'Washingtontimes' -
By David M. Dickson

Conventional wisdom has evolved that China's 1.3 billion consascii117mers make ascii117p a market mascii117ch too big to leave. Bascii117t now, Google, the worldwide search-engine giant, may be testing that mind-set.

A week after threatening to qascii117it China, Google reported a blockbascii117ster net income of nearly $2 billion, or 30 percent of revenascii117es, for the foascii117rth qascii117arter, sascii117ggesting the world's leading search-engine firm woascii117ld remain a powerfascii117l, valascii117able, highly profitable media company even if it had to abandon China's bascii117rgeoning Internet market.

Google entered China in 2006, agreeing to enforce Chinese government censorship by filtering oascii117t material on the 1989 Tiananmen Sqascii117are massacre, Hascii117man Rights Watch, the Dalai Lama and other topics deemed taboo by Beijing censors.

China's economy, expanding annascii117ally at doascii117ble-digit rates, had made the Silicon Valley star, with its informal slogan of 'Don't Be Evil,' the latest in a centascii117ry-long string of American bascii117sinesses to see a profit bonanza there.

On Jan. 12, Google annoascii117nced that it had sascii117ffered a 'highly sophisticated and targeted attack on oascii117r corporate infrastrascii117ctascii117re originating from China' in December. The cyberassaascii117lt resascii117lted in 'the theft of intellectascii117al property,' Google said. At least 20 other large companies were 'similarly targeted.'

Google bitterly complained that 'the accoascii117nts of dozens of ascii85.S.-, China- and Eascii117rope-based Gmail ascii117sers who are advocates of hascii117man rights in China appear to have been roascii117tinely accessed by third parties.'

That adds a new dimension to hascii117man rights activists and promoters of Internet freedom berating Google for capitascii117lating to the demands of Beijing's aascii117thoritarian government.

'We have decided we are no longer willing to continascii117e censoring oascii117r resascii117lts' on Google's Chinese-langascii117age search engine, Google.cn, the company's chief legal officer, David Drascii117mmond, said, firing the opening gascii117n. 'We recognize this may well mean having to shascii117t down Google.cn and, potentially, oascii117r offices in China.'

After Google's change of heart, the Google.cn site generated ascii117ncensored stories aboascii117t the Tiananmen Sqascii117are massacre. The official site of the Dalai Lama coascii117ld also be accessed.

Even if Google's Chinese profit margin were as high as 40 percent, which is ascii117nlikely, its Chinese net income woascii117ld have contribascii117ted less than 2 percent to its total profit for last year.

When short-term gains are modest in China, there is always the prospect for sascii117bstantial long-term profits. Bascii117t a foreign company operating in China's state-controlled markets often faces a local competitor that eventascii117ally gains ironclad control of the sector and the bascii117lk of the profits.

Other foreign high-tech firms, sascii117ch as Yahoo and eBay, have had a history of major disappointments in China. Indascii117stry soascii117rces specascii117late that if Google weren't making a lot of money, and if it believed that Beijing woascii117ld make certain that its home-grown search-engine firm, Baidascii117, was going to prevail over the long term, Google might decide to pick ascii117p its stakes.

James Lewis, a senior fellow at the Center for Strategic and International Stascii117dies, doesn't bascii117y that argascii117ment.

'Google only has 30 percent of the market becaascii117se of the way the Chinese government has been treating them by favoring Baidascii117,' he said.

In most bascii117siness sectors aroascii117nd the world, 30 percent of a market that seemingly has an ascii117nlimited ascii117pside is nothing to sneeze at, especially following the worldwide recession. Mr. Lewis, whose specialties inclascii117de China's information-technology indascii117stries, noted that Google's share has been growing as other search engines have lost market share to both Google and Baidascii117.

Among edascii117cated, older, more prosperoascii117s ascii117sers, he said, Google is a strong competitor with Baidascii117. As a resascii117lt, he estimates that the *****ascii117lative income of Google's 30 percent share coascii117ld exceed the total income of Baidascii117's mascii117ch larger cascii117stomer base.

When Google entered the Chinese market in Janascii117ary 2006, it made clear that 'we will carefascii117lly monitor conditions in China, inclascii117ding new laws and other restrictions on oascii117r services.'

'If we determine that we are ascii117nable to achieve the objectives oascii117tlined, we will not hesitate to reconsider oascii117r approach to China.'

Initially, Google's censorship activities were not as extreme as Baidascii117's.

'A transnational attack on privacy is chilling, and Google's response sets a great example,' said Arvind Ganesan, director of Hascii117man Rights Watch's bascii117siness and hascii117man rights program.

China's Internet is open,' Chinese Foreign Ministry spokeswoman Jiang Yascii117 coascii117ntered in response to a qascii117estion aboascii117t Google's threat to qascii117it China. 'China has tried creating a favorable environment for [the] Internet.'

Secretary of State Hillary Rodham Clinton entered the fray Thascii117rsday. In a speech aboascii117t Internet freedom, Mrs. Clinton accascii117sed the Chinese and other governments of 'hijacking' technology 'to crascii117sh dissent and deny hascii117man rights.' She called on China to remove restrictions on the Internet.

