Google Wins China Permit Renewal, Defusing Standoff

Google says Chinese government renewed internet license
Google Inc. CEO Eric Schmidt. Photographer: Matthew Staver/Bloomberg

July 9 (Bloomberg) -- Google Inc. said it won the renewal of its Web-service license in China, defusing a six-month standoff with the government over censorship that threatened the company’s operations in the world’s biggest Internet market.

“We look forward to continuing to provide Web search and local products to our users in China,” the company said on its blog today. Google’s license, which runs to 2012, will be subject to annual renewal, company spokeswoman Jessica Powell said, declining to say whether the Chinese government had imposed any conditions on renewing the permit.

Google rose in Nasdaq trading as the company avoided getting expelled by the government, which objected to the company’s efforts to keep providing unfiltered search results. The dispute began in January, when the operator of the world’s most-used search engine said it was no longer willing to comply with Chinese regulations to self-censor content.

“The surprising thing was that the process wasn’t longer, there weren’t more concessions and that there weren’t more headaches involved with it,” said Heath Terry, who rates Google “outperform” at FBR Capital Markets in New York. “It signifies the importance of Google to China -- from the candlelight vigils outside of the headquarters to the sheer usage numbers of Google in China. Google is important to the Chinese people and I think the government heard that.”

Chief Executive Officer Eric Schmidt, who is in Sun Valley, Idaho, at a conference for media executives, said he learned of the renewal decision early today.

Overnight News

“This is the outcome we were hoping for, we just didn’t expect a decision this soon,” Schmidt said in an interview. “I didn’t know until this morning. Literally the good news came overnight.”

Wang Lijian, spokesman at the Ministry of Industry and Information Technology, said the government is likely to post a statement on its website. Schmidt had said yesterday he expected the license to be renewed.

Google defied the government in March by ending self-censorship of the Chinese search engine and redirecting users to a Hong Kong site that shows search results deemed unacceptable to Chinese censors. The dispute has cost the company partnerships with China Unicom (Hong Kong) Ltd. and Tom Online Inc., and lifted sales at local rival Baidu Inc.

Google, whose shares have fallen 25 percent this year, gained $10.93, or 2.4 percent, to $467.49 at 4 p.m. New York time on the Nasdaq Stock Market.

China Potential

“Google doesn’t really want to leave China, because it’s a very big market and there is a lot of potential for them,” Bruno Lippens, a fund manager at Pictet Asset Management SA in Geneva, said before the renewal. “It goes much broader than just business issues. It’s about cultural differences and fundamental beliefs like freedom of speech and privacy.”

Google last week resubmitted a license renewal application on the grounds that the Mountain View, California-based company would now point users to an unfiltered Hong Kong site instead of redirecting them automatically.

“This is a reasonable move by the government,” said Jake Li, an Internet analyst at Guotai Junan Securities in Shenzhen. “Google has brought itself into compliance with regulations, so there’s no good reason to deny them the license.”

Google in January said it would stop censoring content and threatened to exit the Chinese market after cyber attacks originating from the nation targeted its systems. The “highly sophisticated” attacks were aimed at obtaining proprietary information and personal data belonging to human-rights activists who use the company’s Gmail e-mail service, it said.

Cyber Attacks

Adobe Systems Inc., Juniper Networks Inc. and Rackspace Hosting Inc. said after Google’s announcement they were also targeted by cyber attacks. The attacks may have targeted more than 100 companies, according to security research firm ISEC Partners Inc.

Google said last week it added a link to its unfiltered Hong Kong site on the google.cn homepage, instead of directing users automatically, and submitted a revised license application to the government based on the practice. That allows the company to “stay true” to a commitment not to self-censor search results in China while adhering to local law, Chief Legal Officer David Drummond said at the time.

Since it began redirecting Chinese users to the unfiltered Hong Kong site in March, Google’s search results have been screened by China’s so-called “Great Firewall,” the monitoring system operated by government censors to block overseas services such as Facebook Inc. and Google’s YouTube.

Losing to Baidu

The “Great Firewall” limits Chinese Web users’ access to information on topics ranging from Tibet’s independence to the 1989 crackdown on democracy protesters in Tiananmen Square.

Google’s market share in China fell to 30.9 percent in the first quarter from 35.6 percent three months prior, according to data from research firm Analysys International. Baidu’s share increased to a record 64 percent from 58.4 percent, according to Analysys. Baidu fell $1.66, or 2.3 percent, to $70.76 today.

Bank of America Corp.’s Merrill Lynch estimated in April Google would generate $160 million in sales this year from China. That’s less than 1 percent of the company’s projected total revenue, according to the average of 29 analyst estimates compiled by Bloomberg. It earned sales of about $335 million from China in 2009, according to Analysys.

China had 384 million Internet users at the end of 2009, the government estimates. That’s more than the total U.S. population. The number may grow to 840 million by 2013, according to EMarketer Inc. in New York.

Google Advertisers

Baidu in April said it benefited from Google’s “semi-exit.” The Chinese company expects “healthy” growth in customers and average spending by clients will continue, Baidu Chief Executive Officer Robin Li said in a conference call on April 29.

Google’s advertisers in China may have cut their spending by as much as 30 percent on average, and shifted their business mostly to Baidu, Credit Suisse Group AG analyst Wallace Cheung wrote in an April 27 report. This has allowed Baidu to charge higher prices, according to Cheung.

The Chinese government on June 8 announced topics it censors on the Internet, including material that may damage “state honor and interests” or “subverts state power.”

No organization can “produce, duplicate, announce or disseminate information” on topics that may be “against the cardinal principles set forth in the constitution,” China’s State Council Information Office said in a 31-page policy paper on the Internet.

Information which may incite ethnic hatred, jeopardize state religious policy or spread “superstitious ideas” is also subject to the restrictions.

The license renewal comes a day after the U.S. said China took a “significant step” last month when it ended its peg to the dollar and allowed markets to drive the currency higher. The report, initially due April 15, concluded that no major U.S. trading partner manipulated its currency and said it’s not yet clear whether China’s policy shift will correct the yuan’s undervaluation.

To contact the reporter on this story: Mark Lee in Hong Kong at wlee37@bloomberg.net; Brian Womack in San Francisco at bwomack1@bloomberg.net.

To contact the editor responsible for this story: Young-Sam Cho at ycho2@bloomberg.net; Tom Giles at tgiles5@bloomberg.net.