Wall Street frets over Google's future in China

NEW YORK/SAN FRANCISCO Wed Jan 13, 2010 12:58pm EST

1 of 5. A Chinese national flag flies in front of the Google China headquarters in Beijing January 13, 2010.

Credit: Reuters/Jason Lee

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Google threatens China exit

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NEW YORK/SAN FRANCISCO (Reuters) - Google Inc's threat to withdraw from China over censorship and cyber attacks has suddenly jeopardized any plans it has for the world's biggest Internet market, stunning investors and analysts.

Google's announcement that it may quit China -- a possibility that analysts said appeared realistic and increasingly likely -- carries with it broader implications for other U.S. technology and media companies that have placed big bets on business in the country.

In the case of Google, China accounts for only a fraction of its current business, roughly $300 million to $600 million in annual revenue, or less than 5 percent of its total, analysts estimate.

The bigger concern is what a withdrawal would mean for Google's future prospects, given the size of China's market and the potential for advertising sales there.

"For investors this is clearly a negative," Broadpoint AmTech analyst Benjamin Schachter said in a research note. "The obvious concern is that China's growth has been solid and its market potential is enormous."

Such concerns pushed investors toward Chinese search engine Baidu Inc, which leads Google in China's search market with more than 60 percent share. Shares of Baidu jumped 12 percent to $432 in early trading, while Google shares slipped 2 percent to $579.

"If Google were to exit China, we believe this represents a significant lost growth opportunity in the long term," UBS analyst Brian Pitz said in a research note. "China is the world's largest Internet market with roughly 298 million users, with only 22 percent of the population penetrated."

He said that checks by the firm suggested that Google.cn has already removed censoring filters for several keywords, increasing the possibility that the site "will be shut down soon, at least for a period time."

Shares of other technology bellwethers marked narrow gains on Wednesday, with Microsoft Corp, Yahoo Inc, and Cisco Systems, Oracle Corp and Adobe Systems each rising by less than one percent.

In a statement, Yahoo said it stood aligned with Google in that attacks to infiltrate company networks in order to obtain user information are "deeply disturbing" and that violations of user privacy are something that must be opposed.

Yahoo did not say whether it was one of the 20 unnamed companies that Google said had also been targeted.

"While we commend Google's management for 'doing the right thing' on important issues of human rights and online censorship, the company's inability to participate in China's growth will be seen as a long-term negative, and therefore cause a valuation discount in the stock," Jefferies analyst Youssef Squali said in a note.

Goldman Sachs analyst James Mitchell said Baidu could pick up two-thirds of Google's revenue if Google exits, potentially adding 25 percent to Baidu's 2010 revenue run rate. He added that China's Tencent Holdings may also benefit.

China's policy of filtering and restricting access to Web sites has been a frequent source of tension with the United States and tech companies, such as Google and Yahoo Inc.

Google's announcement late Tuesday that it was considering a withdrawal from China came after what it said were attacks from China on human rights activists using its Gmail service and on dozens of companies.

Google suggested the recent intrusions were more than isolated hacker attacks. Some 20 other companies also were attacked by unknown assailants based in China, said Google.

China has said it does not sponsor hacking.

Google claims a healthy piece of the market in China today despite arriving relatively late to the country. It was a tiny player in China in 2003 with only a 2 percent market share and has steadily grown into Baidu's formidable foe.

However, like other large foreign corporations -- particularly media concerns -- the search titan faces tighter scrutiny from Beijing censors. For example, last year, they railed against Google for its "pornographic" content and asked the Mountain View, California firm to audit its searches.

Google launched a self-censorship search engine in 2006, and a free music service in 2008. But in March 2009, China started blocking access to video-sharing site YouTube, owned by Google after overseas Tibetan groups posted graphic footage of China's crackdown on protests by Tibetans in 2008.

(Editing by Paul Thomasch and Derek Caney)

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