Investing Caffeine

Google vs. China: Running Away from 660 Million Eyeballs?

January 14, 2010 at 12:31 am 2 comments

Wait, let me get this straight. Google, the $185 billion behemoth that wants to take over the world is seriously considering turning its back on a rapidly growing cluster of 660 million eyeballs (330 million Chinese internet users according to BusinessWeek)? After hitting their head on an obscenely high market share in the U.S. (67% search share based on Nielsen data) and looking for new geographies to expand, I’m supposed to believe Google will walk away from the third largest economy on this planet (see China: Trade of the Century)? The explanation given for Google’s capitulation is discontent related to unknown hackers and censorship concerns. If that’s not enough, this alleged saint-like posturing comes after Google sold its censorship soul for years, before seeing the free speech light. Although the company’s mission is to “do no evil,” Google had no qualms aggressively poaching Microsoft (MSFT) miracle maker, Kai-Fu Lee, to kick-start their Chinese presence. If free speech is truly at the root of the Google’s unease, then why wait four whole years and a hack-attack before laying down an ultimatum on the Chinese government?

I Smell a Rat

In a blog post written by Google’s Chief Legal Officer, David Drummond, the company explains how their iron curtain digital defense was bent but not broken:

“We have evidence to suggest that a primary goal of the attackers was accessing the Gmail accounts of Chinese human rights activists. Based on our investigation to date we believe their attack did not achieve that objective. Only two Gmail accounts appear to have been accessed, and that activity was limited to account information (such as the date the account was created) and subject line, rather than the content of emails themselves.”

I’m no exterminator, but I smell a rat. All this feels a lot more like politics and business tactics then it does an altruistic display of free-speech martyrdom. The Chinese government and Google executives know what is at risk, as they both play a high stakes game of “chicken.”

Google goes onto say:

“As part of our investigation we have discovered that at least twenty other large companies from a wide range of businesses–including the Internet, finance, technology, media and chemical sectors–have been similarly targeted.”

I’m confused. These unknown hackers attacked 20 different companies and only unsuccessfully cracked two Gmail accounts. The evidence sounds pretty harmless on the surface, if this language is representative of reality. Maybe I’m wrong, and a foiled cyber-attack is reason enough to cease operations in a country inhabiting a potential 1.3 billion customers.  

Sure China represents a relatively small portion of Google’s revenues (estimated at less than $1 billion and a single digit percentage of revenues), but Google would be insane to walk away from this massive long-term growth market, even if Baidu (BIDU) is currently eating their lunch. Although Google has a smaller #2 position in China, it still has a respectable 35.6% search market share (according to BusinessWeek).

Not Just About Search – Cell Phones Too

Even if they claimed they were throwing in the white towel on their Chinese search business, I don’t think they really want to flush their newly minted cell phone prospects down the toilet. Even if 275 million or so cell phone users in the U.S. is fertile ground for Google to target their new Android-based phones, I’m guessing they have penciled out the gigantic mobile potential of the rapidly expanding 700 million+ Chinese mobile phone user market.

While I can’t take the scenario of Google ceasing China operations off the table, I consider the chance of Google shutting its doors in China significantly less than 50%. While the bold Google statement of feasibility review regarding their Chinese business existence has gained a lot of attention, I think calmer heads will eventually prevail and Google will resume their targeting of 660 million Chinese eyeballs. Who knows, the high stake game of “chicken” may even benefit their bottom-line as they win the hearts and minds of more future free-speech users.

DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients own GOOG shares and China based exchange traded funds at the time of this article’s publishing, but did not have a direct position in MSFT and BIDU shares. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC “Contact” page.

Entry filed under: International, Stocks, Themes - Trends. Tags: BIDU, cell phone, censorship, china, cyber attack, free speech, goog, Google, Government, malware, search.