What Google might leave on the table in China

Walking away from one of the 21st century's most promising technology markets could have a significant long-term effect on Google's finances.

Tom Krazit Former Staff writer, CNET News
Tom Krazit writes about the ever-expanding world of Google, as the most prominent company on the Internet defends its search juggernaut while expanding into nearly anything it thinks possible. He has previously written about Apple, the traditional PC industry, and chip companies. E-mail Tom.
Tom Krazit
3 min read

This post was updated at 2:02 p.m. PST with the closing price of Google's stock.

Doing business in China comes at a price. But for Google, not doing business in China could prove quite expensive.

Google's ultimatum to the Chinese government that it no longer will censor search results on Google.cn could force the company out of China, if Google follows through on its threat. The Chinese government is not expected to allow such a thing, especially after such a public slap in its face.

That means Google could be stepping away from perhaps the biggest technology business opportunity of the decade. China, already home to the most Internet users in the world at 338 million active users, is still in the very beginning of its Internet era. Only 25 percent of China's 1.38 billion people are actively using the Internet, according to the China Internet Network Information Center.

Google's current operation in China is small. David Drummond, Google's senior vice president and chief legal officer, told CNBC Tuesday that Google's revenue in that country is "truly immaterial." Market share numbers vary, but according to ComScore Google has 14.1 percent of the Chinese search market, trailing Baidu's 62.2 percent.

Still, Piper Jaffray's Gene Munster estimated that Google China would produce 2 percent of Google's 2010 revenue, which financial analysts in general expect to be $20.47 billion. That's a little more than $400 million, and Google China is growing faster than other parts of Google's business, Munster said in a research note distributed Wednesday. Google does not break out specific figures for its China operation in its quarterly earnings reports or in its annual report.

David Drummond, Google's senior vice president and chief legal officer, told CNBC Tuesday that Google's revenue in China is "truly immaterial." Google

"As a sensitivity to next year's growth, if Google China ceased to operate as of Q2, our 2010 [year over year] revenue growth estimates would go to 17 percent from 18.4 percent," Munster wrote.

And beyond next year, the business opportunity in China is only expected to grow. Google has not been able to dent Baidu's advantage, but even maintaining 20 percent of a large, fast-growing market would provide Google with a healthy revenue stream away from the boom-and-bust U.S. economy, as well as the reams of data that Google covets on Internet usage habits.

China is also a big source of research and development labs for major technology companies, which would leave Google on the outside if it followed through on its threat to withdraw entirely. Part of the attacks on its infrastructure involved the theft of intellectual property assets that Google refused to identify, which could raise concerns inside Google about the security of any operations it conducts inside of China.

Google is expected to enter into discussions with the Chinese government over the next several weeks regarding its ability to offer a censorship-free search engine in China, if such a thing is even feasible. Assuming China is unwilling to accept uncensored results, Google may have no choice at this point but to walk away from a huge source of future business.

Investors reacted negatively to Google's decision, sending its stock down 0.6 percent, or $3.39, to close at $587.09. During the course of the day, however, the stock price actually row from early lows.