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Google Backtracks on China, May Pay Steep Price

Funny thing about principles: They tend to carry much more weight when they're stuck to and not merely a matter of convenience.

Google China
STR | AFP | Getty Images
Google China

Google backtracking in Chinamight be a business decision, but this late in its game of Chinese Chicken, it might come at a steep cost.

We all know the background here: Google was hacked. Google was being forced to censor its search results.

Google took a dramatic stand, drawing a line in the sand, and ultimately backed out.

Now, after so many headlines, and a pretty significant stock hit, the company seems to be backing down. I said from the beginning that the decline in Google's stock, and the concomitant meteoric rise in shares of Google rival Baidu were both so overdone it bordered on the laughable; that is, if people's finances weren't at stake.

And here's why: Google has tried for the better part of four years to try to crack the Chinese market, and has little to show for it. Baidu is so entrenched in China that there was really no way for Google to bite off any meaningful market share. The company could easily afford to make a political statement because it had little to lose. Yes, the Chinese market is growing at an enormous clip, and the number of net users exceeds the entire US population, or roughly 400 million Chinese. But if Google couldn't come up with a way to gain from that growth, the growth itself didn't matter. Yet, as the search saber-rattling continued, Google's shares declined, and Baidu — already the Chinese market leader by a long shot —continued to climb.

Which brings us to today.

Google says it is changing its approach in China, which since its decision to pull out of China, had its users automatically redirected to its Hong Kong site, which continues to provide uncensored results. Google now says"instead of automatically redirecting all our users, we have started taking a small percentage of them to a landing page on Google.cn that links to Google.com.hk -- where users can conduct web search or continue to use Google.cn services like music and text translate, which we can provide locally without filtering." Google's Chief Legal Officer David Drummond says in a post on Google's blogspotthat "this approach ensures we stay true to our commitment not to censor our results on Google.cn and gives users access to all of our services from one page."

All of this comes ahead of Google's decision to submit an application to renew its Internet Content Provider (ICP) license with China's government.

So now the real question is whether Google's unilateral decision to compromise, to blink, to back down, will sway government officials to let Google stay in China. It appears while Google might be softening its stance, China is not, with Google disclosing today that the availability of its Web search in mainland China was "partially blocked."

Disturbing for Google as it tries to navigate its way through this morass is what happens next with its other products in China. Unlike Search, Google Maps is very popular in China, and Google needs a license for that product, too. And that's just on the software side. Depending on how nasty this imbroglio becomes, Google might see pressure placed on its mobile Android operating system, and the smartphone partners like Motorola , HTC, Samsung and so many others that are using it.

Colin Gillis, BGC's senior technology analyst, has a good note out on all of this this morning. At the very least, the ongoing turmoil in China is a "drag on management's time and we do not expect the issue is resolved soon." At the very most, Google blinking today sends a clear message to the Chinese government that it could indeed have its way with Google, and that if it so chooses, can attach even more demands to Google's ICP application.

Google took a bold stance with its anti-censorship message in China. Crawling back to the Chinese government with a questionable compromise that doesn't seem to serve its users or its position with regulatory officials seems odd to me. And wavering on principle, with so little to gain in return, doesn't seem smart for business, or Google's reputation.