Analysts Discuss Googles Potential Exit from China

 
 
By Clint Boulton  |  Posted 2010-01-13
 
 
 

Google Defends Cloud Computing in the Wake of China Hack Attacks


Google's threat to exit China in the wake of security attacks on Gmail accounts of Chinese dissidents and human rights activists has roiled the high-tech sector, recalling arguments against the cloud computing model Google famously employs to provide Web services.  

Google Chief Legal Officer David Drummond wrote in a blog post Jan. 12 that Google will cease censoring results on Google.cn, and will discuss with the Chinese government whether or not the company can continue to offer its search engine in China.

Drummond said the attack on Google's corporate infrastructure resulted in the theft of intellectual property from Google, though he declined to specify what the hackers stole.

However, he also said the accounts of dozens of Gmail users in the U.S., Europe and China who are advocates of human rights in China were routinely accessed by third parties. Drummond stressed that these accounts were compromised through phishing scams or malware, not through holes in Google's computing infrastructure. This is a key point.

Google's hosts data from search, Gmail and other collaboration programs that comprise Google Apps for millions of consumers on thousands of servers in data centers all over the world as part of a cloud computing model. When a Google user triggers a request from his or her computer, it speeds to these servers, looking for a response.

While Drummond took pains to explain that at least 20 other companies were similarly attacked in China, David Girouard, president of Google's Enterprise group, also sought to reassure the 2 million businesses that use Google Apps that the attacks were not directed at the cloud computing model. He wrote:

"This was not an assault on cloud computing. It was an attack on the technology infrastructure of major corporations in sectors as diverse as finance, technology, media, and chemical. The route the attackers used was malicious software used to infect personal computers.

Any computer connected to the Internet can fall victim to such attacks. While some intellectual property on our corporate network was compromised, we believe our customer cloud-based data remains secure."

Girouard said Google believes Google Apps and related customer data -- hundreds of thousands of Google Apps users pay the company $50 per user, per year for Apps -- were not not affected by the hacks. Moreover, Girouard took the opportunity to tout Google Apps' security. He added:

"While any company can be subject to such an attack, those who use our cloud services benefit from our data security capabilities. At Google, we invest massive amounts of time and money in security. Nothing is more important to us.

Our response to this attack shows that we are dedicated to protecting the businesses and users who have entrusted us with their sensitive email and document information. We are telling you this because we are committed to transparency, accountability, and maintaining your trust."

Analysts Discuss Googles Potential Exit from China


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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