Is Google's Loss Baidu's Gain?

Google (Nasdaq: GOOG  ) may be ready to throw in the towel in China.

"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," the world's leading search engine posted on its official blog yesterday. "We recognize that this may well mean having to shut down Google.cn, and potentially our offices in China."

It's not just that Big G is tired of whitewashing what went down at Tiananmen Square 20 years ago to visitors of Google.cn. Last month, Google claims that its intellectual property was stolen within China. Hackers tried -- and in some cases succeeded in -- accessing the Gmail accounts of Chinese human-rights activists.

Google isn't blaming the Chinese government directly for the attack on its corporate infrastructure, but it's certainly implied by its threat to bow out of China.

"We should review the feasibility of our business operations in China," is the blog's conclusion.

This may seem like an idle threat, but it's practically a self-fulfilling prophecy. If Google is honest about giving China the unfiltered catalog of cyberspace that its "do no evil" mantra commands, China may block access to Google.cn within the world's most populous nation before Google physically bows out.

The winner for now is Baidu (Nasdaq: BIDU  ) . Shares of China's leading engine shot higher on the news, and it's easy to see why. Google is a distant second to Baidu in China, but no one else is even close. Google's exit may open the door for small players including Sohu.com's (Nasdaq: SOHU  ) Sogou to fill the void, but Baidu's the sure bet. After all, if Google bows out, advertisers will have no choice but to bank on Baidu for their paid-search leads.

Google's potential exit may also force Yahoo! (Nasdaq: YHOO  ) out the door. Yahoo! originally came under fire for ratting out a Chinese dissident several years ago. If Google refuses to censor its site, and Yahoo! opportunistically decides to play along in a quest to matter more in China, Yahoo!'s global credibility will be destroyed. In addition to Baidu, Chinese dot-coms Sohu.com and SINA (Nasdaq: SINA  ) have plenty to gain if Yahoo! and Google both move on.  

Of course, if Google shuts down, that would also mean China chose to tighten the screws instead of compromising with Google, and that may scare away foreign investors. There's a scary notion for Baidu's premium-priced shares.

In the near term, Baidu wins if Google loses. In the long run, they could all be losers.

What should Google do? Share your thoughts in the comments box below.

Baidu, Sohu.com, and Google are Motley Fool Rule Breakers recommendations. SINA is a Motley Fool Stock Advisor pick. Try any of our Foolish newsletter services free for 30 days.

Longtime Fool contributor Rick Munarriz has been to China once and relishes admiring its dot-com revolution from afar. He owns no shares in any of the stocks in this article and is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early. The Fool has a disclosure policy.


Read/Post Comments (3) | Recommend This Article (13)

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  • Report this Comment On January 13, 2010, at 1:30 PM, langco1 wrote:

    google has never been able to compete with baidu and is reality nothing more than a online phone book!

  • Report this Comment On January 13, 2010, at 6:47 PM, rfaramir wrote:

    Censorship and other heavy-handed government intervention is always bad for a country's economy. No two ways about it. China has a freer market than we do in some ways, but this demonstrates the severe risks that are still there.

    Cheer for Google, and pray for the hearts and minds of the Chinese leaders to soften.

  • Report this Comment On January 13, 2010, at 11:26 PM, predfern wrote:

    According to Cramer, Google stands to lose more if its Android smartphones are banned in China. Buy Apple!

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