Google's potential China exit and the revenue hit

Google's potential China exit and the revenue hit

Summary: Wall Street analysts were scurrying to assess the bottom line impact on Google's current and future revenue if the search giant nixes its business in China.

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Wall Street analysts were scurrying Wednesday to assess the bottom line impact on Google's current and future revenue if the search giant nixes its business in China. The consensus: Leaving China will be a negligible hit to 2010 revenue, but a long-term strategic issue.

On Tuesday, Google took on the Chinese government in a very public fashion (Techmeme). Following a cyberattack, Google said it would stop censoring its search results. The company added it may also pull out of China completely.

Also see: Google's showdown with China: Does it make sense?

The risk-reward analysis seems to add up in Google's favor and the company certainly didn't take its China showdown lightly.

Here's a recap of analyst comments on Google's move and what it may mean to the company's bottom line: Piper Jaffray analyst Gene Munster:

We believe there is a 35% probability the company will cease operation in China, but expect a dialog between the Chinese government and Google to try to resolve the issues. We currently estimate China will represent roughly 2% of Google's total revenue in 2010.

And Munster's breakdown:

Jefferies analyst Youssef Squali:

Unless the issue triggers the backing of the US government and a substantial international uproar that forces China to cave in, we think Google's exit from China is more likely than not.

Squali estimates that China contributed $250 million to $300 million in revenue for 2009 and even less on a net basis since Google faces higher traffic acquisition costs than Baidu. However, Squali added:

Shutting down China would be a strategic loss for Google as China is one of the largest and the fastest growing online markets in the world (already the largest in terms of Internet users.) The company's inability to participate in China's growth will be seen as a long-term negative.

Deutsche Bank analyst Jeetil Patel:

We acknowledge the long term implications of withdrawing from China, but the financial impact on Google is minimal in the near term...China users may still potentially access Google sites globally.

JMP Securities analyst Sameet Sinha:

While this would be a setback in its long-term plans to grow a key market, we believe that Google was not making much headway in China, an experience similar to most U.S.-based Internet companies. We would admit that most U.S.-based Internet companies have spoken about lack of traction in China due to the onerous rules regarding business practices. We believe that Google has other business opportunities such as expanding its penetration into other online marketing products (display, video, mobile etc.), which would allow it to offset the loss of revenues from China.

Related: Google threatens China pullout after cyberattack · Adobe confirms ’sophisticated, coordinated’ breach · Bravo! Google takes a stand for human rights in China · The Google escalation and open source

Topics: Banking, Enterprise Software, Google, China

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6 comments
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  • Google is playing the 'elastic defense'

    They withdraw now, and the next year they buy the chinese search engine that has 99% percent of the their market.
    This is a tactical move folks!
    Linux Geek
    • Don't think so

      Don't think so.. Foreign ownership restrictions and regulatory approval required
      adabool
  • RE: Google's potential China exit and the revenue hit

    What I want to know more about are these "cyber attacks"
    and how they're connected to Chinese government censoring
    the internet. Everyone knows that Google will loose money
    with this decision, regardless of whether it's worth it
    or not.
    Ebsan
  • Someday, people will stop thinking only about money as a long term strategy

    Someday, people will stop thinking only about money as a
    long term strategy - but apparently not today.

    If Google wants to impress me, they can quit talking only
    about money as a long term goal.
    CobraA1
  • RE: Google's potential China exit and the revenue hit

    China has a history of not being "business friendly" to western companies. They want the money of western companies without the accompanying western culture exposure. There is still a strong anti-american component of China's military and ruling party that has a significant influence on business dealings.

    The party will do a cost/benefit/control analysis to determine if Google is worth having in China. If they are not able to control the content that Google makes available the party will deem the disadvantages too high and Google is out.
    pmwpaul
  • Why China?

    Not only Google, any other business will have difficulties in China. They'll copy your product and sell it in another name.
    n.b World's largest democracy exists right next to it :-)
    mr.praveeng