Analysts Discuss Googles Potential Exit from China

By Clint Boulton  |  Posted 2010-01-13 Print this article Print

He is also telling the world this because he and his team don't want to lose any customers to concerns that Google is susceptible to security breaches. Google has already fought off concerns about its cloud computing model amid a few data outages in 2009.

Google has been toiling away selling Google Apps in the last three years, but finds itself in an uphill battle versus collaboration software giants Microsoft and IBM, both of whom entered the collaboration cloud in 2009.

Beyond the obvious affront to Google's cloud computing model, the incident spurred the debate of whether or not Google can afford to bid adieu to China, a powerful nation with some 360 million Internet users and the mecca for computer manufacturing facilities.

Millions of Internet users means millions of eyeballs to see Google's search-based advertising, which means big money for Google.  

Still, while Google boasts 65 percent U.S. search market share and some 70 percent worldwide, the company easily trails Baidu in Chinese market share. Baidu boasts 64 percent, with Google corralling a distant second at 31 percent. 

The consensus among financial analysts is that Google banks about $300 million to its top-line from business in China, or roughly 1 percent of its revenues. That may not seem like a lot for the company that racks up $22 billion a year in online advertising, but Google must also keep the future in mind.

Jefferies and Co. analyst Youssef Squali noted this in a Jan. 13 research note:

"Shutting down China would be a strategic loss for Google as China is one of the largest and the fastest growing online markets in the world (already the largest in terms of Internet users.) China's consumers are likely to double their consumption of consumer goods over the next five years, hence doubling the country's online advertising footprint by 2014.

While we commend Google's mgt for "doing the right thing" on important issues of human rights and online censorship, the company's inability to participate in China's growth will be seen as a long-term negative, and therefore cause a valuation discount in the stock."

Piper Jaffary analyst Gene Munster said in a Jan. 13 note there is a 35 percent chance Google will exit China in the coming months even as Google and the Chinese government discuss the issue.

"Obviously, we expect China will be a significant growth market for paid search in the future; however, we do not believe Google is bluffing in their claims that they would shut down operations. The bottom line is that we believe Google can better serve the human rights cause in China by staying active in the country rather than exiting due to the current dispute."


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