What Happens if Google Quits China?

IBM Officials introduce Project X

The fallout from Google’s threat to cease its search operations in China is likely to continue to reverberate throughout the tech industry and government circles for weeks and months to come.

Yesterday, Google’s (NASDAQ: GOOG) chief legal officer, David Drummond, made a bombshell announcement on the company’s blog, saying that the search giant may leave the Chinese market if it can’t work out a way with the government there to offer an “unfiltered” or uncensored search engine. Currently Google and other domestic and foreign media companies, including Yahoo (NASDAQ: YHOO) and Microsoft (NASDAQ: MSFT), cooperate with China’s censorship policies as a cost of doing business there.

While China’s censorship policies are nothing new, Drummond cited numerous cyber attacks on the Gmail accounts of human rights activists in China as a reason for Google’s decision. He said the company’s investigation showed the attacks, which were not successful, originated in China. Drummond also said 20 other companies were targeted in cyber attacks emanating from China, and that Google is in the process of notifying those companies and U.S. government officials.

One of those companies attacked may have been Adobe (NASDAQ: ADBE). In a blog post yesterday, Adobe said that earlier this month it became aware that it had been the victim of “a computer security incident involving a sophisticated, coordinated attack against corporate network systems managed by Adobe and other companies” and is investigating the incident.

“At this time, we have no evidence to indicate that any sensitive information — including customer, financial, employee or any other sensitive data — has been compromised,” Adobe said in a statement emailed to InternetNews.com. “We anticipate the full investigation will take quite some time to complete. We have and will continue to use information gained from this attack to make infrastructure improvements to enhance security for Adobe, our customers and our partners.”

Secretary of State Clinton weighs in

The security breach, and Google’s response, caught the attention of U.S. Secretary of State Hillary Clinton.

“We have been briefed by Google on these allegations, which raise very serious concerns and questions,” Clinton said in a statement. “We look to the Chinese government for an explanation. The ability to operate with confidence in cyberspace is critical in a modern society and economy. I will be giving an address next week on the centrality of Internet freedom in the 21st century, and we will have further comment on this matter as the facts become clear.”

If Google does abandon the China market, analysts say it will have both a near and long term impact on its bottom line.

“[Google’s] surprise announcement regarding its China operations is interesting on many levels, but for investors this is clearly a negative,” Broadpoint analyst Benjamin Schacter said in a note to clients. Schacter estimates Google’s revenue from China is “well less than 5 percent” of its overall balance sheet.

“However, the obvious concern is that China’s growth has been solid and its market potential is enormous. Having said that, [Google] has never been a market leader in China and there is certainly no guarantee that its business would become meaningful even if it were to continue to compete in the country. (No western Internet companies have had market leading positions in China),” Schacter said.

Warren Cowan, CEO of search consultancy Greenlight, said that if Google leaves China it will leave Microsoft, Yahoo and China’s own Baidu as the main search providers for Chinese consumers. “For advertisers, it will mean a greater dependency on foreign operators and advertising dollars going overseas,” Cowan said in a statement.

Microsoft had no comment on the China impact. On the specific security issue, the software giant sent InternetNews.com the following statement: “We have no indication that any of our mail properties have been compromised.”

Yahoo could not be reached for comment by press time.

“I don’t see a domino effect,” IDC analyst Karsten Weide told InternetNews.com. “There’s too much of a potential market there for Microsoft and Yahoo to give up.”

Baidu already has a 59 percent share of the Chinese search market, according to Greenlight, which pegs Yahoo share at 6 percent, and Microsoft’s share at 4.5 percent. Greenlight expects Baidu to be the biggest beneficiary of a Google exit, gaining most of the search company’s users.

David Needle is the West Coast bureau chief at InternetNews.com, the news service of Internet.com, the network for technology professionals.

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