June 11, 2020 / 9:02 PM / a month ago

Breakingviews - Zoom’s China conundrum poses division problem

A student takes class online while using the Zoom app at her home as Egypt shut down schools as the spread of the coronavirus disease (COVID-19) continues, in Cairo, Egypt, April 5, 2020. REUTERS/Amr Abdallah Dalsh

HONG KONG (Reuters Breakingviews) - Zoom Video Communications is getting even more entangled in politics. The $62 billion videoconferencing service temporarily suspended a U.S.-based Chinese activist account after members held an event commemorating China’s Tiananmen Square crackdown in 1989. Like the Chinese owner of TikTok, Zoom founder Eric Yuan needs to start thinking about how to fork his technology or silo his operations to stay in the good graces of Beijing and Washington.

This is not the first time Zoom has come under scrutiny. Internet watchdog Citizen Lab said in April that some Zoom calls made in North America were routed through China along with their encryption keys. Zoom admitted it, and acknowledged that they could do better with their encryption design. In this latest kerfuffle, the Nasdaq-listed company justified closing the Chinese account by saying it must comply with laws in countries where they operate, and the conference had attendees in mainland China. However, it re-activated the account, and said it would modify its processes going forward.

Complying with Chinese monitoring and censorship laws is requisite for any company, foreign or Chinese, that runs internet communications in and out of the People’s Republic. Zoom has extensive research and development centres in China, where it also employed more than 700 employees as of January.

One option, which ByteDance, the Chinese owner of social media app TikTok has explored, according to a Reuters report last month, is shifting some decision-making and research capabilities out of China. Alternatively there could be a technology compromise, like building separate but compatible software products for both markets, a strategy companies like Skype and Evernote experimented with in the past.

Zoom stock is up over 200% this year on the pandemic-induced telecommuting boom, trading at nearly 164 times forward earnings. Revenue growth has been blistering. But the pandemic won’t last forever, whereas diplomatic tensions are here to stay. The sooner Yuan solves his political risk problem, the safer his share price will be.

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