• by Laurie Sullivan , Staff Writer @lauriesullivan, January 13, 2010

Pulling operations from China would mean Google sacrifices an already semi-strong position in a growing market, though its main rival, Baidu, holds nearly 60% market share in the country. For businesses considering addressing Chinese consumers through online advertising, Google's success in paid search isn't easy to overlook.

After all, Google, which has become a fairly trusted source for U.S. advertisers and consumers, pushes for the free dissemination of information, not censorship guidelines drawn by the Chinese government.

If Google pulls out of China, the decision will clearly "limit options" for U.S. advertisers, Broadpoint AmTech analyst Ben Schachter told MediaPost.

Microsoft has a tiny presence in the country, while Yahoo is involved through a third party.  And while China's own Baidu owns the majority share, perhaps that's what the Chinese government hopes for -- an Internet supported by Chinese-based search engines willing to play by the government's rules.

EMarketer expects Internet use in China to reach 840 million, about 61.1% of the population in 2013, up from 518 million and about 38.4% of the population in 2010.

In the near term, the financial impact on Google remains relatively insignificant, Schachter says. For Google, revenue from China is less than 5%, but long term the market potential is "enormous," he explains in a research note.

Schachter believes Google will make a quick exit from China, as the Chinese government will likely block Google.cn within days or weeks. "One might think we are too dour in our assessment given that GOOG's announcement simply says only that it will 'review our business operations in China,' but clearly this statement is much more than that," he writes. "One does not make such a public announcement if it only intends to review its options."

Turning the topic with Warren Cowan, chief executive officer at Greenlight Search, a U.K.-based search marketing agency, about not wanting to overly offend the Chinese government, he says perhaps Google doesn't want to piss them off.

Conspiracy theories aside, Cowan thinks it's a bit late for Google to turn around and say it's had enough of censorship. The company has been there long enough to test the waters, and any compromise made to conduct business in China doesn't appear to have hurt its stock price, he says. "Clearly, you lose a piece of your soul when you capitulate to that level, but maybe you're prepared to do it while the pickings are good," Cowan explains. "At a certain level of incremental profit, if we have to bite our tongue and take it, we will. But as it becomes too much or too little to take, that's when the seesaw tips out of balance."

Not all believe Google will exit China. Joe Apprendi, CEO of Collective, which focuses on display advertising, not search, believes Google's bluffing and wouldn't think about giving up the projected $3 million in Internet spending for search and display advertising in China expected in 2010. "I think Google's making a statement, and it will be really shocking if they pull out," Apprendi says, adding that the move could provide an additional boost in display advertising. "They're just trying to draw attention to some key issues."

Google's announcement Tuesday afternoon that it might leave China caused a variety of reactions  across the Internet. A Google executive highlighted information in a blog post about a mid-December cyber attack the company said included theft of intellectual property and attempts to hack into email accounts of human rights-activists in China, the United States and Europe.

In a blog post, Google's Chief Legal Officer David Drummond wrote that the company no longer feels comfortable with the agreement made with the Chinese government in 2006 to filter some search terms in exchange for permission to operate in the mainland. "We have decided we are no longer willing to continue censoring our results on Google.cn," he wrote.

So where do advertisers go from here? The problem for U.S. advertisers is  lack of information. Few facts have been published by Western reporters or bloggers in English about Baidu's paid search, SEO or display ad programs. In October, Michael Bonfils wrote a fairly comprehensive look into the search engine's "Phoenix" project, Baidu's "Google-like" search engine platform.

That's what Google tried to change. It thought by entering the search market it could create a more transparent search industry for China -- a country with a reputation for intellectual property (IP) theft and unfair business practices. Perhaps Google needs to think again.