Google's Failure in China... Revisited

by Tony D'Altorio

Google's Failure in China... Revisited

Tony Daltorio, Investment U Research

Thursday, March 4, 2010

Back on January 28, I wrote an article about Google's big failure in China. I detailed exactly why the giant tech corporation fell so hard over there even while doing so well in the Western world.

My analysis stirred up a real hornet's nest - if you read it, I'm sure you can understand why - and generated a lot of comments.

Let me begin by saying that I appreciate the positive replies and I understand the negative ones. Any subject matter dealing with China and free speech - in any form - is bound to raise blood pressures.

So let's go over some of the main issues brought up, clarifying a few points as we go along.

Planet Google

First of all, I don't believe that Google (NASDAQ: GOOG) has any plans to leave China completely. It would risk massive future growth and revenues if it did, since China still represents the world's largest mobile phone market.

Knowing that, Google should still launch its Android phone in China sometime this year. And it will probably also keep its research and development arm, and/or its sales and engineering teams.

It might, however, shut down its Google.cn business.

Believe it or not, that kind of action really wouldn't hurt Google very much.

You see, the majority of its financial intake from China doesn't come from Adwords, Google's online advertising. Most of its revenue comes from Chinese companies advertising on the U.S. Google site. Analysts even estimate that the company's business there accounted for only $200 million of its $17.5 billion in annual revenue last year.

Not very impressive, and it does bring me right back to Google's failure. If the company had a dominant position like it does in other countries, it wouldn't be threatening to shut down Google.cn in the first place.

Go anywhere else, and you're living on Planet Google. In China, not so much.

Incidentally, if you click on that last link, it shows how the company has maybe 30% market share in China. Yet by its own internal estimates, it only accounts for a mere 20% of searches... putting it well behind the market leader, Baidu ADR (Nasdaq: BIDU).

Frankly, those statistics have to embarrass the all-mighty Google. Covering them up with ringing cries of "Freedom!" is a much easier out than admitting the truth.

With that said, freedom is an extremely important issue, of course, so let me address that too...

China's Dance in Shackles

The situation is particularly complex in China, where Baidu's design chief, Sun Yunfeng, summed it up in a now-erased blog post:

"For the normal man on the street, the most crucial information is not secrets from Zhongnanhai [the residence of Communist party leaders] but normal economic, cultural and technology information... In China, every company and every individual must dance in shackles."

In recent years, the Internet has provided a curious twist to modern Chinese society, with its mix of market economics and strict governing. Naturally, the World Wide Web makes it a bit difficult for the government to censor its citizens, though it certainly tries. Chinese users even voted "blocked" as the key word for 2009.

But Chinese citizens - especially the younger generations - have an uneasy acceptance about that censorship. Curious about the larger world, they rely largely on the Internet for a connection to the outside. And they know the tricks of the trade that help them get around government blocks.

Making it easier, the "Great Firewall of China" has a multitude of holes. Even if it didn't though, the Chinese are becoming more skillfully defiant as time goes on. Determined users can bypass censors by going onto outside search engines - such as the U.S. Google site - through proxies or virtual private networks (VPNs).

It isn't an easy process by any means, but many young, savvy Chinese see it as a badge of honor to dodge those restrictions.

The End Of The Story... Kind-Of.

Censorship or not, the Chinese government still uses the Internet as one of its many ways of appeasing the middle class.

Don't expect that to change anytime soon, either. Internet access has become a part of regular life for China's citizens to just give it up anytime soon. Instead, they naturally want more of that tantalizing freedom... and more and more. The government won't be able to repress that demand for too much longer without damaging what it has worked so hard to build up.

So while Google might have failed from a profit standpoint, it may have actually helped to weaken government control, even if only by a little.

Was that the business' main plan? Doubtful.

But the Chinese seem to be happy with the results all the same. And in the end, I remain optimistic that other forces will continue working to create a more free China as time goes on.

Good investing,

Tony Daltorio

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