Google’s China Exit Means Asian Success Hinges on Korea, Japan
March 21, 2010, 12:17 PM EDTBy Brian Womack and Mary Childs
March 22 (Bloomberg) -- Google Inc.’s looming withdrawal from China adds to pressure to expand in South Korea and Japan, where the Web-search company has won a fraction of the popularity it enjoys in the U.S. and Europe.
There is little doubt that Google’s Chinese search engine will be shut down after a two-month standoff with Chinese authorities, said Ben Schachter, an analyst at Broadpoint AmTech Inc. in San Francisco. An announcement from Google may come as soon as today, the China Business News reported last week.
A pullout would sideline Google in China, a country that JPMorgan Chase & Co. estimates would account for $600 million of the company’s sales this year. While Google’s market share has topped 75 percent in the United Kingdom, Germany and France, the company handles less than 50 percent of searches in Japan and 8 percent in South Korea, according to research firm ComScore Inc.
“These are growth markets,” said Andy Miedler, an analyst at Edward Jones & Co. in St. Louis. He recommends buying Google shares and doesn’t own any. “We want them to take chances to invest in these areas because they often offer higher growth potential.”
Google, based in Mountain View, California, said Jan. 12 that it was the subject of a highly sophisticated cyber attack that originated in China. Hackers stole intellectual property from Google and targeted e-mail accounts of human-rights activists, the company said. Google responded to the attacks by threatening to stop censoring its search results in China, a plan that the country’s government has called “irresponsible.”
Slower Progress
China was one of the largest Asian markets where Google was making inroads, said Clay Moran, an analyst at Benchmark Co. in Boca Raton, Florida. The company’s market share in China increased to 36 percent in the fourth quarter from 31 percent in the previous three months, according to Beijing-based researcher Analysys International.
“In Asia, Google’s progress has been slower,” Moran said. “But they were doing fairly well recently in China and beginning to gain some share and gain a little momentum, so clearly this will be a setback if they are to leave.”
Google shares have fallen 5.2 percent on the Nasdaq Stock Market since the company announced it may pull out of China. That compares with a 4 percent gain by the Nasdaq Composite Index. The stock declined $6.40 to $560 on March 19.
Jill Hazelbaker, a Google spokeswoman, didn’t return calls seeking comment.
Baidu’s Reign
Google’s departure would force Chinese Internet users to rely more on Baidu Inc.’s search engine, which filters results deemed inappropriate by authorities. That company held 58.6 percent of the country’s online search market last quarter, compared with 35.6 percent for Google, according to Analysys.
Advertisers also would have fewer options in the country, providing a boost to Baidu and other Chinese Internet companies, including Tencent Holdings Ltd. and Alibaba.com Ltd.
Baidu could use Google’s exit to win more business outside of China as well, said James Hawkins, a Singapore-based managing director of digital advertising for the agency DGM Asia. That’s because Baidu could work on campaigns that span China and the rest of the world, whereas Google could not.
“If you look at the big advertisers -- your Apples, your Dells, your H-Ps, Sony -- their No. 1 market is China,” he said. “If Google aren’t there, they’ll have to seek other opportunities. I am sure Baidu will be as pleased as punch.”
Offshore Servers
Chinese users may still be able to reach Google’s offshore servers, even if the company pulls out of the country. The key will be whether China lets people access Google.com, Hawkins said.
China currently blocks important media sites that aren’t policed internally, said Robert Faris, director of research at the Berkman Center for Internet and Society at Harvard University. That includes YouTube, Twitter, Facebook and Blogger, he said.
Google has performed better in the U.S. and Western Europe because its search technology was first built for the Roman alphabet and not Chinese characters, said Colin Gillis, an analyst at BGC Financial LP in New York. Google has since invested in search technology for characters used in China, Korea and Japan. Asia accounts for about 10 percent of Google’s $23.7 billion in annual revenue, he said.
In South Korea, Google had 8 percent of the Web-search market in February, according to Reston, Virginia-based ComScore. The leader there is Seongnam, South Korea-based NHN Corp.’s Naver, which has 51 percent.
‘An Underdog’
“Google is an underdog,” said Schachter, who recommends buying Google shares and doesn’t own any. “That’s not a position they’re used to being in.”
Google is also lagging behind in Taiwan, where its market share slipped to 27 percent in February from 28 percent a year earlier, according to ComScore. The company had 32 percent of the Hong Kong market.
Taking a stand against censorship in China may enhance Google’s reputation in other parts of Asia, said Whit Andrews, an analyst at research firm Gartner Inc. in Stamford, Connecticut.
“Google can say, ‘We won’t censor, and we’ve given up an enormous opportunity,’” Andrews said. “It is not unreasonable to assume that some users attach to Google greater value because of its moral stance against censorship.”
Efforts to gain traction have paid off for Google elsewhere in Asia, including Japan, where it took the top spot from Yahoo Japan Corp. Google had 48 percent of Web searches in Japan in February, up from 40 percent a year earlier, according to ComScore. Yahoo had 43 percent.
Japan, India
“Japan is clearly a large market and they are gaining share,” said Aaron Kessler, an analyst at Kaufman Brothers LP in San Francisco. He recommends buying Google stock and doesn’t own it. “That’s a key market for them.”
Google is dominant in India. The site commanded 88 percent of the search market in February, according to ComScore.
Google will lose out on the world’s biggest Internet market by users by leaving China. The number of Web surfers in the country will more than double to 840 million by 2013 from 2009, according to New York-based EMarketer Inc.
“It’s an area that any investor would want to be in,” Broadpoint AmTech’s Schachter said. “To lose that potential -- that’s really a problem.”
--With assistance from Tim Culpan in Taipei. Editors: Tom Giles, Jonathan Thaw, Nick Turner
To contact the reporters on this story: Brian Womack in San Francisco at bwomack1@bloomberg.net; Mary Childs in New York at Mchilds5@bloomberg.net.
To contact the editor responsible for this story: Nick Turner at nturner7@bloomberg.net
