Face at a price

Google: Google chose morals over profits in shutting down its China portal — and has already paid a hefty price as a result. Yet the search engine will keep a toehold in the world’s biggest market of internet users, re-routing searches to Hong Kong and keeping on staff. That means it won't be starting from scratch if Beijing's censors relax their grip in future.

Google threatened in January to stop censoring politically sensitive searches at Beijing’s behest. But it has only half pulled out. For now, users can still use its Hong Kong site — although there have been reports that the Chinese authorities are censoring sensitive searches such as the crackdown in Tiananmen Square in 1989.

That said, Google might have to wait a long time for Beijing to change its mind and, in the meantime, its presence on the ground could be a wasting asset. The firm is unlikely to keep much of its 30 per cent market share of advertising revenues in China. Traffic may also fall if Chinese Internet users tire of slow connection times — assuming Beijing does not shut Google out completely.

Remaining employees may not stick around either. The Silicon Valley firm has been publicly accused of violating a written promise by government officials. It may be hard to keep the high calibre young engineers Google sought in the past if they sense their employer has little future in China.

Currently, China revenue is only 1-2 per cent of Google's annual total. But the growth trajectory — which Google is now giving up on — is exponential. As a result, the market values Chinese Internet companies highly. Rival Baidu trades on Nasdaq at 41 times forecast 2011 earnings, double Google’s own rating. Since the US firm said in mid-January that it intends to stop censoring search results in China, the stock has fallen about 6 per cent, wiping away $11.6 billion in market capitalisation. During the same period, Baidu rose 40 per cent, adding $5.5 billion of market capitalisation.

Google would have lost credibility among global users if it didn't leave China in some form. Pulling out only half way saves the search giant some face, but with a hefty price tag.