HONG KONG - The Chinese government's decision this week to renew the license
for Google to operate in the country was something of a surprise, not least as
the United States-based Internet search company had delivered an insult to
authorities in Beijing in March by bypassing their control and sending search
traffic "overseas" to its Hong Kong site - and the Chinese government cares
about losing face.
"Despite what it has done, the Chinese government does not want to kick Google
out of China, as the entire world is watching," said a former senior Google
executive.
The decision means not only that Google does not have to censor its search
results, it even has the government’s approval for this. It
also means that the global search giant can "stay" in China - a setback for its
local rival, Baidu, which was well placed to benefit most from Google's
apparent departure.
Baidu's share price soared to US$82 from about $40 before the dispute between
Google and the central government broke out in January and practically every
investor seemed to expect Baidu to snap up most of the search market in China.
They now have to reassess the situation, with the share price already settling
back to US$71.
"In the past six months, the capital market basically assumed Google would
gradually exit the China market and this benefited Baidu's share price," said
Wallace Cheung, China Internet and media analyst at Credit Suisse. "Google's
success in renewing its ICP license in China indicated in our view that Google
wants to stay in China, and also wants to comply with all the rules." He
expected the renewal would have a negative impact on Baidu’s share price. "We
reiterate 'underperform' on Baidu," he said.
An Internet content provider, or ICP, license, is needed for any website to
operate in China. It is relatively easy for local players to obtain the
license, but not so straightforward for foreign companies. Google first applied
for its ICP license for its Chinese site, Google.cn, in 2005 when it opened its
Chinese office, but it did not get it until 2007. Between those dates it used
the license of a local company, Ganji.com.
The renewal of its ICP license means the company can officially use the
"Google.cn" website in China, according to Google's official blog. "We look
forward to continuing to provide web search and local products to our users in
China," the blog site said.
Google.cn at present has a link to Google.com.hk to provide search services
without a content filter, and also provides three local services - music,
shopping and translation - which do not relate to content filtering.
Unlike its competitors in China, such as Baidu, Sogou and Soso, Google does not
screen out politically sensitive information from its search results,
effectively running the search engine much as it does everywhere else in the
world. This means the Mountain View, California, company does not follow the
numerous changes the Chinese government makes in its Internet policies and that
the company can appear to live up to its claim to be "doing no evil".
The latest development does not mean Chinese Internet users can access
information freely, however. Thanks to the "great firewall of China", the
government still has the final say on what its citizen can see - it will simply
block content it does not like. So, in the end, the Chinese government still
has firm control over its territory.
One change in Google's site is that, before the license agreement, Google.cn
gave an automatic link to the company's Hong Kong site. Now, Google.cn has a
non-automatic link to Google.com.hk, and the extra complication is likely to
deter many from using it. The former Google executive believed this was the
result of negotiation between the Chinese government and the company.
Nonetheless, the government's attitude towards the whole Google incident was
unexpectedly "understanding" or mild. Besides making announcements such as
every company should operate "according to Chinese law", it has done nothing to
harm Google.
"Google is getting far more understanding from the government than any local
enterprise would in this situation because there are larger things at play,"
said T R Harrington, chief executive of Darwin Marketing, a Shanghai-based
search engine marketing firm. "The government cares most about presenting
itself as supportive of international investment. That outweighs the negative
feelings about Google's actions."
Darwin Marketing promotes its clients by buying keywords in search engines such
as Baidu and Google. A US citizen, Harrington has lived in China since 2003 and
co-founded Darwin with a former eBay executive in 2005.
Google's apparent intention of quitting China after claiming its site had been
hacked, and its willingness to publicly confront the government, left its
partners with a chill and may have cost it revenue, at least in the short term.
It has already lost several of its biggest partners in China, such as online
portal Tom and online community Tianya. These websites had been sending Google
search traffic via Google's Adsense affiliate network. Google runs the largest
affiliated network in China, with more than 200,000 sites including major
websites, such as Sina. Some of Google's sales agents for selling keywords in
China have also left, said Harrington.
Cheung of Credit Suisse said, "Based on discussions with industry sources, we
expect Google's paid search was down from six months ago, although traffic was
stable, because advertisers are unclear on Google's future."
Darwin's spending on Google has dropped too. Before the crisis broke in
January, Darwin spent about 70% of its clients' budget on Baidu and about 29%
on Google. Now, it spends about 77% on Baidu and 22% on Google. "I expect
Google's revenue to drop further due to losses of partnerships and from loss of
sales distributors," said Harrington.
Google's market share in China fell to 30.9% in the first quarter from 35.6%
three months earlier, according to Analysys International. Baidu's share
increased to 64% from 58.4%.
Some of Google's recent staff movements are also worrying. All Google's
research and development team for search in China have gone - hired by its
competitors, said a hedge fund manager. "Half of them went to Youdau [Netease's
search engine]. Others went to Sogou [Sohu's search engine], Soso [Tencent's],
Baidu, and so on. With Google leaving China, everyone is trying to get a piece
of the cake."
The former senior Google executive said many of the key personnel had left,
although not the entire team. "Many of the engineers are still staying at
Google," he said.
Even so, the head of Google China research institute went to Tencent and the
head of development for Google Adsense in China went to Baidu, an industry
insider said.
Now, with the renewal of its Google.cn license, Google seems to be telling the
world it wants to stay in China and has the Chinese government's blessing too,
which could lead to a u-turn in its revenue trend.
"The ICP license renewal will attract some advertising spending back to
Google," said Cheung.
Suddenly, it seems prospects are good in China for Google's search engine, its
affiliate network, Adsense and, its mobile initiative, Android. "Right now all
three have a future. Android is the most interesting of the three because it is
the least known, and the mobile market, though more heavily regulated, has a
huge install base in China and eventually people will only search from their
mobile phone," said Harrington, "Android is big".
China has close to 800 million mobile-phone users. There were 795.92 million
subscribers of mobile communication services in China as of the end of May
2010, up 15.86% from a year earlier, according to China's Ministry of Industry
and Information Technology (MIIT).)
And although many of Google's research and development team for search in China
have gone, Google China's Android team stayed on. Almost all phone-makers -
foreign and local, large and small - with the exception of Nokia, plan to
launch their versions of Android phones in China this year or next.
"We believe wireless Internet including the Android system is a key reason for
Google to stay in China in the longer term," said Cheung.
With the renewal of its ICP license, Google is also likely to be granted a
China online mapping license, Cheung said. "Google Map has been a highly
successful application for wireless Internet in China," he said.
The former Google executive was more pessimistic about Google's future in
China. "Google's market share will never recover. It will drop to 10%
eventually, but it might be a long steady decline - over two to three years."
The automatic link to the Hong Kong site would give Google more market share -
up to 15% eventually - but to the Chinese government this would seem too much,
he said. The deterrent effect of users having to click to access the Hong Kong
site will eventually give Google about a 10% market share, which would be
acceptable to the Chinese government.
In the end, he expected Google would be a small player, but the Chinese
government would leave it alone. "If Google plays by the Chinese government's
rules, it will have 30% of the market. In a few years, China's search engine
market will be enormous. The 20% difference could be huge," he said.
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