GoogleS Growth Prospects in China

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Im Feeling Lucky
Googles Growth Prospects in China
4/14/2009

INTRODUCTION
This paper will examine Google¶s attempts to expand into China, one of the company¶smost challenging growth areas. It will focus on Google¶s battle with local search engineBaidu and why Google has struggled so much in China despite dominating elsewhere.There are three variables that are out of Google¶s control but influential in determining itssuccess: politics, culture, and Baidu, as well as one variable that Google can control:technology. This paper will break down these variables by looking the past, analyzing thecurrent state, and projecting how developments on the horizon will affect Google¶s position in China. GOOGLE¶S INTERNATIONAL PRESENCE

Today Google lists local domains in 170 countries and controls over 80% of the searchmarket in most of Europe and South America. International revenues have increased as a percentage of total revenue and in 2008 accounted for 51% of total revenue, up from 48%a year ago i

. There are however still several regions where Google has struggled to penetrate the market, namely Russia and East Asia. As of January 2008, Googlecommanded a measly 32% in Russia, 19% in China, and 5% in Korea ii

. In each of thesecountries, it has been unable to unseat incumbent local search engines. This failure istroubling for Google because these countries are rapidly developing economies withgrowing Internet user populations. On the other hand, if Google can gain an 80%majority like it does in most of the world, the effect on revenue growth would betremendous. In China alone, there are more Internet users than in all of the U.S. In 2008,Chinese Internet usage grew 42% to 298 million, but only 1 in 4 have Internet access.The Chinese government hopes to provide phone and broadband access to every village by 2010 iii

.
GOOGLE IN CHINA
Google first translated its search engine to accept Chinese and other Asian languages in2000. In 2006, Google opened offices in China and launched a modified version of itssearch engine with a Chinese domain name, google.cn. Google put former Microsoftexecutive Kai-Fu Lee in charge of its China operations and installed content filters inaccordance to Chinese censorship laws. In 2008, Google increased its share from 23% to28% while Baidu also grew from 59% to 62% iv

. Despite difficulty in growth, Googlerealizes the importance of the Chinese market. At the 2009 Morgan Stanley TechnologyConference, Google CEO Eric Schmidt called China ³the obvious prize´ in internationalexpansion. v

POLITICAL FACTORS
The biggest challenge for Google¶s future in China may be political forces. China¶scentral government lacks the transparency of its U.S. and European counterparts and asudden policy change from Beijing can dramatically affect Google¶s fortunes. Censorship

The central political issue surrounding the search engine business is censorship. It wascensorship that first stunted Google¶s growth in China: In 2002 Google .com
controlled 25 percent of the Chinese market while underdog Baidu was struggling with less than 3 percent. vi
Then starting September 3
rd
, 2002, Google was blocked by the ³Great Firewallof China´ for two weeks and afterwards suffered continuous outages to the point where itwas inaccessible 15 percent of the time. Baidu however had no such problems becausetheir servers were located in China. Faced with a severe competitive disadvantage,Google decided to open offices and data centers in China and subject itself to Chinesecensorship laws. In January of 2006, google. cn

was officially launched. By then, Baiduhad already taken command of over half the Chinese market while Google essentiallyremained unchanged at 27 percent. Worst of all, Google was getting almost no exposureto the all important college demographic because it had been blocked at Chineseuniversities.Since then, the Chinese government has shown no indication that it is relaxing itscensorship rules and a brief...
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