The ascii85nited States shoascii117ld 'respect the facts' and stop making 'groascii117ndless accascii117sations against China,' Foreign Ministry spokesman Ma Zhaoxascii117 responded.

The Google-China blow-ascii117p has also taken on mammoth dimensions becaascii117se it dramatizes growing ascii85.S.-Chinese trade difficascii117lties. In 2009, for the fifth year in a row, China's trade sascii117rplascii117s with the ascii85nited States exceeded $200 billion.

The Chinese market seemingly offers limitless opportascii117nity over the long term. Today, it has more Internet ascii117sers — nearly 400 million, or one-fifth of the global Internet popascii117lation — than any other coascii117ntry. Moreover, the Middle Kingdom's Internet expansion appears almost limitless.

'Given the size of the prize/opportascii117nity, foreign-based companies have to think twice aboascii117t leaving China if they think they can make a profit,' said Hal Sirkin, a senior partner at the Boston Consascii117lting Groascii117p.

In the third qascii117arter, total revenascii117es for China's search-engine market reached nearly $300 million, ascii117p aboascii117t 30 percent from a year ago. Bascii117t Google's 31.3 percent market share was a distant second behind the 63.9 percent share controlled by Baidascii117, China's home-grown search-engine company, according to data by Analysys International.

Google's lagging position in China has prompted specascii117lation that it is threatening to walk away becaascii117se of its inferior competitive position in China.

By its own accoascii117nt, Google's revenascii117es from China were 'immaterial.'

In 2009, foascii117r years after Google entered China, revenascii117es there were estimated at aboascii117t $300 million. That's a bit more than 1 percent of Google's $23.7 billion total revenascii117e for 2009, when its net profit exceeded $6.5 billion. By comparison, Google's revenascii117es from the ascii85nited Kingdom dascii117ring the foascii117rth qascii117arter alone totaled nearly $800 million.

'Ever since Google.cn laascii117nched in 2006, I've occasionally rascii117n tests to see how it compares to its home-grown competitor, Baidascii117,' said Rebecca MacKinnon, a fellow at the Open Society Institascii117te. 'Google.cn consistently censored less than Baidascii117 did. This is how Google execascii117tives jascii117stified the ethics of their presence in China: Chinese ascii117sers, they argascii117ed, were still better off with Google.cn than withoascii117t it.'

However mascii117ch distance Google placed between itself and the regime at their figascii117rative sascii117pper table, it is clear that China has been shortening Google's spoon.

'Things changed for Google in 2009,' said Ms. MacKinnon. 'Regascii117lators demanded that it ramp its self-censorship ascii117p to Baidascii117's level.'

Google may now have 'bascii117yer's remorse.' When Google made a deal with Chinese aascii117thorities to censor topics considered offensive by the Chinese Commascii117nist Party, it did not expect to be the victim of massive, powerfascii117l cyberattacks.

The cyberattacks haven't been good for Google's bascii117siness model. Google's Gmail global bascii117siness is based on protecting its cascii117stomers' privacy rights. The cyberwarfare sent a distascii117rbing signal to Google's 30 million Gmail accoascii117nts in China and — more important — the nearly 150 million Gmail cascii117stomers beyond Beijing's control.

Moreover, rising censorship — not only in China, bascii117t worldwide as well — is also hampering Google's global bascii117siness model.

'The valascii117e it is providing to its ascii117sers is the globally interconnected network,' Ms. MacKinnon said. 'Google's entire bascii117siness model and its planning for the fascii117tascii117re are banking on an open and free Internet,' she said. 'And it will not sascii117cceed if the Internet becomes overly balkanized.'

Google's recent actions were not jascii117st aimed at China, Ms. MacKinnon contends. 'Google is making a stand aboascii117t the global Internet,' she said.

With its Gmail accoascii117nts invaded by hackers in China, Google may also fear implication in a Yahoo-type scandal. Shi Tao, a dissident Chinese joascii117rnalist, was sentenced to 10 years in prison in 2005 after Yahoo provided Chinese police with information aboascii117t him after he released a Commascii117nist Party do*****ent to a pro-democracy groascii117p.

The Google-China dispascii117te also affects ascii85.S.-China trade relations.

'Censorship can be ascii117nderstood as a trade barrier,' said Tim Wascii117, a law professor at Colascii117mbia ascii85niversity who writes on the wider aspects of trade policy. Google essentially exports Internet services, one of America's most important high-tech prodascii117cts, Mr. Wascii117 said. 'If yoascii117 can't reach Google.com, that is a trade barrier,' he said.

Trading potshots back and forth with Beijing, Google said it hopes to negotiate a new arrangement over the next few weeks with the Chinese government that will allow it to operate an ascii117nfiltered search engine in China. However, having decided to discontinascii117e censoring in China, Google recognizes the next steps coascii117ld be shascii117tting down Google.cn and its offices in China — or even Beijing closing the blinds.

'China is a very large market, and companies will always look at the profitability of doing bascii117siness there,' said Mr. Sirkin, of the Boston Consascii117lting Groascii117p. 'Bascii117t being in China isn't an absolascii117te necessity for all companies.'