China: The World's Untouchable Internet Market, Even For Google

With China's 338 million Internet users surpassing the U.S. population, Google and other key media and commerce players are struggling to stake claim there to an exploding, complex market tightly controlled by government censors.

Google's efforts to establish U.S.-style dominance is being squashed in China by stiff regulatory scrutiny and competition from the home search engine favorite, Baidu. The economic potential of China's nascent market is big, although Chinese-generated revenue is a mere "rounding error" -- not more than $300 million, or less than two percent, of Google's $21.8 billion in annual revenues, according to RBC Capital Markets.

In recent years, Google has built a well-received Chinese-language search engine, but it has been thwarted by competitive and government elements despite efforts to lure Chinese users and advertisers with incentives. Baidu has about 63 percent of the Chinese Internet search market, compared with 33 percent for Google, according to iResearch, a Chinese research firm. Google has 60 percent of the U.S. search market and 67 percent of search worldwide, according to comScore.

User access to Google and its YouTube video site is periodically disrupted and was blocked last month when China accused the company of illegally spreading pornographic and other "unhealthy" Internet content.

Shortly after Google made adjustments and service was restored, Google's Greater China president, Kai-Fu Lee, last week announced his departure to head Innovation Works with $115 million funds to back Chinese start-ups. The diplomatic pass Lee secured for Google is only as good as the next crisis.

The Economist recently voiced concern about Google being unduly picked upon. "Google has long struggled to reconcile its corporate credo ('Don't Be Evil') with the onerous demands of China's Internet regulators.... But the company has fair cause to wonder why it has been singled out," the magazine opined.

But on many levels, Google's experience is not unlike the tangled relations endured by other U.S.-based media companies -- from Yahoo to Twitter. In July, the Chinese government began requiring all PC manufacturers and Internet service providers to use special "Green Dam" software to filter "objectionable" online materials.
Such infractions have created tension between China's government and U.S.-based companies, dashing global hopes that the two countries will cooperate in pulling the world out of its recessionary slump. China's most recent crackdowns may have been prompted by the role the Internet and Twitter have played in Iranian protests following that country's disputed elections.

Last week, China's Ministry of Culture imposed new music censorship measures to increase control of unauthorized foreign music and reduce copyright infringement. A strict review of lyrics applies to Google and its YouTube unit as well as to Baidu and other of China's Internet services.

The Chinese music market is only a fraction of the size of the U.S. $5 billion music industry, according to the International Federation of the Phonographic Industry, although more than 60 percent of the Chinese music market consists of downloads, or nearly twice the percentage in the US.

Earlier this summer, just days before the 20th anniversary of Tiananmen Square, Chinese censors blocked access to Twitter, Hotmail, Flickr and other photo-sharing sites.

Perhaps the most onerous Chinese government order came in August. It requires new users to log on under their true identities to post comments on news portals such as Sohu and Sina. Such heightened surveillance and free speech restraints continue over the objections of Internet companies and users.
The companies that play nice can reap major financial rewards. An analysis of Sohu, described by analyst Jeffrey Lindsay as "the Chinese equivalent of Yahoo," suggests the new NASDAQ-listed service will reap $564 million in 2009 revenues (up 30 percent from last year) from brand advertising, multi-player online games, and emerging wireless services. An editor of one of the news sites anonymously explains the government believes it is justified since "the influence of public opinion on the Net is still too big."

That has to strike Google, the target of constant monopolistic cries at home, as a little strange indeed.