Who Will Profit When Google Exits from China?

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Qilai Shen / EPA

An employee leaves Google's sales and R&D office in Shanghai on March 15, 2010

Updated: March 19, 2010

The days are winding down for many of the best and brightest who went to work for Google in China over the past couple of years. It now appears that it's no longer a matter of if Google is forced to exit the search business in the People's Republic, but when. It could be in a matter of weeks (On Friday, Chinese media was reporting April 10 as the last day). Google employees can't say so publicly, of course — and some of the 700-plus employees who work at the company's Beijing headquarters will no doubt retain their jobs — but to say that others are fatalistic is to put it mildly. "What can we do?" says a computer scientist who has worked at Google China for more than two years. "If the search business in China is shut down, it's shut down. If I have to find another job when it happens, I'll do it."

The Internet giant's extraordinary insistence that it would no longer censor the search results on Google.cn — the second leading search engine in the country with the most Internet users in the world — appears to be leading to the demise of its Chinese-language search business. Beijing was never going to negotiate with Google on the issue of censorship — particularly not after the U.S. government hitched its wagon to Google's cause, in the form of Secretary of State Hillary Clinton's Jan. 21 speech on Internet freedom. In fact, only in the past few days has anyone from the Chinese government even conceded publicly that Beijing was talking to Google at all. But on March 13, Li Yizhong, head of China's powerful Industry and Information Technology Ministry, made sure there was no confusion. "If you don't respect Chinese laws, you are unfriendly and irresponsible, and you will bear the consequences," he said.

Google's stunning pronouncement in January that it would no longer censor Google.cn may have given a thrill to human-rights activists the world over, but a lot of investors were — and remain — furious. Since posting the announcement on its website on Jan. 12, Google's stock price has declined from $595 to about $567, while Baidu, the leading search engine in China, has seen its stock price rise by 50%.

The reason for that is obvious. Jan. 12 was, in effect, the starting point for the next phase of competition in China's search market — the battle for Google's share, which is about one-third in terms of search revenue. The most obvious potential foreign beneficiary is Bing, Microsoft's new search entry. And while Bing may not exactly have been handed the keys to a very rich kingdom, the executives there understand their good fortune — and have not been shy about subtly sticking the knife into Google. On March 17, Craig Mundie, chief research and strategy officer, told the China Daily — an English-language newspaper controlled (like all papers in China) by the Communist Party — that "we feel good enough now [about Microsoft's position in China]," adding, "But it's a 20-year [journey], and not just three years." While Bing has yet to make a dent in China — its market share is less than 1% — Mundie stated the obvious when he said the company stood to gain share in Google's wake. And, he couldn't help adding, "Microsoft is here to stay."

That's no doubt true — but it's also true of several other domestic Internet companies that are moving swiftly to capitalize on Google's — choose one — self-inflicted wound/inspirational stand. Numerous sources says both Sohu.com — a Yahoo!-like website founded by MIT graduate Charles Zhang — and a hugely successful instant-messaging company called Tencent Holdings are already aggressively trying to hire Google China staff. (Google China declined to comment.) Neither has much of a presence in search, with less than 1% of the market each. But the two companies were investing significantly in search even before Google's ultimatum in January, and are now obviously even more determined to take on Baidu.

Analysts believe that of the two, Tencent is in the better position to capitalize, given its dominant position in China's booming instant-messaging business. According to estimates by Analysys International, nearly 70% of China's 400 million Internet users use instant-messaging, and of those, 80% use Tencent's system, known as QQ. That's the major reason that Tencent's market capitalization is bigger than Baidu's, and an insider at the company acknowledges that search "is very much" a target of opportunity.

All the potential usurpers do what the Chinese government requires: censor their search results (as Google still does, despite reports in the blogosphere to the contrary). Random searches on all three platforms on March 17 for "Tiananmen Square, 1989," and "Falun Gong" — two hot buttons as far as Beijing is concerned — prompted the usual government-approved pabulum on the subjects. If Microsoft and the others intend to be in China "to stay," as Mundie put it, there is no chance — none — that the censorship issue will change for them going forward.

Since Jan. 12, Google's primary mission when it comes to its China operations has been damage control. What, if any, of its businesses beside search will survive? So far, it appears that Chinese adopters of Google's new Android operating system — including China Mobile and China Unicom, the two dominant mobile-phone companies — still have the government's permission to utilize the platform. But the future of other businesses that Google is involved with in China — for example, TOP 100.cn. a music portal funded by Google and several big music labels — is unclear.

To date, in fact, the only thing crystal clear is the market's verdict on Google's stand. And however noble Google's anti-censorship stand may be, one of its large institutional investors (who did not want to be identified publicly) no doubt speaks for many when he says, "There are still a lot of us who can't believe they are going to be out of the Chinese search market; that they've effectively made this choice." But out is what the world's dominant search company will apparently be. "I guess," says the investor, "we just get to lump it."