Google in a Straitjacket

Google (Nasdaq: GOOG  ) announced late Tuesday that it's considering leaving China for good. The search engine powerhouse revealed that it fell victim to a "sophisticated and targeted" cyberattack. Apparently, Google believes that the hackers were trying to find information on Chinese human rights activists.

The news bulletin is spreading like wildfire, not just within business circles and industry groups, but in the upper echelons of our own government. U.S. Secretary of State Hilary Clinton has said that Google's allegations "raise very serious concerns and questions. The ability to operate with confidence in cyberspace is critical in a modern society and economy."

So how severe are the accusations? My Foolish colleague Eric Bleeker believes that Google's assertions are a "high-stakes bluff." I'm not so sure.

Big trouble in regular-sized China
Unlike domestic rival Baidu (Nasdaq: BIDU  ) , Google has always been reluctant to abide by the rules of the Chinese government, especially when it comes to censorship and search compliance. And Google wouldn't be the first company to decide that jumping through the bureaucratic hoops just isn't worth it. Yahoo! (Nasdaq: YHOO  ) , eBay (Nasdaq: EBAY  ) , and Amazon.com (Nasdaq: AMZN  ) have all but disappeared from the fastest-growing nation in the world.

In addition, Google trails Baidu substantially when it comes to market share. Baidu boasts about 300 million users and 66% of the market. While 33% isn't exactly chump change, Google has had difficulty increasing this number, most likely because of its unwillingness to comply with every regulation thrust upon it. So it seems that in order to increase its market penetration, Google would have to put its morals aside and focus on making amends with the Chinese government. However, removing items from its search engine that conflict with Chinese rhetoric doesn't exactly coincide with Google's long-standing mantra: "Don't be evil."

Nevertheless, will Google really exit a country with 1.34 billion people, an emerging middle class, and an estimated 400 million Internet users? The question's not just about google.cn -- it's about the technology sector as a whole. Google partners with Sina (Nasdaq: SINA  ) , a Chinese search-engine company; with Warner Music Group and others in order to offer streaming music in China; and with China Mobile (NYSE: CHL  ) , a state-owned mobile carrier that utilizes Google's search services on its handsets. A Google departure, according to the Wall Street Journal, "would throw the future of its investments and partnerships throughout the Chinese Internet and telecommunications sectors into question – while also potentially creating opportunities for Chinese rivals." It's one thing to stand firm on moral grounds, but quite another thing to commit corporate suicide by leaving one of the world's most potentially profitable regions.

Searching for a better solution
It seems as though Google has put itself in a commercial straitjacket. If it doesn't exit the market, and the Chinese government makes no concessions, the company's stand looks like an ethical ploy gone bad. If it does leave China, there's really no estimating how badly Google's bottom line could suffer in the future.

While I applaud the company's effort to continually raise awareness about censorship and vocally denounce its recent violation of privacy, I wonder whether Google couldn't have handled this ordeal more productively. If it's truly going to leave China, Big Goo they should proceed accordingly -- threats and vague warnings don't seem sufficient to sway the Chinese media autocracy. And if Google never had plans to leave China in the first place, well, then this seems like a great way to bring attention to the company's focus on social responsibility and commitment to privacy.

What do Fools think -- is Google genuine in its threats to leave the biggest online market in the world, or is this one big bluff?

Sound off in the comments below!

Fool contributor Jordan DiPietro doesn't own any of the shares mentioned above. Baidu and Google are Motley Fool Rule Breakers recommendations. Amazon.com, eBay, and Sina are Motley Fool Stock Advisor choices. Motley Fool Options has recommended a bull call spread on eBay. The Fool owns shares of China Mobile. The Fool has a disclosure policy.


Read/Post Comments (9) | Recommend This Article (16)

Comments from our Foolish Readers

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  • Report this Comment On January 13, 2010, at 4:01 PM, yzfinance wrote:

    "While 33% isn't exactly chump change, Google has had difficulty increasing this number, most likely because of its unwillingness to comply with every regulation thrust upon it."

