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Summary:

Google earlier today made a bold decision — it stopped censoring results on Google.cn, its Chinese destination. This will most certainly get the company banned from China and it is going to cost it hundreds of millions of dollars.

tiananmen_tank_man_google_china.gif

Google, earlier today made a bold decision — it stopped censoring results on Google.cn, its Chinese destination. The decision, was a direct consequence of a sophisticated attack on its infrastructure as attempts were made to penetrate Gmail accounts of human rights activists. This will most certainly get the company banned from China and it is going to cost it hundreds of millions of dollars.

This is not only brave, but a very costly decision. According to estimates by J.P. Morgan, if the Chinese government bans the search giant, then Google could be walking away from about $600 million in 2010 revenues.

In our current model, we estimate Google will generate ~$600M in revenue from China in 2010. We expect segment margins of the Chinese operations to be in the 15% to 20% range. However, if Google is not allowed to operate in China, beyond the immediate revenue loss, this could potentially have a far-reaching impact on the company’s overall long-term growth rate.

Of course, this could help Baidu, the Chinese search engine. Fortune magazine’s Stephanie Mehta had talked to Jennifer Li, Baidu’s chief financial officer back in December 2009. According to Li, “Baidu’s market share for search in China was about 77% in the third quarter” and Google “lost share in China, dropping to 17% in the third quarter, from about 19% in the second quarter.”

A more cynical view would say that perhaps Google is cutting its loses and getting rid of a money-losing unit. I don’t think so — for once Google is sticking to its aspirational goal: do no evil. It is a shame that they were kowtowing to the Chinese government in the first place — but better late than never.

Image courtesy of Joy of Tech

  1. Om – again an interesting conversation around Google and your view(bias!) about the company is in question here How come u did not want to raise how much other kowtowing other competitors of Google are doing?

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  2. Not only do they have a bunch of money to lose but I think someone like Microsoft is going to be more than willing to fill their void. However, the amount of PR and kudos they are going to get back may be well worth it. It’s about time corporate America started acting more responsibly.

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  3. Google never fails to impress..One more reason to love the company..

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  4. I agree that this is a welcome development. Google must have information which strongly suggests that the Chinese government perpetrated this attack. That is why Google sees no point in cooperating with the Chinese government any more. If the attack had come from any other source, why would Google pick a fight with the Chinese government?

    However, a few questions persist: When will Google stop censoring in other countries? Will it take a cyber attack by the government of a country for Google to stop censoring in that country? What about not censoring because it’s the right thing to do? Because that is what freedom of speech is all about?

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    1. Gee, how about giving away all their money, declaring bankruptcy, never again dealing with anyone in another country because they aren’t “up” to American standards?

      Join the religion.

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  5. It took ‘em a while, but good for them.

    …and maybe a little savvy too: it’s not like Chinese users won’t be aware that Baidu is the censored search engine and if they want to get at the full internet, they’ll find a way through the Great Firewall to Google, just as the Iranian pro-reform movement finds a way to Twitter.

    I’m also betting that a good number of Google employees were unhappy with their China operations.

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  6. I wish I could feel warm and fuzzy about Google’s aspirations, but the cynic in me is thinking that they’re smart in exiting/pairing down a business unit that’s losing market share. I think Google is realizing it’s ok to fire customers, but for financial reasons, not altruistic ones.

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    1. Google is losing badly to Naver and Daum in South Korea. Google is showing no signs of pulling out of South Korea. Google is losing badly to Yahoo! Japan (operated by Softbank) in Japan. Google is showing no signs of pulling out of Japan.
      No need to be cynical. Google is angry that the Chinese cyber army hacked them. Google realizes the same thing that their former China head realized. It will be nearly impossible to beat Baidu which is very willing to be an instrument of the state in China, and very willing to allow activity which is considered criminal by many observers.

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      1. Retreating from those countries wouldn’t give Google any PR.

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  7. Fine start for Jill Hazelbaker?

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  8. Exactly what is altruistic here?
    Is google leaving China because…

    • Someone attacked their servers… and that’s… wrong? Surprising? (regardless of what/whose data they tried to access?)
    • or because they are losing market share? (Even though they seem be making a profit?)

    In either case, I don’t see how exiting the market will be a rational/altruistic/financially sound response. They’re facing a purely technical issue (someone attacked their servers). Why are they trying to create a political issue out of it is beyond me.

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  9. “15-20% margin on 600M revenue” the goodwill and publicity that the 100-150M bought them is well worth it.

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  10. This may have serious repercussion worldwide including India.

    Malick.

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