HONG KONG - Shareholders of Baidu, China's biggest search engine, could yet be
the biggest loser from the shock announcement by Google to quit the China
The United States-based company, the leader in the global search market,
threatened last week to pull out of China because of a recent hacker incident
and Chinese government interference on the Internet, surprising industry
watchers and the public at large.
Even Microsoft's chief executive officer, Steve Ballmer, could make little
sense of Google's stance. "There are attacks every day. I don't think there was
anything unusual, so I don't
understand ...", Reuters and other news outlets reported him as saying. "We're
attacked every day from all parts of the world and I think everybody else is
too. We didn't see anything out of the ordinary." Microsoft's recently
introduced Bing search engine now competes with Google for customers and
At the same time, numerous voices, particularly in the United States, welcomed
the move as evidence that Google intended, at last, to stand by its motto of
"Do no Evil".
If it follows through on its threat, Google would not only be walking away from
the world's biggest Internet market. It would be doing so at a time that its
business there is getting better and better. Google at the end of last year had
a 35.6% share of market, compared with 31.3% in the third quarter, while
Baidu's share fell to 58.4% from 63.9%, according to Analysys International, a
Beijing-based market research firm.
That is a dramatic gain by Google over the past three to four years. Its China
market share was as low as 16% in the second quarter of 2006, a year after it
set up its China office. At that time, Baidu had 50%, according to Analysys.
Google has the momentum to do even better, thanks to its lead in Internet
search using gadgets such as mobile phones; that market is still in its infancy
and is destined to play an increasingly important role.
Google developed mobile search much earlier than Baidu - in 2007, according to
former Google China president, Lee Kaifu - and has China's largest cell-phone
operator, China Mobile, as its mobile search partner. The carrier claimed more
than 518 million customers as of November 30, after adding 61 million in that
month alone. (The US had "only" 276.6 million wireless subscribers as of last
Baidu started to develop mobile search only last year, and last May it
partnered with the smallest of the country's three mobile-phone operators,
As 3G mobile technology expands its reach across China and the number of people
searching the Internet with their phones grows with it, Google's advantages
over Baidu should become even more apparent.
If Google can gain a further 5% from Baidu, that is 40% against Baidu's 50-55%,
Google will no longer be just a smaller rival. It will be unavoidably
recognizable as a serious competitor to Baidu, and a powerful player in China
Internet space. The Chinese government will be watching that development -
should it happen - of a foreign-owned company rising to such a position at the
heart of the Internet in China with concern.
At the same time, the number of Internet users in China, at 384 million already
outstripping any other country, continues to grow at a remarkable pace - 28.9%
last year, according to CNNIC, a Chinese government-backed research institute;
and the market is far from saturated, as less than a third - 29% - of China's
population is online. That is a lot to walk away from.
Google's confrontation with the Chinese government, with little apparent escape
route for either side, is, however, only one, albeit very public move, in a
chess game, according to one industrial insider who declined to be named for
The Google announcement last week said it detected "a highly sophisticated and
targeted attack originating from China" and "a primary goal of the attackers
was accessing the Gmail accounts of Chinese human rights activists" (Click
here for original.)
Then after a long discussion of the significance of the event, it said, "We
have decided we are no longer willing to continue censoring our results on
Google.cn, and so over the next few weeks we will be discussing with the
Chinese government the basis on which we could operate an unfiltered search
engine within the law, if at all."
Google started Google.cn to provide better accessibility of Google to Chinese
Internet users, as Google.com's services was frequently blocked by the Chinese
government. Google.cn has to follow Chinese rules and censor its results, just
like other Chinese search engines.
The company's announcement then, at the first glance, might look like a suicide
note - the Chinese government is not used to backing down on foreign company
threats. Dick Wei, China Internet analyst of JP Morgan, said Google would leave
by February. Most analysts agree with him - Google will cease its operation in
Certainly, human rights and unfiltered search results are related, because
freedom of speech is an aspect of human rights. However, they are separate
issues. Nor is Google alone in being the victim of hacker attacks; companies
worldwide devote considerable expenditure on security against such things. It
is therefore an unusual pretext to link an attack on the accounts of
human-rights activists with the company's intention to run an unfiltered search
engine in China.
It is not yet clear whether Google has hard evidence tracing the hackers to the
Chinese government. Reports on Monday suggest there might also be an employee
within Google who had a role in the attack. Whatever the case, it is reasonable
to assume that as the world's leading search engine, Google has technology and
capability to trace the hackers to their origins.
It was also revealed last week that Google informed US Secretary of State
Hillary Clinton of its situation before the company made its intentions public.
What evidence it passed to the US government at the same time is not known.
Nevertheless, the US government backed the company, with Clinton stating right
after the announcement, "We have been briefed by Google on these allegations,
which raise very serious concerns and questions. 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."
Clinton is expected to deliver a major policy address on Internet freedom this
Thursday in Washington, DC.
Is it possible that with hard evidence of a hacker attack and its source,
Google believed it had leverage to gain better cooperation from the Chinese
government in its goal of removing censorship from search results in China?
