Internet February 25, 2010, 12:01AM EST

Google Undergoes Global Growing Pains

International operations are under fire on an increasing number of fronts. As the list grows, so do investor concerns

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Beijing. Milan. Brussels. For attorneys at Google (GOOG), this is no vacation itinerary. Rather, it's part of a growing list of sites around the world where Google's widening empire is under fire.

Two unrelated incidents involving scrutiny of Google by foreign regulators on Feb. 24 reminded analysts and investors that the company's global expansion comes at a cost. "As an investor, you have to be aware of this and at some level you have to be concerned," says Heath Terry, an analyst at FBR Capital Markets (FBCM). "In the aggregate, [foreign incidents like these] show what kind of target Google is going to become and at some level will limit the plans they have."

The European Union said it is examining complaints from companies that accuse Google of demoting links to their sites in search results. The same day, a court in Italy found Google managers and a former employee of the Mountain View (Calif.)-based company responsible for privacy violations caused by a user-submitted video on YouTube. The flare-ups in Europe come just six weeks after Google threatened to shutter some Chinese operations after a cyber attack on its users was linked to the country.

International markets made up $3.5 billion, or 52% of Google's revenue, in the three months ended Dec. 31. In the days following Google's standoff with the Chinese government in January, some analysts said the company could afford to give up its business in that country, since it represented a tiny fraction, or less than 4%, of sales. Google doesn't disclose all European sales, though it says the U.K. alone makes up 12% of the total.

Overseas Markets' Importance

Building business outside the U.S. is paramount as growth slows in domestic search advertising, Google's strongest business. "People's expectations for how Google will be able to grow over the long term are based on geographic and product expansion," says Michael Pytosh, tech analyst for ING Investment Management, which oversees $600 billion. The fund formerly held shares in Google but sold them in part amid concerns it had become too reliant on U.S. search, Pytosh says.

The complaints lodged with the European Commission by U.K. shopping site Foundem, French legal search engine Ejustice.fr, and a Microsoft (MSFT)-owned price comparison service accuse Google of using its dominant position in the search market to stifle competition. Google controls almost 80% of the Web search market in Europe, a higher proportion than in the U.S. The company says it complies with competition laws in the countries where it operates. "The question [the complaints] ultimately pose is whether Google is doing anything to choke off competition or hurt our users and partners," Julia Holtz, Google senior competition counsel, wrote in a blog post. "This is not the case."

The European Commission is conducting a preliminary review of the complaints, and has not announced a formal antitrust investigation. But it presents a new risk, analysts say. "If some sort of antitrust action is taken, it could hurt Google's business model," says Jim Friedland, analyst at Cowen & Co. (COWN). Though it's unlikely, one worst-case scenario would be the EU forcing Google to reveal why it ranks some search results higher compared with others.