Google and China: A Win for Liberty and Strategy

Isaac Mao saw this coming. In early 2007, a year after Google (GOOG) launched a China-based version of its search engine that adhered to Beijing's strict censorship rules, the prominent Chinese blogger posted an open letter to founders Larry Page and Sergey Brin. Mao described the frustration he and other Chinese Google fans felt as a company with the informal motto "Don't be evil" obeyed policies forbidding access to sites deemed taboo by China's government. Google's self-censorship "hurts those loyal users a lot," wrote Mao, who said it was "high time to change [Google policy] back to the right track."

Now the 37-year-old Mao seems to be getting his wish. After Google's Jan. 12 announcement that it would stop censoring search results on—in response to what the company called "highly sophisticated" hacking from China of its computer systems and the infiltration of Gmail accounts of human-rights activists—Internet users in China had new hope they might gain access to information on the 1989 Tiananmen Square crackdown, the Dalai Lama, and other banned topics. The company says it will quit China if it can't run a permanently unfiltered search engine. It's hard, though, to imagine the Chinese giving Google, or anyone else, that kind of autonomy.

An exit from the mainland would uphold the right of free expression and acquit Google in the eyes of those who protested its initial complicity with Chinese restrictions. "It's a smart move," says Mao. But before heaping too much praise on Page and Brin, it's worth noting that a pullout would also end a bruising commercial battle. In the U.S. Google has over 60% of the search market. In China its share of search profits is 35.6%, a distant No. 2 to local champion Baidu's 58.4%, according to China data tracker Analysys International. No wonder, says David Wolf, CEO of Beijing-based advisory firm Wolf Group Asia, "Google appears to be more interested in winning hearts and minds than in sustaining its business in China."

China, which has more than 330 million Web users, has not been kind to American Web giants. Instead of replicating their U.S. success, eBay (EBAY), Yahoo! (YHOO), and Microsoft (MSFT) portal MSN found they couldn't go it alone against such domestic rivals as Baidu, e-commerce leader Alibaba's Taobao, and instant messaging power Tencent. Even after U.S. players teamed up with local partners, they still trailed.

Google struggled from the get-go. Despite its submission to censorship, its YouTube business was regularly blocked, and censors still occasionally restricted access to the entire search engine, not just results to offending queries. After Google announced that it would alert Chinese users every time it provided them with a censored result, the government-run media attacked the company for allegedly operating without a license. Chinese Net users even mocked Google's Chinese name, a transliteration of the word Google that was rendered inelegantly as "Valley Song." Google also had to wage a bitter court battle in 2005 before winning permission to hire a brilliant Microsoft executive, Kai-Fu Lee, to head its China business. Lee quit in September.

Google says financial considerations have nothing to do with its challenge to the Beijing censors. Outsiders disagree. "Google is in a really tough spot," says Bill Bishop, a Beijing-based angel investor in Chinese startups. "There is no long-term potential." By citing the hacking and censorship issues as reasons for leaving, Google can end its agony and "get this incredible lift in brand equity," he says. Google won't lose much financially: Its Chinese business was on target for 2010 sales of $600 million, according to JPMorgan Chase (JPM). That's a fraction of Google's estimated overall sales this year of $26 billion.

The irony is that the main Google site,, is popular with China's English-speaking elite, who find local search engines insufficiently global. Sounds like the makings of a good business. Such logic doesn't always work in China.

With Tom Giles in San Francisco and Douglas MacMillan in New York

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