The recent launch of an investigation into Google‘s (GOOG) business practices in Europe and the company’s threat to pull out of the Chinese search market due to government spying on users have contributed to the continuing drama of Google’s position vis a vis Microsoft (MSFT). The European investigation was nurtured by complaints from two entities either owned or heavily supported by Microsoft.
Now, Microsoft’s CEO has announced that the company is not considering following in Google’s footsteps with regard to China. The company plans to beef up its investment in the Chinese search market in order to boost its paltry share. Google and Baidu (BIDU) together control about 95% of the search market in China, leaving precious little for Microsoft.
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One question is, how realistic is it for Google to pull out of China? Certainly the Chinese search market is currently very small, totaling less than $1 billion in revenue annually. Google’s total revenue in 2009 reached $23.65 billion. But with 350 million Internet users in China, and the likelihood of millions more, the potential market is bigger than huge.
Google may be willing to forego its current share of the Chinese market, but can it really walk away from it’s second-place position in a market of that potential size? According to comScore, the search market in China grew 13% year-over-year in 2009. The US search market grew 22% in the same period.
Interestingly, Chinese searches totaled about 13 billion, compared with 22 billion in the US. That’s two-thirds the number, but a tiny fraction of the revenue.
Looking at online shopping, Taobao, China’s largest online retail shopping destination reported that it sold $11.9 billion worth of goods in the first half of 2009, a jump of 97% from the first half of 2008. That translates into about 1.4% of total retail sales in China for the first half of last year.
In the U.S. in the second quarter of 2009, online sales totaled $32.4 billion and accounted for 3.6% of total retail sales. The comparison points out that US consumers spend a lot more than Chinese consumers, and that after about 15 years of online retail sales, the total percentage of online sales is still pretty low.
One of two explanations for the small Chinese numbers is possible. First, the search market in China is poised to explode, and it just needs time to develop. Or, the Chinese don’t understand search, don’t like search, and won’t use it, ever.
The second is highly unlikely. That means that big things are going to happen in China, but it will take some time for that to happen.
And as Microsoft sees it, time is on their side. Microsoft is a fierce competitor andaAnything the company can do to distract Google from focusing on growing Google’s business is an advantage for Microsoft.
Google will almost surely not pull its search business out of China. The company is reportedly talking with the Chinese government right now on the sidelines of the convening of the National People’s Congress. Some compromises with the government will turn up, and a joint press release will assure everyone that Google has a bright future in China.
China saves face, Google saves a potentially huge market, and Microsoft gets to continue to play the role of the evil empire.
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