Google Hangs On To China, but It's Too Late to Make up Profit Losses

Google Inc. (Nasdaq: GOOG) announced Friday that China renewed its Internet license to operate a Web site, but the previous months of tension have already damaged Google's chance at mainland profitability.

Google's chief legal officer David Drummond posted the announcement on the company's blog Friday morning.

"We are very pleased that the government has renewed our ICP license," Drummond wrote, referring to Internet content provider license. "And we look forward to continuing to provide Web search and local products to our users in China."

The license renewal should dissipate - at least, temporarily - months of tension that started earlier this year when Google claimed China was the source of cyber attacks on its databases and user e-mail accounts. Then the company said it would stop censoring search results in compliance with China's government regulations. China prohibits Internet users from accessing offensive and politically controversial material.

Instead of a total withdrawal from the country, Google decided in March to redirect Internet traffic from its site to an unfiltered Hone Kong page, is still operating but with limited offerings, like music and e-mail services. A license non-renewal would have forced Google to shut the site down altogether. Users can currently use to search, but cannot open many links.

Google has softened its stance in recent weeks by altering its site traffic. Instead of automatically routing China users to its Hong Kong site, it created a Web page offering mainland users the choice of which site to use. That gesture may have appeased Beijing officials enough to help approve the license renewal.

Continuing its site allows Google to keep a hand in China, but its profits from the fastest-growing Internet market will be drastically cut by its limited access.

"Google doesn't really want to leave China, because it's a very big market and there is a lot of potential for them," Bruno Lippens, a fund manager at Pictet Asset Management SA, told Business Week. "It goes much broader than just business issues. It's about cultural differences and fundamental beliefs like freedom of speech and privacy."

China had 384 million Internet users at the end of 2009, and the number may grow to 840 million by 2013, according to Emarketer Inc. China's hottest Internet companies, like Baidu, Tencent and Alibaba, are reaping huge profits.

China will only account for less than 1% of Google's $28 billion in revenue this year. Google earned $335 million from China in 2009, but 2010 sales are estimated at $160 million, according to Merrill Lynch.

Google's search engine market share fell to 30.9% in the first quarter from 35.6% the previous quarter, while Baidu's market share reached 64%.

"It will be interesting to see if Google can stop the slow bleeding," Paul Denlinger, an Internet consultant for startups, told The Associated Press.

Motorola has already replaced Google on its mobile phones with Baidu and Baidu has been able to raise prices as most advertisers have shifted to the local rival.

"Even last year, before this crisis, Baidu always was in a stronger position," Vincent Kobler, managing director of ad buyer EmporioAsia Leo Burnett, told Business Week. "In terms of media buying, customers in general ... are still more comfortable with Baidu."

The dustup has also cost the company partnerships with China Unicorn Ltd. and Tom Online Inc.

Google's future in China remains unclear. Users may be turned off by the limited service offerings and the site redirection to Hong Kong.

"It'll be interesting to see if this two-click handicap will work for Google commercially," Duncan Clark, chairman of consulting firm BDA China Ltd., told The Wall Street Journal.

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