    Care to elaborate? I fail to see how complying to regulations increases your market share. If Google is not doing as great in China, I don't think it's because of its "do no evil" motto. The rest of the article is fine, but were I a critical editor, I'd have said that one sentence has some shaky logic behind it...

  • Report this Comment On January 13, 2010, at 4:20 PM, lbcdpg wrote:

    As a Google shareholder, I sure hope they can work this out with the Chinese government. I just have a hard time believing the Chinese government cares what Google thinks. Google is a threat to them, and they will gladly say goodbye. If that does occur, I'll become a BIDU shareholder soon afterward.

    -Marc

  • Report this Comment On January 13, 2010, at 4:34 PM, liulu wrote:

    There are many other ways for Google to raise its concerns than this most dramatic way. I agree with yzfinance that the reasons Google failed in China are far more than the regulation alone. Google is making a big gamble by tying business to politics. If other companies rise and follow Google’s step we may see a mess to the world economy and order in the scale that we’ve never seen before. If others don’t, then Google will lose big.

  • Report this Comment On January 13, 2010, at 4:35 PM, liulu wrote:

    There are many other ways for Google to raise its concerns than this most dramatic way. I agree with yzfinance that the reasons Google failed in China are far more than the regulation alone. Google is making a big gamble by tying business to politics. If other companies rise and follow Google’s step we may see a mess to the world economy and order in the scale that we’ve never seen before. If others don’t, then Google will lose big.

  • Report this Comment On January 13, 2010, at 7:40 PM, shanghaid wrote:

    I suspect they may have significant revenues in China but insignificant profits and that continued censorship hurts their business model. Users finding high profile articles allows serving of more ads. They may be insulted by hacking but they are devastated by losing money.

  • Report this Comment On January 13, 2010, at 7:41 PM, shanghaid wrote:

    I suspect they may have significant revenues in China but insignificant profits and that continued censorship hurts their business model. Users finding high profile articles allows serving of more ads. They may be insulted by hacking but they are devastated by losing money.

  • Report this Comment On January 14, 2010, at 12:03 AM, IlliniBanker wrote:

    This was probably the right thing to do in the long run- both for China and Google's shareholders.

    Google generates $20 Billion/year in revenues. $600 million of those come from China. Meanwhile, China has 20% of the world's population and eventually, there will be four times as many middle-class Chinese as there are middle-class families in the US.

    Would you be willing to forgo $600 million today to significantly increase your revenues- which may be $5 or 10 Billion- in 10 years by getting China to relax some of its censorship?

    I think most people will agree Google's decision has the potential to create a lot more long-term value for foreign business in China than $600 million if the Chinese government is feeling pragmatic. The question is how much of that will Google see.

  • Report this Comment On January 14, 2010, at 2:56 PM, hoodat wrote:

    China has been making fools of American companies for years by dangling the profit carrot in front of them but always keping it just out of reach. They milked Ebay and Yahoo for millions using this method. I, for one, am glad that Google has given up reaching for the carrot. It's probably plastic anyway.

  • Report this Comment On January 19, 2010, at 11:50 AM, greeko wrote:

    Unfortunately it's like cutting off your nose to spite your face. If they pull out, it's a "higher ground" response to getting squeezed by the Chinese Gov't. and that's their only way out. Having said that, it's a bluff. They'll hang for 2 reasons. 1- Money talks and they have metrics to meet. It the World Wide Web . Optimum word "wide" as in wide open. and,,,2 - Were China to boot out Google they would overplay their hand hugely and create essential warfare vs. the Globe.

    The Chinese are dirty but masterful long term players.

    Our short term myopia has cost us a great deal.

    Principally, I think it would be great for the World to start isolating China across many areas for their egocentric communism. Here in the US, we've never had a white House with the Testicular Fortitude to do so.

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