Google Wins Lifeline to Keeping Operating in China, for Now

July 10 (Bloomberg) -- Google Inc.’s victory in China -- by winning permission to keep delivering search results there -- may prove short-lived.

The company was surprised by how quickly China renewed Google’s Internet-services license, Chief Executive Officer Eric Schmidt said yesterday in an interview. There were no formal negotiations between Google and Chinese officials over the decision, a person familiar with the matter said.

Getting the go-ahead gives Google a chance to win search share lost to market leader Baidu Inc. and woo advertisers put off by the company’s half-year dispute with the government. Some Google operations were in jeopardy as it balked at censorship rules that require companies to filter Web content.

China renewed the license through 2012, and officials will revisit the decision annually. China’s government can still use its authority to yank the license if it deems Google’s compliance wanting, said Sandeep Aggarwal, an analyst at Caris & Co. in San Francisco.

“Google remains at risk at China,” Aggarwal said. “Chinese regulators gave them a back door.”

Google, owner of the world’s most popular search engine, went public with its dispute in January, saying it was no longer willing to comply with China’s filtering regulations.

“We look forward to continuing to provide Web search and local products to our users in China,” the company said on its blog yesterday. Spokeswoman Jessica Powell declined to say whether China had imposed any conditions on renewing the permit.

Complicating Search

Google, based in Mountain View, California, won approval after changing the way it handled search requests. After closing its Chinese search engine in March, it had been automatically redirecting users to its unfiltered site in Hong Kong. To allay officials’ concerns, Google added an extra hurdle for Chinese Web surfers, directing them to a landing page that in turn pointed them to the Hong Kong site.

That change comes at a price, said Gene Munster, an analyst at Piper Jaffray Cos.

“The landing page strategy for Google.cn adds one more complication to Google’s user experience in China,” Munster said in a research note yesterday. “Every step added to the search process will ultimately cause Google to lose some users.”

China also made concessions. Letting Google keep operating may help the government show it’s open to outside competition, said Scott Kessler, head of technology equity research at Standard & Poor’s, who rates Google “strong buy.”

Risks for China

“There were definitely risks if Google were to be unceremoniously dismissed from a country lock, stock and barrel,” said Kessler, who’s based in New York. “Then, you’d have Baidu as the sole, dominant player there with the likelihood of continued gains in market share.”

Google’s Schmidt, who was in Sun Valley, Idaho, for a conference with media executives, said in an interview he learned of the renewal decision early yesterday.

“This is the outcome we were hoping for, we just didn’t expect a decision this soon,” Schmidt said. “Literally, the good news came overnight.”

Wang Lijian, spokesman at the Ministry of Industry and Information Technology, said the government is likely to post a statement on its website.

China’s decision may also constitute a nod to the Chinese people who voiced support for the company, partly through lighting candles outside Google offices, said Heath Terry, who rates Google “outperform” at FBR Capital Markets in New York.

Holding Vigil

“It signifies the importance of Google to China -- from the candlelight vigils outside of the headquarters to the sheer usage numbers of Google in China,” he said. “Google is important to the Chinese people and I think the government heard that.”

Google’s decision to end self-censorship has cost the company partnerships with China Unicom (Hong Kong) Ltd. and Tom Online Inc., and lifted sales at Baidu.

“Google doesn’t really want to leave China, because it’s a very big market and there is a lot of potential for them,” Bruno Lippens, a fund manager at Pictet Asset Management SA in Geneva, said before the renewal. “It goes much broader than just business issues. It’s about cultural differences and fundamental beliefs like freedom of speech and privacy.”

Google rose $10.93, or 2.4 percent, to $467.49 on the Nasdaq Stock Market yesterday. The shares have declined 25 percent this year.

Google resubmitted a license renewal application last week. The company had said in January it would stop censoring content and threatened to exit the Chinese market after cyber attacks originating from the nation targeted its systems.

‘Sophisticated’ Attacks

The “highly sophisticated” attacks were aimed at obtaining proprietary information and personal data belonging to human-rights activists who use the company’s Gmail e-mail service, it said.

Since it began redirecting Chinese users, Google’s search results have been screened by China’s so-called Great Firewall, a government monitoring system that blocks overseas services such as Facebook Inc. and Google’s YouTube.

The firewall limits Chinese Web users’ access to information on topics ranging from Tibet’s independence movement to the 1989 crackdown on protesters in Tiananmen Square.

Google’s market share in China fell to 30.9 percent in the first quarter from 35.6 percent three months prior, according to data from research firm Analysys International. Baidu’s share increased to a record 64 percent from 58.4 percent, according to Analysys. Baidu fell $1.23, or 1.7 percent, to $71.20 yesterday.

Biggest Web Market

Bank of America Corp.’s Merrill Lynch estimated in April Google would generate $160 million in sales this year from China. That’s less than 1 percent of the company’s projected total revenue this year, according to the average of 29 analyst estimates compiled by Bloomberg. It earned sales of about $335 million from China in 2009, according to Analysys.

China had 384 million Internet users at the end of 2009, the government estimates. That’s more than the total U.S. population, and according to EMarketer Inc., it may grow to 840 million by 2013.

Baidu in April said it benefited from Google’s “semi- exit.” The Chinese company expects “healthy” growth in customers and average spending by clients will continue, Baidu CEO Robin Li said in a conference call in April.

Google’s advertisers in China may have cut their spending by as much as 30 percent on average, and shifted their business mostly to Baidu, Credit Suisse Group AG analyst Wallace Cheung wrote in an April report. This has let Baidu charge higher prices, according to Cheung.

The license renewal comes after the U.S. said China took a “significant step” last month when it ended the yuan’s peg to the dollar and allowed markets to drive the currency higher. It’s not yet clear whether China’s policy shift will correct the yuan’s undervaluation, the U.S. Treasury Department said.