As the Google vs. China saga continues to drag on, Wall Street analysts
are left wondering what to make of the search engine titan's plans for
the world's largest Internet market.
Yesterday, Google Inc.
announced it was shutting down its Chinese-language, China-based search
engine and had begun redirecting traffic to its Hong Kong portal in a
move which drew swift condemnation from Beijing.
By opting to
stop offering censored search results in China — which boasts the
world's largest Internet market with more than 384 million users —
Google is running the risk of the Chinese government blocking Google
sites for its citizens.
Of course, if Google loses access to
the Chinese market, that's bound to have an impact on the Mountain
View, California company's core online advertising business, and its bottom line.
While Google's
decision to redirect Chinese users to its Hong Kong servers may prove
to be the beginning of the end for the company's China controversy, it
"does not end the negative reverberations that are likely to continue
for some time," said BGC Partners technology analyst Colin Gillis in a note
delivered to clients yesterday.
"No one wins by Google's
actions," he said. "Google is not helping shareholders or the citizens
of China by exiting the country. China loses the benefit of having its
country grow by using Google's technology."
Mr. Gillis — who
maintains a Hold rating on Google's shares and a long term price target
of US$580 — said questions remain over how the hacking of Google's
Gmail service by unidentified parties in China resulted in the
company's decision to stop offering censored search results.
"The
lack of transparency from Google on the actual events and the decision
process that occurred is a disservice to shareholders," he said.
Google's
actions could have a downside impact of between $10-billion and
$15-billion on the company's market value (about $30-$50 per share)
depending on the severity of the response from the Chinese government.
If
Google does wind up being shut out of China, or if Chinese users grow
frustrated with the slower speeds of the search engine which are likely
to occur due to the increased traffic strain on the company's Hong Kong
servers, one possible winner would be Chinese-based search provider
Baidu.
J.P. Morgan analyst Dick Wei raised his forecast on
Baidu to US$650 from $540 based on the assumption that Google would
lose 50% of its traffic to Baidu due to "inferior user experience" and
Baidu's "current weaker monetization capability compared to Google."
Mr. Khan believes Baidu's revenue could jump by 8.5% ($85-million) in 2010 and 14.5% ($218-million) in 2011.
However,
Mr. Khan's forecast assumes Google will continue directing Google.cn
traffic to its Hong Kong servers, Gmail will remain accessible from
China, sites such as YouTube will still remain on the Google.cn servers
and that Google will maintain its marketing and R&D teams in China.
"From our checks, Google.com.hk is currently accessible from
China," Mr. Wei wrote in a note to clients yesterday. "Advertising is
up and running" sponsored advertisers links have moved to the HK
server. While current situation is in line with expecation, we believe
there are still risks that Google service will be blocked from China in
long run."
Matt Hartley