China renews Google’s licence

“It’s not a complete surprise because I think the politics were that the Chinese wanted to avoid a big fight,” James Lewis, a cybersecurity expert from the Centre for Strategic and International Studies, said.

“With [Chinese president] Hu Jintao coming to Washington it was not the best time to reshape the agenda of the meeting by messing with Google.”

Google and the Chinese government have been trying to uphold their conflicting principles while protecting their economic interests, and Lewis said that this decision was “good for Google as well as for China”.

Subversive search results

Earlier this year, Google vowed to end its four-year practice of omitting search resultsthat the Chinese government considers subversive or pornographic, triggering an angry response from Beijing.

It also blamed Chinese computer hackers for an attack aimed at stealing the company’s technology and email information from human rights activists.

As soon as Google published a blog post in January, publicly challenging China’s censorship policies, “it became clear that Google.cn could never operate the same way again,” Scott Kessler, an internet analyst at Standard & Poor’s, said.

Google wanted to stay in China because the country is expected to be an internet growth area for decades.

But the latest compromises threaten to curtail Google’s growth in China simply because it requires hundreds of millions of users to take an extra step to get to Google’s search engine.

The single additional click required to get through to the Hong Kong-based site could diminish traffic and send users to more convenient options, such as the homegrown Baidu.com.

If that happens, Google will have fewer opportunities to show the advertisements that bring in virtually all its revenue.

Even if users in mainland China decide to use the service, China’s government can still block results by using technology controls commonly known as its “Great Firewall”.

Still, investors were relieved by the decision, with Google shares edging up 2.4 per cent on the news. However, they remain down by about 25 per cent so far this year, partly due to the spat with China.

Google’s search market share in China now stands at about 30 per cent, down from roughly 35 per cent at the end of last year, according to the research firm Analysys International.

Baidu’s share has risen slightly to about 60 per cent.

China is not yet a big moneymaker for Google, accounting for an estimated $250m to $600m of Google’s projected $28bn revenue this year, but it is expected to become a more lucrative market as the economy matures.

Marianne Wolk, an analyst with Susquehanna Financial Group, believes that Google could be soon earning around $5bn to $6bn annually from China’s online advertising market if it can manage to keep its market share in the 30 per cent range.

The makeover of Google.cn is bound to hurt the company, but “it’s a sacrifice well worth making if it means they can stay in China,” Scott Kessler said.

For China, losing a technology powerhouse would be a setback in its effort to cultivate more innovation and in attracting foreign investment.