By PAUL MOZURSEPT. 13, 2015
Joshua Motta, left, Carmen Chang and Matthew Prince in the San Francisco offices of the security start-up CloudFlare. Credit Jason Henry for The New York Times
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.”