What China Can Learn From its Dustup with Google

If you’re keeping score in the contest between Google Inc. (Nasdaq: GOOG) and China’s central government, you should be aware by now that everyone involved loses.

* Google stands to lose anywhere from $400 million to $600 million in annual revenue, as well as a considerable foothold in the world’s largest and fastest growing Internet community.

* Chinese netizens lose access to a search engine that is vital to the free transportation of online information.

* China’s online market loses the innovation and competition that is unique to one of the world’s most dynamic companies.

* And Beijing has been robbed of the illusion that it has enough economic muscle to strong arm the West into playing by its rules.

This whole conflict is very interesting because, up until this point, the government has blithely assumed it’s in control of everything and that its markets would be so powerful that everyone who participates in it would fall in line. This may be the first real chink in Beijing’s armor.

Indeed, China’s central government is guilty of miscalculation. It thought that by putting down roots in China, Google was agreeing to accommodate Beijing’s loose interpretation of privacy and human rights in exchange for a chance to profit from the country’s 338 million Internet users.

Google and Chinese officials have clashed over content and privacy issues since the company launched Google.cn in 2005. Even as critics and human rights groups blasted Google for agreeing to censor information Beijing deemed too sensitive, Chinese officials chastised the company for granting access to “pornographic” information.

But Google’s recent discovery – that China targeted at least 20 overseas firms and hacked into the e-mail accounts of at least two human rights activists – was the final straw.

Fed up with China’s censorship demands and its widespread cyber-espionage, Google has alerted U.S. intelligence officials to China’s intrusions, begun un-censoring its content, and finally indicated that it is ready pack up and leave China.

“These attacks and the surveillance they have uncovered – combined with the attempts over the past year to further limit free speech on the web – have led us to conclude that we should review the feasibility of our business operations in China,” Google Senior Vice President David Drummond said on the company’s blog.

“We have decided we are no longer willing to continue censoring our results on Google.cn, and so over the next few weeks we will be discussing with the Chinese government the basis on which we could operate an unfiltered search engine within the law, if at all,” he added. “We recognize that this may well mean having to shut down Google.cn, and potentially our offices in China.”

Google’s investigation provoked a response from U.S. Secretary of State Hillary Clinton, who said the allegations “raise very serious concerns and questions.”

“We look to the Chinese government for an explanation,” Clinton said.

However, Beijing may not be so forthcoming with a response to Google’s allegations or the company’s plans to possibly leave the Chinese market. The government has said only that it would look into the matter and has leaned on news outlets to play down their coverage.

Translations of the Google blogpost have been obliterated from Chinese Web sites, as have public discussion boards that centered around the Google missive.

An editorial running on the state-owned People’s Daily Web site compared Google to a “spoiled child” and said that even if the search giant left China it would eventually return because of the importance of the Chinese market. And a separate report in Xinhua echoed that sentiment.

“It will not make any difference to the government if Google quits China, however Google will suffer a huge economic loss from leaving the Chinese market,” Guo Ke, a professor on mass communication from Shanghai International Studies University, told Xinhua. “Chinese Internet users are the real victims if Google quits China. I think Google is just playing cat and mouse, and trying to use netizens’ anger or disappointment as leverage.”

Unfortunately Guo’s opinion – while indicative of what many Chinese policymakers believe – is terribly misguided.

For one thing, the amount of money Google earns from China pales next to the revenue it earns elsewhere.

Dan Brody, who set up Google’s China office and who now runs an Internet media investment firm called Koolanoo Group, told The Washington Post that Google has about $300 million to $400 million in revenue in China. Other analysts peg the figure closer to $600 million. That may sound like a lot, but it’s really just a drop in the bucket for a company that earns $22 billion in global revenue and just launched a smartphone to rival Apple Inc.’s (Nasdaq: AAPL) iPhone.

More importantly, though, no amount of money Google makes in China could ever be worth its credibility.

“From a business and moral perspective, user trust in the West is so important to them,” Brody said.

The big winner if Google leaves China will be Baidu Inc. (ADR Nasdaq: BIDU) – China’s homegrown Internet search leader. The domestic giant already has a commanding 58.4% of the Chinese market, versus 35.6% for the No. 2 Google, according to Beijing-based research firm Analysys International.

Other Web portals like Sohu.com Inc. (Nasdaq ADR: SOHU) and Netease.com Inc. (Nasdaq ADR: NTES) will benefit, too, but Google’s departure really just paves the way for Baidu to dominate the Chinese market.

Google’s “influence on the Chinese Internet industry goes far beyond its role as a search engine, mostly thanks to its strong power of innovation,” said Lu. “The existence of Google in the Chinese market was always regarded as a motivation of Chinese Internet ventures’ efforts to innovate. Without Google, such innovation… would be gone.”

Shares of Google fell $3.39, or 0.57%, yesterday (Wednesday) to close at $587.09. Meanwhile, shares of Baidu surged $52.99, or 13.71%, to close at $439.48.

Source: money morning

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