How Much Will It Cost Google to Exit China?

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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

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