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For Google, a Threat to China With Little Revenue at Stake

Published: January 14, 2010

SAN FRANCISCO — Google has said principle drove its threat to back out of China unless the government there allowed it to run its search engine without censorship.

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Jason Lee/Reuters

Google's Chinese headquarters in Beijing. The company's revenue in the country last year was $300 million, a tiny slice of its more than $22 billion in global sales.

Analysts say that inevitably, the decision was a business calculation, too.

Google’s business in China, for now, remains small. Estimates put Google’s China revenue last year at about $300 million, a tiny fraction of its more than $22 billion in global sales.

Still, Google’s investment in China includes building a staff of more than 600 people there, many of them highly paid engineers. And in October, Eric E. Schmidt, Google’s chief executive, predicted that China would become a dominant market for online businesses, saying that in five years, the Internet “will be more non-English, it will be Chinese.” Clearly, Google has high hopes for its business there.

But there is also an economic value, even if it is hard to gauge, of the good will that Google’s decision has earned it. And it comes at an opportune moment.

For much of the last year, the company has been under attack for disregarding the rights of individual authors as it builds an immense digital library and bookstore. The company, which needs users of its Gmail and other services to trust it with their data, has been criticized for its privacy practices. And the federal government began multiple antitrust investigations into its business.

Lately, it has been difficult to find anyone in Silicon Valley who would utter Google’s “Don’t be evil” motto without a bit of a snicker.

But its surprising threat to pull up stakes in China has replaced the smirks with lavish praise. Much of it is coming from longtime critics.

For a company that has been in something of a defensive crouch for much of the last year, the turnaround has been swift.

“Taking the stance that they took put them on a higher plane,” said Regis McKenna, a Silicon Valley marketing consultant.

If it stays, the potential losses to its reputation, and eventually its business, are real, too. “Certainly they are aware that continuing to compromise in China would be seen as a move to the dark side,” Mr. McKenna said.

Google strongly dismissed suggestions that economics played a role in its decision. “We are not going to make a financially based decision to stay in a market that is intolerable for us,” David Drummond, Google’s chief legal officer, said this week. And he denied that public relations was a factor. “This wasn’t a question of P.R.,” he said. “It was a question of trying to do the right thing.”

There is little doubt, however, that public perception of Google has shifted sharply since the company publicized online attacks on its computer systems this week, which it said were aimed in part at entering the Gmail accounts of Chinese human rights activists.

In China, young people deposited flowers in front of Google’s offices, as praise for the company reverberated from Twitter to the reader forums of various newspapers.

The Electronic Frontier Foundation, an online civil liberties group and frequent critic of Google, commended the company in a blog post titled “Uncensoring China — Bravo Google.” Human Rights Watch said that Google’s response to the attacks “sets a great example.” On Capitol Hill, Republicans and Democrats alike hailed Google’s move.

Google’s top executives, and many of its employees, are steeped in idealism and are strong supporters of free speech. The company agreed to censor its search engine in China in 2006 to enter that market, but only after an internal debate in which the founders, in particular Sergey Brin, who was born in the Soviet Union, argued strongly against it.

Still, some have argued that Google can afford to take a principled stance because the losses from leaving China are small. The company has struggled to compete with Baidu, the dominant China-based competitor, and some critics say the attacks gave Google a good excuse to pull up stakes and cut its losses.

Google rejected those suggestions. While Google’s sales in China remain small, the business is growing rapidly and Google just had its best quarter in that country, said Gabriel Stricker, a Google spokesman.

Yet, he also suggested that Google could shut down its search engine in China with little financial impact, saying that the majority of its business in the country comes from ads that Chinese companies place on Google’s American-based Web site.

The reaction on Wall Street suggests few worried that Google would suffer financially. While its shares dropped nearly 3 percent on Wednesday, the day after Google’s announcement, they have regained most of their value.

Analysts say that Google’s economic pain may one day be great but is not likely to be felt for years. But they also say that staying in China, especially after the attacks, was a risky proposition. Google’s change of heart in China may not have been solely about freedom of speech, but also about something that strikes at the core of its business: the security of information stored on Google’s servers.

“The moment that some activist goes to jail because his Gmail account was compromised, Google will be accused of giving them up,” said Siva Vaidhyanathan, associate professor of media studies and law at the University of Virginia. “That would do incredible damage,” not only among human rights advocates, but also for anyone who uses a Gmail account, he said.

Some who praised Google’s move have said that they hope other companies will follow suit. While the calculus on whether to abandon China is no doubt different for every company, following in Google’s footsteps could have all the downside risk and may produce only marginal payoff — at least on the publicity front.

“To the extent that there is any realized gain from this kind of move, the first company to do it gets all the headlines,” said David B. Yoffie, a professor at the Harvard Business School. “The second company to do it will be seen as a follower who didn’t have the courage to act according to its convictions in the first place.”