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Maybe I'm naive, but I just can't see how these NetSweeper people justify this to themselves.
They care about money. And that's it.
Demand <--> supply.

Controls might help prevent this type of thing but often just pushes it underground. In all likelyhood they'd probably just get it from some source without public tenders. Then we'd know even less about their censorship capabilities.

Or at best they'd get a less-capable software version from an amoral and less technically savvy country - which may be easier to circumvent.

Bluecoat seems to still be operating fine despite doing similar things years ago in the US.

"Somebody is going to do this, so we might as well do it" is not a valid defense for doing something that is immoral.
You mischaracterized my argument. To reiterate:

If somebody is going to do it anyway it is therefore often better to have it done in public rather than pushed into black markets via controls (see: drug war).

The additional condition I provided is where the black market options are much weaker or limited than the possible public options, allowing the markets to effectively circumvent or eliminate the negative utility of the black market products - therefore making controls a valid option (see: nuclear arms).

Money are extremely good at placating the conscience of a person.
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You should read the article.
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To make matters even more complex, Netsweeper appears to have received subsidies / grants from the federal government of Canada ( see http://www.giantgoat.com/blog/2010/03/guelph-partnership-for... )
This is very common for tech companies operating in Canada. Though it is interesting to consider nonetheless.
Canadian companies doing business with foreign governments get help from the Canadian Commercial Corporation and probably consular personnel too. The Canadian government is very much involved.
"Andrew Graydon: Chief Operating Officer of Netsweeper Inc. Andrew gave an enthusiastic talk on the benefits that IRAP has had on Netsweeper; explaining how they started out in 2002 with an IRAP YEP grant (Youth Employment Program) and then moved on in subsequent years to get IRAP project funding that enabled them to develop very innovative and what sounds like potentially very profitable technologies in the Internet content filtering area."

Last line is pure gold in retrospect.

Shame on them, both as a Canadian and coming from a family who used to live in Bahrain.
Same here. I was just across the causeway in Dhahran.
Whatever 1.2 million is not much money. And if they don't do it someone else will do it.
One could justify the sale of any unethical product or service to any despicable group this way, could they not?

Is there ever a role for principled commerce?

Netsweeper is creating a bigger national security threat than any so-called subversives could. They are reinforcing a constricted, benighted, world-view in a place that needs exposure to diversity of thought more than most others.
One of the cornerstones of international law is that a country's internal affairs are their own.
Now if it also turned out that the money actually comes from the Canadian government as some sort of aid funding for development projects abroad, that would be perfect!
We say no to these deals because the cost of doing them is too great.

Not only have we said no to these opportunities in the past, but we probably said no to this specific one. Here is our documented anti-censorship policy: https://www.opendns.com/about/anti-censorship-policy/

Even as a part of Cisco, it's easy to avoid these kinds of deals still today. You simply say "No – The cost is too great."

I doubt you can get every technologist to say "no" to a million dollars. There will always be someone willing to supply this technology.
Definitely. It just doesn't need to be me.
Maybe it is me but 1.2 mio dollars does not sound like much for doing something like this.

But then the article doesn't really describe what exactly what censorship entails.

I'm appalled that someone would give up such basic principles for a million dollars. A billion, and I could understand it being hard to turn down, but one million?

If you're going to sell out, might as well be for a large sum†.

† Given they have to implement it, and there are probably more than a few people involved, I can't see anyone getting more than 100 thousand out of this. On the other hand, Judas was content with 4 months pay, so maybe some people just don't care.