Two full trading days on Nasdaq have now passed since Google released their highly unanticipated China news and I thought I would comment on it from a relative stock valuation perspective as I find the market reaction quite interesting in addition to the news in itself.
Much has been said about the communicated Google decision already, so I will not repeat too much of the background other than linking to the original Google China news source where you can find several relevant links to other news sources commenting this. Apparently, the Google apology to Chinese authors for copyright infringement a few days ago was preparing way for this big announcement, and celebrating Chinese innovations at Google.cn today most probably is intended to fulfil a similar purpose afterwards.
As for the Swedish media reaction, I must say I have been surprised to see quite balanced responses overall. Both from those I know are either extremely positive or extremely negative about Google as a company. In general, most Swedish media commentary have been strongly favouring the Google decision from a business ethics point of view. But at the same time, I have not seen any serious questioning of the underlying business rationale for Google´s communication or intentions by this move which I find strange.
That said, no, I don´t fully believe in the Google ”don’t be evil” public stance and that only business ethics are behind a decision like this. Absolutely not because I don´t like the ”don’t be evil” idea as such (it´s a great ambition, indeed), but because I don´t believe any public company of Google´s size are able to keep up to such standards and ambitions long-term as they very often are negative for short-term profit maximization. Short-term profit maximization is what the market primarily are focused on and this tend to be reflected in individual managers´ KPIs as well and it does not go hand in hand with an ambition of ”don’t be evil” all the time unfortunately.
That said about the background, here is a snapshot of Baidu (BIDU) versus Google (GOOG). Both companies are traded on Nasdaq:
Strong positive market reaction for Baidu, hardly any negative reaction at all for Google two trading days after Google China news.
As you can see, the market reaction has been very strong and positive for Baidu, the local Chinese search compatitor to Google, but not at all that negative for Google which is very surprising to me:
Why? Well, although one can argue that China search revenues for Google today are very small (Google do not disclose exact numbers, qualified guesses I recall having seen are in the ~ 500 million dollar/year range), China is already the biggest country in the world in terms of web usage. Above all, it still has a huge untapped potential for the future with millions more consumers coming to the web.
However, China represents so much more than potential search revenues for Google and although many Western media seem to think it is “up to Google” what to do now in China, Chinese are known culturally for being long-term, concerned about face and and seeking confidence. Chinese are also very sensitive to this kind of open, definite and aggressive typical “American” stance that Google has taken in public communication on this issue.
Therefore, I personally think risks are very high the Chinese door is closing on Google now rather than Google having a choice about how to take their business in China further. I simply can´t see this going in any other direction given how Google have chosen to play their cards regarding this issue communication wise. In my view, this potentially concerns all China related business Google are involved in and comprises everything from Android for Chinese mobiles to the hardware collaboration with HTC on Nexus One.
Discounting lost “scrap value” future cash flows for just search in China which is what the market reaction is indicating, is therefore hardly enough as I see it.
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Agreed with the Chinese taking the long view.
I live in Beijing and they don’t take kindly to others wagging their finger at them.
Notice how Yahoo (founded by a chinese-american) has managed to steer clear of trouble and rarely gets this type of flack.
Google taking the high moral ground can also backfire if/when someone finds out that they’re not quite the good guys they position themselves as.