Google's China rift hints at challenges ahead

In this file photo woman walks past a banner of Google inside a campus as Lee Kai-fu, vice-president of Google Inc. and co-president of Google China, holds a talk at the University of Hong Kong September 14, 2006.

SAN FRANCISCO (Reuters) - The tension between Google Inc and Beijing is more of a nuisance than a financial blow for now, but it's a taste of the challenges that lie ahead as the world's largest Internet search engine strives to expand in China.

On Thursday, a Chinese official accused Google of spreading obscene content over the Internet. The comments came a day after Google.com, Gmail and other Google online services abruptly became inaccessible to many users in China.

Analysts said the service disruptions are unlikely to have major financial repercussions on Google given its presence in China, but may prompt the company to tweak its operations in the world's single largest Internet market by subscribers.

"China itself is a rounding error for Google. It's a high growth opportunity for them, but it's not a major contributor today," said RBC Capital Markets analyst Ross Sandler.

Google, which gets 52 percent of its revenue from outside the United States, does not divulge China-related income. Sandler estimates Google's annual revenue from China at $200 million to $300 million, or about 1.4 percent of the $21.8 billion in revenue the company recorded in 2008.

"There's a lot of volume in China, but the monetization of the traffic, the online advertising, isn't as far along as it is in U.S. and Europe," said Richard Fetyko, an analyst with Merriman Curhan Ford.

Google's share of the Chinese search market lags Baidu, the country's home-grown Internet powerhouse which analysts believe has upwards of 60 percent market share.

But with more than 200 million Internet users, China represents a market Google cannot overlook.

"It's an important growth region for them," said Fetyko. "So they can't just ignore it and walk away from it."

The Chinese government has not acknowledged whether it had a hand in the recent Google service outages. Google said it is investigating the incidents but would not comment on whether it has had any contact with Chinese authorities.

ANTI-PORN DRIVE?

Beijing's criticism of Google comes as the government steps up a campaign against Internet pornography, but it isn't clear why the search engine has been singled out by Chinese officials.

China has required all PC makers pre-install special "Green Dam" software to filter out objectionable material like online pornography. Critics, including U.S. Commerce Secretary Gary Locke and U.S. Trade Representative Ron Kir, say the software can also be used to enforce broader censorship.

Last week, Beijing ordered Google to block overseas sites with "pornographic" or "vulgar" content from being accessible through the Chinese language version of its search engine.

Google said it met with Chinese government officials and was taking necessary steps to ensure that the search results on its Chinese language site complied.

That pragmatic approach is common among U.S. Internet companies doing business in China. On Thursday, Yahoo Inc CEO Carol Bartz answered a question about Chinese censorship at the company's annual shareholder meeting by saying that Yahoo was not created to "fix China."

"We have worked better, harder and faster than most companies to respect human rights and try to make a difference," said Bartz.

"But it's not our job to fix the Chinese government."

Given the longer term importance of doing business in China, analysts said Google is now likely to figure out how to stay in the good graces of the Chinese authorities.

"There's nothing that Google can do to get around it but make peace with the Chinese government," said RBC's Sandler.

Google maintains a Chinese language website, Google.cn, which the company says complies with the local laws. The company's flagship, English language site Google.com does not adhere to China's rules.

The Chinese government's comments on Thursday were aimed at Google's English language Web site, suggesting that the authorities may be trying to exert a broader level of control over its operations.

It's unlikely that Google would alter search results on its international sites to conform to Chinese standards, said Sanford Bernstein's Jeff Lindsay. But he said the company could devise ways to address China's concerns, such as routing all Chinese Internet traffic going to Google.com through its Chinese infrastructure.

According to Google, the English site Google.com has suffered from outages in China before, such as in October 2007. YouTube, the video sharing site that Google own, has been inaccessible in China since March.

Sanford Bernstein's Lindsay said Beijing appears to be trying to exert more control over the Internet during a politically sensitive period, with the country marking the 20th anniversary of the Tiananmen Square protests.

And the role of the Internet in the recent protests in Iran, following that country's disputed elections, could also have been a factor, Lindsay said.

Last week, the U.S. Department of State urged microblogging service Twitter to delay an upgrade to its technology that would have disrupted daytime service to people in Iran.

Google accelerated the release of a Persian translation version of its online service last week to "improve access to information" for people inside and outside of Iran.

"Probably what sparked (the Chinese crackdown on Google), or made it particularly relevant at the moment, is the U.S. government and U.S. Internet companies being seen as having some kind of role in prolonging the unrest in Iran," Lindsay said.

(Reporting by Alexei Oreskovic; Additional reporting by Chris Buckley and Emma Graham-Harrison; Editing by Edwin Chan and Richard Chang)