Google finds few allies in China battle

SAN FRANCISCO/WASHINGTON (Reuters) - Google used Internet freedom as a rallying cry in its confrontation with China.

But the deafening silence from the U.S. corporate arena underscores how Google (GOOG.O) looks increasingly isolated in its hope of rewriting the rules in the world's largest Internet market by users.

Only GoDaddy.com has followed Google's lead in protesting Chinese policies. The Internet domain name and web hosting company said on Wednesday that it would no longer register domain names in China due to new rules requiring it to collect customers' photos.

The move by GoDaddy -- more famous for risque commercials than an Internet freedom stance -- contrasts sharply with the anemic response from other companies.

Microsoft Corp (MSFT.O), Yahoo Inc (YHOO.O) and others have trumpeted the general principles of Internet freedom, but none have directly echoed Google's call for an end to Web censorship in China. And GoDaddy aside, no other tech company has hinted at a change in business practices in China to protest regulations and restrictions there.

"China is a very important market," said Cowen and Co. analyst Jim Friedland. "What's the incentive for a government or another company to join with Google? There is none and that's why you haven't seen it happen."

Google's difficulty in enlisting allies could hint at the challenges ahead for the world's largest search engine in China, where organizing broad support has in the past proven to be an effective tool for negotiating with the government.

Last summer, a concerted pushback from industry groups and U.S. officials caused China to back off a controversial plan to force PC makers to adopt special "Green Dam" filtering software on computers sold in the country.

But U.S. officials appeared to be taking a hands-off stance this time, calling Google's move a "business decision" in which Washington played no part. The State Department, however, said it would continue discussing Internet freedom with Beijing.

RISKS TO CHINA BUSINESS

Unlike the Green Dam episode, Google's stand on censorship is not a cause with which many tech companies want to be seen publicly identifying.

Many of them have much more substantial businesses and assets, such as factories and warehouses, in China than Google, and thus more to lose. Analysts estimate Google's China business is a modest 1 percent to 2 percent of its $6.5 billion in annual net profit. Similarly, GoDaddy said that China contributes less than 1 percent of the $1 billion in revenue it expects to generate this year.

"The Chinese government and the Communist party have a unique ability to reach out and touch companies in a way that can make it very difficult for them to do business in a market," said a source at a business group who did not want to be identified for fear of ruffling Chinese feathers.

"So foreign companies are very cautious and very circumspect about how they speak out."

Google announced in January that it would no longer censor search results in China, following a sophisticated cyber attack that it traced to the country and that it said was intended to access email accounts of Chinese human rights activists.

This week, after unsuccessful negotiations with the Chinese government to operate an uncensored search engine in China, Google effectively closed Google.cn and re-routed traffic to an uncensored site in Hong Kong.

Google intends to retain some business operations in mainland China, including research and development staff and a sales team, but the government could make conditions tough.

For example, China might not let Google renew its Internet license, which media reports have said expires in a month.

INCREASED ISOLATION

Bobby Chao, a managing director at the China-focused venture capital firm DFJ DragonFund, said Google's public confrontation with China has created a negative brand image among many Chinese, which could jeopardize the company's other business prospects in the country.

"I anticipate to see more and more major market players disassociate themselves with Google," said Chao, noting that handset manufacturers, for instance, might shun Google's Android operating system because of the anti-Chinese image increasingly associated with Google.

U.S. companies have on occasion collectively pushed back against Chinese policies they saw as discriminatory or protectionist.

But trade experts say they pick their fights carefully.

"If China takes a broad action ... then all the trade associations sign a joint letter and complain about it. If it's an action against one company, the reactions are more private," said Alan Wolff, a former U.S. Trade Representative official who now works as a trade lawyer Dewey & LeBoeuf.

In a Wall Street Journal editorial on Thursday, former U.S. representative to the United Nations John Bolton called on the Obama administration to support U.S. businesses in situations like Google's so "they don't have to act alone."

Publicly linking arms with Google could make it more difficult for a U.S. company to do business in China, where staying in the good graces of regulators is crucial.

"There is a barrage of new rules, regulations for foreign companies operating in China. And everybody is trying to figure out what it means," said the former CEO of a Fortune 500 company that has a long history of doing business in China.

"I think people want to kind of see how it impacts me, rather than take sort of a broad position, or industry position," the source said on condition of anonymity.

(Reporting by Alexei Oreskovic and Paul Eckert, with additional reporting by Diane Bartz and Sinead Carew, editing by Leslie Gevirtz)