HONG KONG - The Chinese government's decision this week to renew the license for Google to operate in the country was something of a surprise, not least as the United States-based Internet search company had delivered an insult to authorities in Beijing in March by bypassing their control and sending search traffic "overseas" to its Hong Kong site - and the Chinese government cares about losing face.
By Sherman So
"Despite what it has done, the Chinese government does not want to kick Google out of China, as the entire world is watching," said a former senior Google executive.
The decision means not only that Google does not have to censor its search results, it even has the government’s approval for this. It also means that the global search giant can "stay" in China - a setback for its local rival, Baidu, which was well placed to benefit most from Google's apparent departure.
Baidu's share price soared to US$82 from about $40 before the dispute between Google and the central government broke out in January and practically every investor seemed to expect Baidu to snap up most of the search market in China. They now have to reassess the situation, with the share price already settling back to US$71.
"In the past six months, the capital market basically assumed Google would gradually exit the China market and this benefited Baidu's share price," said Wallace Cheung, China Internet and media analyst at Credit Suisse. "Google's success in renewing its ICP license in China indicated in our view that Google wants to stay in China, and also wants to comply with all the rules." He expected the renewal would have a negative impact on Baidu’s share price. "We reiterate 'underperform' on Baidu," he said.
An Internet content provider, or ICP, license, is needed for any website to operate in China. It is relatively easy for local players to obtain the license, but not so straightforward for foreign companies. Google first applied for its ICP license for its Chinese site, Google.cn, in 2005 when it opened its Chinese office, but it did not get it until 2007. Between those dates it used the license of a local company, Ganji.com.
The renewal of its ICP license means the company can officially use the "Google.cn" website in China, according to Google's official blog. "We look forward to continuing to provide web search and local products to our users in China," the blog site said.
Google.cn at present has a link to Google.com.hk to provide search services without a content filter, and also provides three local services - music, shopping and translation - which do not relate to content filtering.
Unlike its competitors in China, such as Baidu, Sogou and Soso, Google does not screen out politically sensitive information from its search results, effectively running the search engine much as it does everywhere else in the world. This means the Mountain View, California, company does not follow the numerous changes the Chinese government makes in its Internet policies and that the company can appear to live up to its claim to be "doing no evil".
The latest development does not mean Chinese Internet users can access information freely, however. Thanks to the "great firewall of China", the government still has the final say on what its citizen can see - it will simply block content it does not like. So, in the end, the Chinese government still has firm control over its territory.
One change in Google's site is that, before the license agreement, Google.cn gave an automatic link to the company's Hong Kong site. Now, Google.cn has a non-automatic link to Google.com.hk, and the extra complication is likely to deter many from using it. The former Google executive believed this was the result of negotiation between the Chinese government and the company.
Nonetheless, the government's attitude towards the whole Google incident was unexpectedly "understanding" or mild. Besides making announcements such as every company should operate "according to Chinese law", it has done nothing to harm Google.
"Google is getting far more understanding from the government than any local enterprise would in this situation because there are larger things at play," said T R Harrington, chief executive of Darwin Marketing, a Shanghai-based search engine marketing firm. "The government cares most about presenting itself as supportive of international investment. That outweighs the negative feelings about Google's actions."
Darwin Marketing promotes its clients by buying keywords in search engines such as Baidu and Google. A US citizen, Harrington has lived in China since 2003 and co-founded Darwin with a former eBay executive in 2005.
Google's apparent intention of quitting China after claiming its site had been hacked, and its willingness to publicly confront the government, left its partners with a chill and may have cost it revenue, at least in the short term.
It has already lost several of its biggest partners in China, such as online portal Tom and online community Tianya. These websites had been sending Google search traffic via Google's Adsense affiliate network. Google runs the largest affiliated network in China, with more than 200,000 sites including major websites, such as Sina. Some of Google's sales agents for selling keywords in China have also left, said Harrington.
Cheung of Credit Suisse said, "Based on discussions with industry sources, we expect Google's paid search was down from six months ago, although traffic was stable, because advertisers are unclear on Google's future."
Darwin's spending on Google has dropped too. Before the crisis broke in January, Darwin spent about 70% of its clients' budget on Baidu and about 29% on Google. Now, it spends about 77% on Baidu and 22% on Google. "I expect Google's revenue to drop further due to losses of partnerships and from loss of sales distributors," said Harrington.
Google's market share in China fell to 30.9% in the first quarter from 35.6% three months earlier, according to Analysys International. Baidu's share increased to 64% from 58.4%.
Some of Google's recent staff movements are also worrying. All Google's research and development team for search in China have gone - hired by its competitors, said a hedge fund manager. "Half of them went to Youdau [Netease's search engine]. Others went to Sogou [Sohu's search engine], Soso [Tencent's], Baidu, and so on. With Google leaving China, everyone is trying to get a piece of the cake."
The former senior Google executive said many of the key personnel had left, although not the entire team. "Many of the engineers are still staying at Google," he said.
Even so, the head of Google China research institute went to Tencent and the head of development for Google Adsense in China went to Baidu, an industry insider said.
Now, with the renewal of its Google.cn license, Google seems to be telling the world it wants to stay in China and has the Chinese government's blessing too, which could lead to a u-turn in its revenue trend.
"The ICP license renewal will attract some advertising spending back to Google," said Cheung.
Suddenly, it seems prospects are good in China for Google's search engine, its affiliate network, Adsense and, its mobile initiative, Android. "Right now all three have a future. Android is the most interesting of the three because it is the least known, and the mobile market, though more heavily regulated, has a huge install base in China and eventually people will only search from their mobile phone," said Harrington, "Android is big".
China has close to 800 million mobile-phone users. There were 795.92 million subscribers of mobile communication services in China as of the end of May 2010, up 15.86% from a year earlier, according to China's Ministry of Industry and Information Technology (MIIT).)
And although many of Google's research and development team for search in China have gone, Google China's Android team stayed on. Almost all phone-makers - foreign and local, large and small - with the exception of Nokia, plan to launch their versions of Android phones in China this year or next.
"We believe wireless Internet including the Android system is a key reason for Google to stay in China in the longer term," said Cheung.
With the renewal of its ICP license, Google is also likely to be granted a China online mapping license, Cheung said. "Google Map has been a highly successful application for wireless Internet in China," he said.
The former Google executive was more pessimistic about Google's future in China. "Google's market share will never recover. It will drop to 10% eventually, but it might be a long steady decline - over two to three years."
The automatic link to the Hong Kong site would give Google more market share - up to 15% eventually - but to the Chinese government this would seem too much, he said. The deterrent effect of users having to click to access the Hong Kong site will eventually give Google about a 10% market share, which would be acceptable to the Chinese government.
In the end, he expected Google would be a small player, but the Chinese government would leave it alone. "If Google plays by the Chinese government's rules, it will have 30% of the market. In a few years, China's search engine market will be enormous. The 20% difference could be huge," he said.
Sherman So is a Hong Kong-based correspondent and co-author of Red Wired: China's Internet Revolution.
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