Google's China rift hints at challenges ahead

By Alexei Oreskovic - Analysis

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.