That appears a fruitless dream. As Chinese online users approach 30% of its
total population, government censorship on the Internet is becoming ever
harsher. Even with self-imposed censorship, Google.cn still upsets the Chinese
government from time to time. State-owned China Central Television, in a news
program last month, accused Google of providing links to obscene content (this
charge was not limited to Google, with some Chinese search engines, Baidu and
Sohu's Sogou, also being named.)
Yet at the end of its statement, Google said it was going to talk with the
Chinese government in the next few weeks.
So far, the government's reaction has been mild - a Chinese Foreign Ministry
spokeswoman, Jiang Yu, said company had to cooperate "according to law", but
"China's Internet is open".
"The Chinese government works hard to encourage the healthy development and
expansion of the Internet, and works to create a favorable environment for
that," Jiang added.
It seems, then, that the Chinese government is willing to negotiate, though
there appears little wiggle room for either side between Google's wish to "run
an unfiltered search engine" and Beijing's bottom line that everything must be
"according to Chinese law". Yet wiggle room there is, depending on the
interpretation of "according to Chinese law" - a flexible concept, as people
doing business in China know full well.
One way out was to let the Chinese government do the censorship itself, said
the industry insider. Google would run the unfiltered search engine, and the
Chinese government could block any results it does not like, as was the case
before Google formally entered China. Only the blocking might not be as heavy
handed as some people expect. Chinese Internet users would than still be able
to use Google for most of their daily searches.
If Google can get its negotiations right, and secure a compromise with the
Chinese government, it might have even more room to maneuver. If that is the
case, Baidu, whose stock price surged 10% after Google made its withdrawal
announcement, might be the one to be threatened.
Google is already the preferred search engine of many better-educated and
wealthier Chinese Internet users, especially in the major cities. The publicity
Google gained over its threat to quit the country served there as a free
advertisement for the global search giant, while drawing attention to the
support it does have in China - witness the widely broadcast pictures of people
placing flowers in front of Google's Beijing office, which even the local
press, including the Beijing-based
Global Times newspaper, carried. This is likely to encourage even more
Chinese Internet users to try the site, if only out of curiosity to see if
there is any difference from Baidu. And some will stay - because Google is
better in some aspects of its business; its translations, for example, and map
applications are more sophisticated than Baidu's.
Only if the negotiation fails will Google shut down Google.cn and leave China.
But that does not means it is a total loss.
Google's China business can be divided into three parts:
1. Google.cn - selling search ads to target the domestic market.
2. Google.com - selling search ads to target the international market. 3. Adsense Network - through which Google directs ads of its advertisers
to websites that have joined its affiliated program.
Only the first business is directly affected if Google.cn is shut down. Chinese
advertisers who want to target the international market can still use
Google.com. And Google's Adsense network can still operate for advertisers to
reach Chinese consumers through hundreds of thousands Chinese websites that
have joined Google's affiliated program. Google runs the largest affiliated
network in China, with more than 200,000 websites, including the leading
Chinese portal, Sina.
No matter what happens in China, a prize Google has already won in this chess
game is the heart of its global audience, especially in its home country, the
US. (Microsoft's Ballmer made it clear that his company had no intention of
pulling back from its involvement in China.) The positive publicity generated
from the incident can help to secure Google's position as the number one search
engine in the world.
It has also attracted broader attention from the general Chinese public to its
presence, its search ability, and to its other Internet tools, at a time when
it is preparing to introduce its Android free mobile-phone software to the
world, where it will compete with the likes of Apple's iPhone and Nokia, and in
China with numerous other local brands.
Google has done something that appears to be crazy on the surface, but the
company has a record of taking on the world and coming out on top. The original
idea of a stand-alone search website with free results paid for by text
advertising was one such unconventional battle. Another is its proposal in the
US to access the "white space" between television channels for a new generation
of wireless devices - this after the company lost out at a wireless spectrum
auction in March 2008 that netted the US government almost US$20 billion but
left Google with $4.6 billion still burning a hole its corporate wallet.
Google's showdown with the China government might be another huge bet by the
search engine giant. Baidu, meanwhile, has its own issues to contend with. Its
chief operating officer, Ye Peng, left the company this month for "personal
reasons", and on Monday the chief technical offer, Li Yinan, also quit - again
for "personal reasons".
Li, a 16-year veteran of the industry, was previously the chief telecom
scientist at Huawei Technologies, the largest telecom solutions provider in
China, where he oversaw the development of 3G cellphone chipsets. He will move
to a unit of Google partner, China Mobile, China Business News reported,
without naming its source.
Ye was previously general manager of Apple China and before that managing
director of SatCom AG and a vice president of Motorola Mobile Business North
With the US company's track record, Google's long-shot bet that it can
threaten, then come to a deal with, the Chinese government might yet pay off.
Baidu's shares have gained 323% in the past year, while Google's have gained
109%. Recent buyers of Baidu shares might consider that now is the time to swap
them for Google's before reality bites. Conveniently, both are listed on the
Nasdaq market in the US.