Commentary: Search giant''s exit from China a mix of business and altruism

"marke*****ch" -
Therese Poletti

Many are looking at Google Inc.''s /quotes/comstock/15*!goog/quotes/nls/goog (GOOG 586.90, -0.11, -0.02%) possible exit from the Chinese market as a bold stance of defiance against the Chinese government. Kudos upon kudos are being heaped upon the Internet search giant for its altruistic stance. See Google news on China here.
But let''s face it -- Google also has some very good business reasons to exit China at this time. As the distant number two player to dominant Baidu Inc. /quotes/comstock/15*!bidu/quotes/nls/bidu (BIDU 439.16, -0.32, -0.07%) , which according to comScore Inc. has 62.2% of the Chinese Internet search market, it is not exactly risking a lot. Google had a 14.1% stake in November, comScore said.

And there is another reason. Google needs to protect its own intellectual property. Google said last week''s cyber attack on its corporate systems was "highly sophisticated and targeted," originated from China and "resulted in the theft of intellectual property from Google."

Clearly, it does not want to face continued risk to its systems or its own intellectual property. At least 20 other companies systems were also attacked, it said.

Wall Street analysts estimate that China''s contribution to Google''s revenue are in the $200 million range for 2009, with forecasts of about $300 million coming from China in 2010. That may sound like a decent chunk of revenue, but to Google it is a drop in the bucket, a mere 1% or so of overall revenue, estimated to reach $17.5 billion in 2009.

"Based on data from comScore and Analysis International, Google''s search market share in China is less than 31%, far behind Baidu''s 64%," said Youssef Squali, an analyst with Jefferies & Co., in a note to clients Wednesday. He also noted that Google pays higher traffic acquisition costs (TAC) to its Chinese partners.

Clearly, there is also an element of altruism at work here, but by its very presence in the Chinese market since January 2006, Google had condoned a form of censorship.

Google explained how it came to that decision in its blog post late Tuesday on China. It said the "benefits of increased access to information for people in China and a more open Internet outweighed our discomfort in agreeing to censor some results."

But when rival Yahoo Inc. /quotes/comstock/15*!yhoo/quotes/nls/yhoo (YHOO 16.90, -.00, -0.01%) came under attack in a Congressional hearing in 2007 for handing over information to the Chinese government that ultimately lead to the arrest and jailing of two Chinese dissidents, Google stayed in China.

"We condemn any attempts to infiltrate company networks to obtain user information," a Yahoo spokeswoman told the Wall Street Journal in a prepared statement. "We stand aligned that these kinds of attacks are deeply disturbing and strongly believe that the violation of user privacy is something that we as Internet pioneers must all oppose."

Sandeep Aggarwal, a Collins Stewart analyst, got to the heart of the matter. He noted that Google has to protect its reputation. "As a leading Internet company, it cannot afford its reputation to be tarnished by allowing anyone to tamper with users'' personal information or privacy data," Aggarwal said in a note.

On the downside, however, some analysts were concerned that Google''s possible exit would be a major strategic loss for the future, while at the same time they commended the company for "doing the right thing." China is one of the fastest growing online markets in the world, and presents the largest growth opportunity for any Internet firm.

Google has said that as a result of the cyber attack on its servers, it will stop censoring its search results in China. It will start talks with the Chinese government to see if it can operate an unfiltered search engine within the law, which is unlikely. Baidu is expected to grow more dominant if Google decides to shut down its Chinese Internet search engine and possibly even close its office in Beijing.

"The company''s inability to participate in China''s growth will be seen as a long-term negative, and therefore cause a valuation discount in the stock," Squali added.

Google could, of course, always re-enter the market.

So while many look at Google''s brave stance as part of its embrace of its corporate mantra, "don''t be evil," it''s mostly looking out for No. 1