precedents concerning cus­ tomer privacy were still evolving in the young Internet industry, and Yahoo! already had some experience with these issues. In 2000, a company called Answer Think filed a defamation lawsuit against a Yahoo! user who had posted derogatory comments about AnswerThink on a chat room. The company served Yahoo! with a subpoena to reveal the user's name, and Yahoo! complied. The user then sued Yahoo!, claiming the company had vio­ lated his privacy by inappropriately shar­ ing his information with a third party with­ out first notifying him or validating the subpoena.2o The case was ultimately set­ tled out of court. In another privacy case, Yahoo! refused to hand over the e-mails of a U.S. marine to his father after the soldier was killed in Iraq. The family sued and won, and Yahoo! complied with the court

16 Human Rights Watch, "Yahoo! Risks Abusing Rights in China," 9 August 2002, http://www.hrw.org/press/ 2002/08/yahoo080902.htm (accessed 25 February 2008). 17 A strong, often insurmountable advantage gained by the first significant (as opposed to simply the first) company to move into a new market. For example, though eBay may not have been the first on-line auc­ tion Web site, it was the first significant one and there­ fore had "first mover advantage." 18 Jason Dean and Kevin J. Delaney, "Limited Search: As Google Pushes into China, It Faces Clashes With Censors; Executives Wrestled With Issue as Others Took the Lead; Now, It's Charging Ahead; What 'Don't Be Evil" Means," Wall Street Journal, 16 December 2005, A-1. 19 Mure Dickie, "Yahoo's China Site Modeled on Google's," Financial Times, 22 June 2004, 31. 20 According to U.S. law, AnswerThink was required to notify the defendant about the suit, and if unable to do so, it had to request permission from the court to issue a subpoena or post public notice about the law­ suit. Because AnswerThink had not sought permission to issue the subpoena, the user contended that his rights had been violated, and that Yahoo! was party to this. Source: Dan Bischof, "Through Accusations of Defamation, Companies Are Starting to Unmask Anonymous Online Critics," News Media & the Law, 1 January 2001.

32 Part I • Ethics and Business

order, saying it was glad to do so under the legal process.21

The company also faced international challenges. In 2000, a French court ordered Yahoo! to block access for French users to its auctions that included Nazi and other similar memorabilia, because such items were outlawed for display or sale in France. Yahoo! fought the suit, saying that it already excluded items from its French site, www.yahoo.fr. but that France had no juris­ diction to restrict content of its U.S. site, www.yahoo.com. which was also available to Internet users in France. Yahoo! attorney Christophe Pecnard stated: liThe question put before this court is whether a French jurisdiction can make a decision on the English content of an American site, run by an American company ... for the sole reason that French users have access via the Internet. ,,22

What Do You Do, Yahool?

There were several possibilities open to Yahoo!, but none was Simple. The com­ pany could just comply with the Chinese request. In the United States, such a request for information would likely have been more explicit as to why the informa­ tion was needed, or might even be in the form of a subpoena that the company could formally investigate and confirm. Since the request was from the Chinese government, it seemed to have sufficient official authority to meet Yahoo!'s criteria for when to divulge customer information. Working with the Chinese government certainly was a different experience than working in the United States. If the user in question was committing crimes, such as kidnapping or murder, surely it would be easy for the government to share that, but if the case involved more nebulous politi­ cal issues, Yahoo! could find itself in an uncomfortable situation.

Saying no to the government could be difficult, and the government's tight reign over business could put the company's

Chinese operations at risk. Resisting the request could prod the government into divulging more information, or perhaps its intentions, but there was some risk of offending officials. Rumors of human rights abuses abounded, but without more infor­ mation it was difficult to know if this was such a case.

Searching for alternatives to compli­ ance held some promise, but was difficult and fraught with risk, as exemplified by Chinese media tycoon Liu Changle. Liu's Phoenix Satellite television, China's only private television network, was the only station to mention the death of former Communist Party Leader Zhao Ziyang who had been punished for his opposition to the government's response to Tianan­ men Square. When provincial governments began blocking his TV signal, however, Liu stopped broadcasting the story of Ziyang's death and quickly started apologizing. He explained his actions: "We walk on a tightrope ... If we do everything the gov­ ernment wants, people will treat us with contempt. If we follow the people com­ pletely, the government will wipe us out.... It can be very uncomfortable."23

Liu believed, as did other business leaders, that while China should move towards a more democratic system, it could only do so in a gradual and orderly manner.24

The various issues of legality and confidentiality seemed overwhelming, but the bottom line was that Yahoo! had to decide exactly what to do with "[email protected]."

21 Stephanie Olsen, "Yahoo Releases E-Mail of Deceased Marine," News.com, 21 April 2005, http:/ / news.com.com/2100-1038_3-5680025.html (accessed 12 November 2007). 22 "France Bans Internet Nazi Auctions," BBe News, 23 May 2000, http://news.bbc.co.uk/1/hi/world/europe/ 760782.stm (accessed 12 November 2007). 23 Philip P. Pan, "Media Tycoon Stirs Up China's Airwaves," Wall Street Journal Asia, 20 September 2005. 24 Pan.