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Cyber Attacks May Cause Google To Leave China

January 14, 2010

Recent cyber attacks aimed at Chinese human rights activists have led Google to defy Chinese Internet censors and risk banishment from the lucrative Chinese market, Reuters reported.

In a move that has shocked investors and analysts, Google’s announcement that it may quit China carries with it broader implications for other U.S. technology and media companies that have placed big bets on business in the country.

Analysts estimate that China accounts for only a fraction of Google’s current business, roughly $300 million to $600 million in annual revenue, or less than 5 percent of its total.

However, the size of China’s market and the potential for advertising sales has raised bigger concerns over what a withdrawal would mean for Google’s future prospects.

Broadpoint AmTech analyst Benjamin Schachter said it is clearly a negative for investors. “The obvious concern is that China’s growth has been solid and its market potential is enormous.”

Such concerns pushed investors toward Chinese search engine Baidu Inc, which leads Google in China’s search market with more than 60 percent share.

UBS analyst Brian Pitz said that if Google were to exit China, it would likely represent a significant lost growth opportunity in the long term.

“China is the world’s largest Internet market with roughly 298 million users, with only 22 percent of the population penetrated,” he added.

Checks by the firm suggested that Google.cn has already removed censoring filters for several keywords, increasing the possibility that the site will be shut down soon, at least for a period time, according to Pitz.

Meanwhile, shares of other technology bellwethers marked narrow gains on Wednesday. Microsoft Corp, Yahoo Inc, and Cisco Systems, Oracle Corp and Adobe Systems each rose by less than one percent.

Yahoo said in a statement that it stood aligned with Google, saying that attacks to infiltrate company networks in order to obtain user information are “deeply disturbing” and that violations of user privacy are something that must be opposed.

Jefferies analyst Youssef Squali said that while they commend Google’s management for ‘doing the right thing’ on important issues of human rights and online censorship, the company’s inability to participate in China’s growth will be seen as a long-term negative, and therefore cause a valuation discount in the stock.

Baidu could pick up two-thirds of Google’s revenue if Google exits, potentially adding 25 percent to Baidu’s 2010 revenue run rate, according to Goldman Sachs analyst James Mitchell.

He added that China’s Tencent Holdings might also benefit.

The United States and tech companies such as Google and Yahoo Inc have frequently disagreed with China’s policy of filtering and restricting access to Web sites.

Google’s announcement late Tuesday that it was considering a withdrawal from China came after what it said were attacks from China on human rights activists using its Gmail service and on dozens of companies.

However, Google officials believe the recent intrusions were more than isolated hacker attacks. Google said some 20 other companies also were attacked by unknown assailants based in China.

China maintains that it does not sponsor hacking.

Despite arriving relatively late to the country, Google claims a healthy piece of the market in China today.

But the search titan faces tighter scrutiny from Beijing censors. Last year, they railed against Google for its “pornographic” content and asked the Mountain View, California firm to audit its searches.

China even started blocking access to video-sharing site YouTube, owned by Google after overseas Tibetan groups posted graphic footage of China’s crackdown on protests by Tibetans in 2008.

Rebecca MacKinnon, an expert on the Chinese Internet at the Open Society Institute, said the general tendency over the past year has been to accuse foreigners of having a Cold War mentality and being anti-China.

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