In China, Google Fallout Damages Yahoo!

Long before Google (GOOG) had problems with China's censors and hackers, Yahoo! (YHOO) was struggling to follow Beijing's rules without alienating the company's users in the rest of the world. Yahoo often didn't succeed: In 2006, critics subjected it to scathing criticism: U.S. Representative Tom Lantos (D.-Calif.), a Holocaust survivor, compared the company's executives to Nazis. A year later, at a Congressional hearing following disclosure that Yahoo had given the Chinese police information that helped jail a dissident who had used Yahoo e-mail, Lantos called Yahoo executives moral "pygmies" for cooperating with Beijing.

Yahoo executives now seem to have tired of their dealings with Beijing. Yahoo was one of the few companies to express support for Google when it announced last week that it would stop censoring search results in China. Google's decision was in response to what it said was a coordinated attack on its corporate computers from Chinese hackers, Yahoo said it was "aligned" with Google's position.

Although Yahoo's stance might win over some critics in the U.S., it could also provoke a spat between Yahoo and its local partner in China. While Google owns its Chinese website,, Yahoo China is part of a Chinese company, Alibaba, which bought control of Yahoo's struggling Chinese portal in 2005. Alibaba has expressed its disapproval of Yahoo's statements supporting Google, calling Yahoo "reckless" for aligning itself with the search giant. On Jan. 19, Alibaba chairman Jack Ma said he has "no idea" who was responsible for the attacks against Google and other companies.

Yahoo shares another thing with Google: Both companies are underperforming in China and therefore have little to lose by criticizing Beijing. Although Yahoo owns 39% of Alibaba, the U.S. company doesn't control the Hangzhou-based e-commerce specialist, which has been focusing on successful businesses such as Hong Kong-listed business-to-business site and Taobao, an eBay-style consumer site that is the market leader.

Google woes help Baidu and Tencent

Yahoo China is an also-ran, far behind top Chinese search engines and portals. "Most of the focus and resources have been put into and Taobao," says Elinor Leung, an analyst with CLSA in Hong Kong. She says Yahoo China's share of the Chinese search market has fallen in two years to less than 3% as Alibaba has invested in its other businesses. If Google ends up shutting its China operation, she adds, Yahoo China is unlikely to benefit much.

Which companies are best positioned to gain from a Google departure? One is Baidu (BIDU), the Beijing-based company that controls more than half the Chinese search market. Another is Tencent, which operates China's most popular instant messaging service and has branched into games and social networking.

Both face challenges. On Jan. 19, Goldman Sachs (GS) downgraded Tencent. With Google likely to exit China, Baidu will be able to focus more on offering the sort of games and services that attract users to Tencent.

But Baidu will have to overcome internal problems. On Jan. 18, Baidu announced the resignation of its chief technology officer, Li Yinan, who left the company for personal reasons. That's the second high-level executive to depart Baidu in just 10 days. The company lost its chief operating officer, Peng Ye, early this month.

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