The Cost of Google Pulling Out of China

If Google follows through on its threat to pull out of China it would walk away from billions in potential revenue

If Google follows through on its threat to shut down operations in China in response to cyber attacks and spying efforts, it would be walking away from a fairly significant chunk of revenue. The resulting Internet advertising vacuum would lead to hundreds of millions of dollars flowing out of the United States and into Chinese coffers.

There is a good reason that Baidu stock shot up more than 15 percent. The Chinese-based rival search engine stands to gain a virtual monopoly--or possibly a real monopoly--on Internet-based advertising in China if Google folds up its tent.

Currently, Google has a 30 percent share of the Internet advertising market in China. Baidu is the leader, with nearly 60 percent, and Microsoft and Yahoo make up the remaining ten percent. If Google walks away, the balance of power will be shifted further.

Warren Cowan, founder and CEO of Greenlight, explains "If Google quits china, it leaves Microsoft, Yahoo, and Baidu as the primary sources for accessing the Chinese searching audience. Without Google, assuming Yahoo and Bing remain, that 30 percent share will re-distribute--most likely to Baidu, which will further cement its leadership position."

Cowan added "The remainder may not split equally among Bing and Yahoo users, which would further upset the balance of power for one or the other, and means growing in the Chinese market is likely to make it very difficult for at least one of them."

How Much Money are We Talking About?

Saying that Google would be surrendering a 30 percent stake in the market sounds marginally impressive, but that 30 percent has to be quantified as well. If it had 30 percent of the market demand for full-size SUV's in China, that wouldn't be saying much.

Internet advertising is a different story. Internet research firm eMarketer.com estimates the 2010 market in China for search-based advertising alone at over $1 billion dollars. That means Google would be giving up roughly $300 million to be divided among the remaining players.

eMarketer.com estimates the total Internet advertising market for China over the next three years at over $8 billion. Assuming the overall distribution mirrors the market share--Baidu would stand to grab a dominant share of that pie and take in another $7 billion plus over the next three years.

Buy American

We live in a global economy and I don't truly subscribe to the "buy American" mantra, but the statement seems appropriate in this situation. Currently, United States businesses have only two real choices for where to send their advertising dollars in China: China or the United States.

Greenlight's Cowan points out that, without Google, more of that money will flow out of the United States and into Baidu's bank accounts. "For the US and global advertising industry it means ad dollars are going to go overseas into Chinese pockets as opposed to strengthening the US coffers too."

And Then There Was One

All of my speculation about the balance of power and shifting of Google's share of the Chinese Internet advertising pie assumes that Bing and Yahoo continue doing business in China and stay to fight for Google's scraps.

Doing so could be a major public relations fiasco, though. If Google claims the high road and walks away from a potential $2.5 billion in Internet advertising revenue over the next three years in protest over Chinese human rights violations and cyber espionage, what does it say about the standards and ethics of Bing and Yahoo if they continue to do business in China?

If Bing and Yahoo follow Google's lead and pull out of the Chinese market, Baidu will be the only game in town.

It remains to be seen if Google will follow through on its threat. But, it's easy to see why the mere speculation is enough to send Baidu stock through the roof.

Tony Bradley tweets as @PCSecurityNews, and can be contacted at his Facebook page .

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Tony Bradley

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