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Google Puts Free Speech Above Phone Sales

By Mary Childs and Amy Thomson

(Bloomberg) — Google Inc.'s decision to stop censoring search-engine results in China and potentially shut down its local Web site may prevent it from selling its new mobile phone in the world's largest market.

The Nexus One smartphone, released this month, is sold via Google's Web site. Closing the Chinese version of the site would kill its potential distribution channel in China, said Clayton Moran, an analyst at Benchmark Co. in Boca Raton, Florida.

Phone makers are racing to get a foothold in China, where sales will grow 21 percent this year, outpacing other major economies, according to Gartner Inc. Apple Inc. released the iPhone in China last year, and Motorola Inc. is selling a new line of phones based on Google's Android software. Exiting China is a blow to Google's global ambitions, said Pat Becker Jr., chief investment officer of Becker Capital Management Inc.

"The global story for Google is an important part of the investment thesis," said Becker, whose Portland, Oregon-based firm manages Google shares. "Does it limit the growth of the company down the road? Possibly."

The Nexus One is currently offered in the U.S., with an international expansion slated for later this year. Google declined to comment on its plans for the Nexus One in China, saying the phone would be available in other countries in the near future.

Biggest Market

China had 738 million mobile-phone subscriptions at the end of November, according to government data. The U.S. had 276.6 million wireless subscribers as of June, according to the industry group CTIA.

Google said this week that Chinese attacks on its site had led to theft of intellectual property. Hackers targeted Gmail accounts of human-rights activists, the Mountain View, California-based company said.

"These attacks and the surveillance they have uncovered—combined with attempts over the past year to further limit free speech on the Web—have led us to conclude that we should review the feasibility of our business operations in China," Google said on its blog. "We recognize that this may well mean having to shut down and potentially our offices in China."

Google sold about 20,000 Nexus Ones in the week after it first went on sale, according to Flurry Inc., a San Francisco-based tracker of phone software use. That compares with 1.6 million for the iPhone and 250,000 for Motorola's Droid. Google's pricing, online-only sales and support limited uptake, said Peter Farago, vice president of marketing.

iPhone Sales

Apple had sold more than 100,000 iPhones in the country via China Unicom (Hong Kong) Ltd. through Dec. 10. The carrier released the phone in China at the end of October.

While the Chinese market is still relatively small for Apple, the growth may prove attractive to rival phone makers, said Andy Hargreaves, an analyst at Pacific Crest Securities Inc. in Portland. Apple sold a total of 7.4 million iPhones in the third quarter. As competitors stream into China, the loss of Google probably wouldn't make much of a difference for Apple, he said.

Natalie Harrison, a spokeswoman for the Cupertino, California-based company, declined to comment.

Google's Android software, a freely available operating system that any phone maker can adopt, is already in the country—offered on phones from Motorola and other manufacturers. China Mobile Ltd., the world's biggest phone company by market value, has developed an Android-based phone system called OPhone.

'Critical Market'

Android backers aim to build support for the software by encouraging third-party applications that work with the phones. Motorola said it's continuing those efforts in China.

"China is a critical market," the company said in a statement. "Motorola will continue to work with its partners to provide all the needed support, toolkits and distribution opportunities necessary to ensure that they can profitably bring Android applications to market in China."

Motorola said it is monitoring the situation and that cyber attacks are "sophisticated and increasingly common."

Google fell $3.39 to $587.09 in Nasdaq Stock Market trading at 4 p.m. New York time. The shares more than doubled in value last year. Apple, also up more than two-fold in 2009, gained $2.93 to $210.65.

While Google would miss out on some sales, the decision could help the company's perception in other parts of the world, increasing customer loyalty, Benchmark's Moran said.

It strengthens "their overall brand identity, and that is one of protecting the user, in this case at least, and fighting censorship," Moran said. "It does do a lot for the brand globally, taking a stand here."

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