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Assessing Google's Showdown with China

This story is by Larry Dignan, Editor in Chief of ZDNet and Editorial Director of TechRepublic, which are part of the CBS Interactive.

On the surface, Google's threat to shut down its China operations after a cyberattack on its infrastructure looks like sheer business lunacy. How can the search giant give up on the world's biggest growth market? It's easier than you'd think.

First, the background. Google in a long blog post detailed how it suffered a cyberattack that changed the company's outlook on China.

• The attack was coordinated and focused on 20 large companies and some appear to be confirming that they were also involved.

• The aim of this attack was to get the Gmail accounts of Chinese human rights activists.

• The attack also focused on U.S., China and Europe-based Gmail accounts that supported human rights in China.

• Google is way public about this attack and its reaction to them.

• Google says it won't continue to censor search results and may just shut down operations in China.

Reading all of this laid out in a blog post can be summed up in one word: Wow. Now let's look at how Google arrived at this big decision, which could result in a complete pullout. Why would the Chinese government give a hoot if Google leaves the country? If Google departed, the Chinese government's chosen champion-Baidu-will lock up all the search share. Baidu already has 63 percent of the Chinese market, according to comScore.

So let's look at some of the calculus behind Google's big decision on China.

Google's currency is user trust. As a global business that profits from tracking users and tailoring ads to them security matters a lot. If users don't trust Google to keep their data safe Google's business suffers. In that light, Google's showdown with China makes sense. Google can't let one country-even one that could be insanely profitable-erode the company's goodwill it has built up in its short history.

What happens in China can hurt Google's other businesses. It's no coincidence that Google launched an blog about enterprise security to ride shotgun with its primary riff about China. A coordinated attack on Gmail is a blow to cloud computing.

Dave Girouard, president of Google Enterprise, wrote in a blog post:

While any company can be subject to such an attack, those who use our cloud services benefit from our data security capabilities. At Google, we invest massive amounts of time and money in security. Nothing is more important to us. Our response to this attack shows that we are dedicated to protecting the businesses and users who have entrusted us with their sensitive email and document information. We are telling you this because we are committed to transparency, accountability, and maintaining your trust.

Simply put, none of Google's new ventures-Nexus One, Google Apps, Google Checkout etc.-make sense if the users don't trust them.

Google doesn't have as much to lose in China-at least today. Simply put, China is one of Google's weakest markets. It sounds crazy, but if Google is going to close up shop China is one place where it could do so without a significant financial hit. Google is second fiddle to Baidu. Meanwhile, Google may be able to compete in China from outside the country. Here's comScore's data on the Asia Pacific search landscape:

There may be a regulatory payoff. Let's face it: Google needs a lot of government approval on many fronts. Google has to worry about antitrust regulators meddling in little purchases such as the search giant's acquisition of AdMob. European Union watchdogs are increasingly eyeing Google. Taking a hard line against China can win over a lot of fans in Washington D.C. It's hard not to like a company taking a stand against China-especially since the U.S. government can't right now (China is our banker).

Google's threat to leave China may be a bluff. Google made waves, but left a door open to discussion with the Chinese government. It's possible that both sides want some sort of agreement. After all, we're talking business and money here.

Larry Dignan is Editor in Chief of ZDNet and Editorial Director of ZDNet sister site TechRepublic. See his full profile and disclosure of his industry affiliations.
For daily updates, follow Larry on Twitter.
By Larry Dignan

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