Page last updated at 00:05 GMT, Friday, 26 March 2010

Google's rift with China is a calculated business risk

By Russell Hotten
Business reporter, BBC News

Google's relations with Beijing were never going to be smooth

Google's move into China four years ago was billed by some people as a battle between the irresistible force and the immovable object.

The inexorable expansion of the internet - epitomised by Google - would never exist happily in a command economy like China, said critics.

By taking its search engine onto Chinese soil - and thus agreeing to Beijing's censorship rules - Google was accused of trading reputation for profit.

On Monday, however, Google pulled its search facility out of mainland China, redirecting users to an uncensored site in Hong Kong.

What now for both profits and reputation? Has it shut the door on the world's biggest internet market?

The Great Firewall

China has hit back at Google, limiting its citizens' use of the search facility through web filters that are collectively known as the Great Firewall.

And some of Google's business partners are already starting to distance themselves from the company.

On Wednesday China's second-largest mobile operator, Unicom, announced that it would drop Google's search function from two new handsets that are being developed.

Google has taken a hard-headed business decision
Graham Titterington
Principal analyst, Ovum

Official Chinese figures put the number of internet users at 384 million. But the number of mobile subscribers - people who do or will eventually - use the internet on their handsets is 745 million.

At Sina Corp, which owns a portal featuring a Google search bar on its main page, executives are considering the future of link with the US giant.

And there are several other news reports from China about how Google's partners and advertisers are reviewing their relationships with the internet giant.

These moves underline the potential impact on Google's business.

On the face of it, picking a fight with the rulers of what is soon to be the world's biggest economy looks like commercial stupidity.

Today's business mantra says that any company which wants to be global has to do business with China.

And yet, there is a growing consensus among analysts that Google's move will have only limited impact on its business.

Google's share price had fallen about 6% since the company announced on 12 January that it was considering a withdrawal from China.

But since Monday, when the final decision was made, the shares have been rising.

Don't Be Evil

Google, whose motto Don't Be Evil was tarnished by the move to China, has won plaudits in the blogosphere and among the commentariat for its decision to withdraw.

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The company has stood up for free speech and unfettered enterprise, they say.

These are fine words, says technology analyst Graham Titterington, but in reality they are just "fluff".

"Google has taken a hard-headed business decision," he said.

Mr Titterington, principal analyst at Ovum, said: "Google has looked at the benefits and damage to its business, and made a decision on whether the move will do more harm than good."

In the immediate term, Mr Titterington does not expect much damage because China remains a small part of the company's operations. "Indeed, outside China there will be some kudos and benefits to company and its brand image," he said.

China's total internet advertising market was worth about $1bn last year, with Google's revenues from the country amounting to about $250m-$300m.

Chinese newspaper
Chinese press has attacked Google's decision

This revenue figure represents about 1% to 2% of Google's total, estimates Youssef Squali, analyst at Jefferies & Co.

Before Google moved to the mainland, it had perhaps 13% of the China search market. Going "onshore" took market share to about 20%. Even if Google's share returns to 13% or less, it is by no means critical for the company.

"Exiting China would not be too damaging for Google since the company is the market share leader in most non-domestic markets, where search usage and monetisation opportunities still abound," Mr Squali said.

Besides, Google was already struggling to consolidate and grow in China. For many analysts Beijing clearly backed Baidu as the home-grown internet market leader.


Google also faced subtle - and not so subtle - attempts to restrict growth, and was already the subject of attacks from officials over alleged failure to comply with censorship rules.

It is likely that Google saw the writing on the wall a long time ago.

But, surely, losing a position in the world's single biggest constituency of web users must be a retrograde step? After all, by 2014 the Chinese market for internet advertising could grow to as much as $20bn, according to estimates.

Mr Titterington agrees: "In the longer term, Google needs China more than China needs Google."

But he does not believe Google will remain outside China forever. In fact, he believes the company could be operating within the country again within three years.

"China is opening, and in time they [the leaders] will change and react," he said.

Google may have anticipated China would relax its rigid control on society sooner than it has done. But eventually it will happen.

"Politicians have to live with short memories. At some stage they [Google and Beijing] will start co-operating again," Mr Titterington said.

Baidu is the market leader for online search in China

"The big question, though, will be how much momentum Google will have lost in the meantime." Will the growth of indigenous operators like Baidu effectively marginalise Google, making a return to China irrelevant?

Not everyone is so optimistic that Google will make a quick return. David Wolf, president of technology marketing consultancy Wolf Group, says it will take years for Google to rebuild partnerships in China.

"Trust me, [Google] aren't walking away from this unhurt," he told the Associated Press news agency.

Nor does the rhetoric coming from Beijing bode well for an early rehabilitation.

The Beijing government called Google's withdrawal "totally wrong", while the People's Daily newspaper was even more strident.

The paper said Google was part of an internet war being orchestrated by the US intelligence services.

Herein lies a danger. What is currently a dispute over business, risks becoming a dispute over politics - which would make it far more difficult for relations to heal.

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