HONG KONG — It is one of the best-guarded borders in the world, and one of the most time-consuming to cross. Yet in the past few months, a new agreement has let people speed over it billions of times.
The border is the digital one that divides China from the rest of the world. It is laden with inefficiencies and a series of filters known as the Great Firewall, which slows Internet traffic to a crawl as it travels into and out of China.
Now, a partnership between an American start-up and a Chinese Internet behemoth has created a sort of fast lane to speed traffic across the border. In the process, the two companies are establishing a novel business model with implications for other American technology firms looking to do business in China’s politically sensitive tech industry.
The partnership, signed in July 2014, is between CloudFlare, a security company based in San Francisco, and Baidu, China’s equivalent of Google. Using a mixture of CloudFlare’s web traffic technology and Baidu’s network of data centers in China, the two created a service that enables websites to load more quickly across China’s border. The service, called Yunjiasu, began operating in December. It has a unified network that makes foreign sites more easily accessible in China, and allows Chinese sites to run in destinations outside the country.
At the heart of the arrangement is an unusual structure known as a virtual joint venture. Under that arrangement, CloudFlare does not actually operate in China. Instead, CloudFlare cooperates primarily from afar as Baidu runs the business in China.
Baidu and CloudFlare’s virtual joint venture relies on a principle generally considered anathema to foreign companies looking to do business with China: trust. CloudFlare transferred its intellectual property that is used to manage and speed up Internet traffic to Baidu and works closely with its engineers to run that technology on Baidu’s network in China. The two share revenue from the service.
The virtual joint venture could prove to be a new model for American tech firms that are considering doing business in the delicate areas of China’s tech industry. Companies including Uber, LinkedIn and Airbnb have recently sought to expand in China by using the political connections and sway of Chinese investors to clear a path to opening and running their own businesses there. Yet because of the Chinese government’s preoccupation with how the Internet is run and controlled within its borders, that was not an option for CloudFlare and Baidu.
“With the right Chinese companies, there’s going to be more of these types of deals,” like virtual joint ventures, said Carmen Chang, a partner at New Enterprise Associates, a venture capital firm that has invested in CloudFlare. As China’s largest Internet companies have grown, so have their international ambitions and exposure to international laws, ultimately relieving some tech companies in the United States of the paranoia many have when they contemplate going to China, she said.
For CloudFlare, a five-year-old company that manages Internet traffic for millions of websites and makes browsing quicker and more secure, the central question was whether to transfer its intellectual property and give up local control or to forgo the vast business opportunities in China.
Outside of the high-profile sites that Beijing sees as a threat and blocks — like Facebook and Twitter — are a huge number of businesses that suffer under China’s network inefficiencies. Those are the customers the service is targeting. And since the fast-lane service began operating, CloudFlare and Baidu said they have registered 450,000 businesses that account for 57 billion page views per month.
Customers can try the service free, though CloudFlare and Baidu added supplemental security features and greater control over web traffic last month, both of which must be paid for.
Matthew Prince, CloudFlare’s chief executive, said transferring the company’s intellectual property to Baidu enabled a deeper trust and a partnership. He added that the intellectual property is not the most critical part of the company.
“We had much less apprehension about sharing our code, because we don’t think there’s any line of code we write that’s so clever that gives us a sustained advantage,” Mr. Prince said. “That comes from the network itself.”
Still, to be safe, Baidu and CloudFlare worked out a contract that gives each company control over crucial elements and would inflict penalties if either partner withdrew. For example, Baidu controls customer information within China, but CloudFlare owns the web address through which the entire operation works.
“At some level, we designed the contract so we both have leverage,” said Joshua Motta, CloudFlare’s head of special projects. “We’re both pointing guns at one another, to some extent.”
To work out the arrangement, Baidu’s president for new business, Ya-Qin Zhang, said the company was in contact with Chinese regulators from the beginning of its negotiations with CloudFlare.
“We emphasized the fact that working with CloudFlare was really going to benefit the vast majority of Internet companies in China and allow us to provide better services to them — that it creates value for both Chinese and American companies,” he wrote in an email.
Not actually operating in China spares CloudFlare some of the difficulties faced by other recent American entrants into the country. For example, the professional social network LinkedIn agreed to censor sensitive content posted in China in order to expand its business there, which has stirred controversy with users. And Uber has been pushing to host the data it collects on Chinese drivers and customers locally to comply with Chinese laws.
For CloudFlare, the burden of dealing with local Chinese laws falls largely on Baidu, which has full control of data for the China service. CloudFlare stores its customer data on servers outside of China, offering encryption options that enable secure cross-border payments.
“From a technical perspective, we could give up a lot of control without putting our customers at additional risk or doing anything that might make us uncomfortable about sharing information,” Mr. Prince said.
CloudFlare, which has raised $72 million in venture capital and is valued at more than $1 billion, has long had its eye on the Chinese market. In 2013, it met with several Chinese web firms, including Baidu, about a partnership. Mr. Motta said that, with guidance from CloudFlare’s Chinese engineers, the company decided Baidu and CloudFlare had more of a shared ethos.
The partnership faced bumps. Just weeks before Baidu and CloudFlare were about to sign the agreement in 2014, an online voting platform that was set up as an informal referendum on the political future of Hong Kong was hit by a huge cyberattack.
Using its global network of data centers and its ability to control Internet traffic, CloudFlare mitigated the so-called distributed denial-of-service attack. Though it remains unclear who was behind the attack, the obvious political motive led to concerns that the deal would be scuppered.
“There was definitely a moment there where it wasn’t entirely clear whether that situation would spook Baidu or spook the government, and we handled it, I think, in a very professional way,” Mr. Motta said.
With the fast-lane service, the companies estimate that the network has processed requests from about 207 million users in China in the last month, or roughly one-third of China’s total Internet-using population. They estimated that over a period of 24 hours on Wednesday, the service saved about 243 years in time that users in China would have otherwise spent waiting for pages to download.
Among those who have embraced the service is ChaseFuture, a start-up in Shanghai that advises university applicants in China on applying to international institutions. With a site that hosts large amounts of video, ChaseFuture had struggled to keep its service quick both inside and outside China.
“With servers in China, download times in America were atrocious, but with them outside China, it creates the reverse issue with clients who trust us waiting 15 or 20 seconds for a page to load, if it does at all,” said Greg Nance, ChaseFuture’s chief executive and founder.
The Baidu-CloudFlare service has solved the problems, Mr. Nance said.
“Someone was going to change the way the Internet works in China through this kind of structure, and they’re well on the way to doing so,” he said.
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