An Uncertain Future: Without Search, What Will Google do in China?

Google's application to renew its Chinese website license remains in limbo. While the application rides through a maze of Chinese governmental bureaucracy, representatives from Google remain cautiously optimistic that the license will be approved. To support their application, Google recently announced that it would will stop automatically rerouting users to its uncensored Hong Kong search site, a move that helped reduce tensions in Beijing that threatened to jeopardized Google's operational standing in China (an emerging market that currently houses the worlds largest crowd of internet users). In January, tensions between Google and the Chinese government rose following Google's announcement that it was considering abandoning China over censorship concerns. Despite this announcement, and the recent conflict, Google's decision to withdraw services from China is anything but clear. The number of internet users in China is growing faster than anywhere in the world. Thus, withdrawal from the Chinese market would likely have significant negative implications for Google's overall profitability, advertising revenues, and long run growth. Yet, despite Chinese posturing, Google does not appear eager to budge. Google has built its search tool around the principle of open access, and has not bent easily to censorship requests. With Google continuing to be stoic, important question must be asked. If Google ceases to exist in China - at least in its current form - what does the future hold for this online giant?

If the Chinese government does not approve Google's license application, Google's Chinese search presence will revert back to its initial state - one that existed without a localized search page. Originally, Chinese users keen to access Google search had to turn to its offshore sites, meaning longer search times -- and a boost for Baidu, the top local player. Today, Google's search business in China accounts for a tiny slice of the firm's $24 billion in annual revenue. Analyst estimates of Google's annual revenue in China range from $300 million to roughly $600 million, but the long-term growth prospects are key. As the world's largest Internet market with nearly 400 million users, China has incredible potential. Firms which originally invested early in the Chinese market, and adapted their policies to fit the requirements imposed by the Chinese government, have reaped tremendous rewards. Those that failed, including Ebay and Yahoo, have consistently struggled to regain a foothold in China, particularly after local competitors including Taobao swooped in and dominated the vacuum. As Google continues to mull over its approach to licensing, one can be certain that both Ebay and Yahoo's fortunes are top of mind. As a telling indicator, since Google first announced its intention to pull out of China, Baidu shares have rocketed 76 percent on expectations of the significant market gain that will ensure. Since that time, Google;s shares have fallen around 25 percent, while markets including the Nasdaq have only fallen between 8 and 10 percent cumulatively. In the first quarter of 2010, Baidu captured more than 64 percent of China's search market in the first quarter, while Google hovered around 30 percent.

If Google is serious with its intention to abandon the Chinese market, one must assume that profitable business lines are ready to fill the vacuum. In fact, Google still has its Android platform, an open source operating system for mobile phones that is expected to become one of the most popular mobile operating system in China in the long run (beating out Apple's popular iPhone). China's two main telecom firms China Mobile and China Unicom already offer smartphones running Google's Android system. Despite this, the non-renewal of Google's ICP licence spells uncertainty for Android, as the Chinese government may make it difficult for Google to develop and market the Android platform in China if the web search business is inactive. In fact, earlier this year, China Unicom said it will continue to offer Android phones, but will drop Google's search as the default search engine and re-evaluate their inventory on Google phones once the outcome of the censorship / licensing dispute is announced. Google is keen to provide non-search functions on the Google.cn site such as music search and text translation.

Additionally, Google Maps may also face difficulties in the near future.  China recently implemented new laws requiring firms wanting to provide online mapping services to apply for a license. On Wednesday, China's State Bureau for Surveying and Mapping released a preliminary list of 23 companies approved for online mapping. Baidu was on the list but Google was not. A governmental source familiar with the situation said the list was not the final one. Still, the absence of Google from the list seems to foreshadow a dangerous future should Google's internet license not be renewed. Currently, the Chinese government has blocked a number of popular Google products such as Blogger and YouTube, with rationale including the defense of public security and social harmony. It seems entirely plausible, in fact probable, that a failure to secure a search license within China could have drastic implications for all other products in Google' assortment. Overall, uncertainty regarding Google's future within the Chinese market continues to trouble nervous investors. While Google's Chinese market share had stabilized, a non-renewal of the ICP licence could see a significant fall in the number of Chinese users, as well as a migration of many loyal Google users to competitors. If a large number of Google users flock to Baidu, it is likely that advertisers will follow. This will mean that Google's offshore search sites will also see drastically reduced revenue from China business, a potentially disastrous consequence.