The saga of Google
The subtext of that quote foreshadows more trouble for Google in China. The question for Google in the world's largest Internet market has long been whether it can get a fair shake in a country that prefers both to protect homegrown companies and sensitive information -- facts that work against Google's inherent competitive advantages elsewhere in the world. While it looked like Google had taken a step forward when it got its Chinese operating license renewed earlier this month, the entrance of a new state-owned venture into its field is evidence that China still wants to control how information is disseminated over the Internet.
Where this matters
While the China Mobile/Xinhua effort will have a Web presence, the fact is that the battle for market share on the Internet in China has already been all but won by Beijing-based Baidu.com
Where Google still has a significant opportunity in China is in mobile search. That's thanks to the increasing popularity of its Android operating system in China and to the fact that Baidu only has about one-third of China's mobile search market. Baidu, of course, has been attempting to expand this position by getting handset makers to place its search engine prominently on their phones, but the entrance of China Mobile into this market may end up being problematic for both Google and Baidu. Remember that China Mobile is China's largest mobile phone carrier with more than 550 million subscribers. Should the company succeed in developing an effective search solution, it could easily push it out to its massive subscriber base and take share from both Baidu and Google.
The bottom line
While Baidu and Google are formidable competitors, China Mobile is a $220 billion behemoth with more than $30 billion in net cash. Whether it wins or loses in search, there will be little impact on the company's overall operations and current valuation.
Investors in Baidu and Google, however, should be more wary. In the case of Google, it's prudent at this point to just assume China will never become a meaningful part of Google's operations. Although the market is enormous, the headwinds just keep coming at the company.
In the case of Baidu, the entrance of state-owned China Mobile into the space means that it's no longer a foregone conclusion that Baidu will dominate mobile search as it has Internet search. Given the company's currently premium valuation of 34 times sales and 70 times EBITDA, that's worth noting.
Tim Hanson is co-advisor of Motley Fool Global Gains. He does not own shares of any company mentioned. Google is a Motley Fool Inside Value pick. Baidu and Google are Motley Fool Rule Breakers recommendations. The Fool owns shares of China Mobile and Google. Try any of our Foolish newsletter services free for 30 days. The Motley Fool has a disclosure policy.