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At stake for Google in China: Smart phone empire

As the company tangles with the Chinese government, it puts in jeopardy its tentative grip on the cellphone market in a nation where staggering growth in mobile search is expected.

March 25, 2010|By David Pierson, reporting from beijing and Jessica Guynn
  • Although Google is a distant second on computer searches in China, Google is nearly tied for first with Baidu Inc. for market share in China's mobile-search sector. Above, a man uses a cellphone outside Google China headquarters in Beijing.
Although Google is a distant second on computer searches in China, Google… (Alexander F. Yuan / Associated…)

Reporting from San Francisco and Beijing Jessica Guynn -- In its public wrangling with the Chinese government, Google Inc. not only risks losing access to millions of personal computers in China but also its toehold in the world's largest cellphone market.

The U.S. technology giant has been providing Chinese handset manufacturers its Android operating system for free in hopes of penetrating a country where, soon, more people are expected to access the Internet on mobile phones than on desktop computers.

Although it is a distant second on computer searches, Google is nearly tied for first with China's Baidu Inc. for market share in China's nascent mobile-search sector.

Many Chinese are increasingly relying on smart phones for both telephone and computer services, including surfing and searching the Web.

But Google's ambitions are in jeopardy after it raised the ire of Beijing by redirecting Internet users in China on Monday to an uncensored search engine in Hong Kong.

Analysts say the Chinese government could pressure partners to sever ties with the company. And Google has acknowledged the possibility that its products could be blocked any day by censors.

"By leaving China now, Google may have lost out on these other potential opportunities," said UCLA business professor Christopher Tang.

Google said Tuesday that it would delay rolling out in China mobile applications that run on Android phones after its Chinese partners came under government pressure to pull out of deals with Google.

Access to Google's Hong Kong search site has been spotty. Google responded to mounting concerns of business users of Gmail and other Google services with a blog post that offered some technical solutions that would allow business users in mainland China to access a corporate network offshore, similar to what other businesses do.

The company acknowledged that China could block access to those services at any time. It has set up a dashboard on its website displaying which services are accessible and which ones are being blocked or partially blocked.

"My concern is that lots of Google's mobile services are based on search," said Kevin Wang, director of China research for iSuppli Corp. "Now we don't know if we'll still have their search engine in China."

As long as the search engine is accessible, Google will be positioned to capture a growing share of mobile advertising, analysts said, noting that the company's strategy is to get as many Web-enabled phones as possible into the hands of consumers.

That requires driving costs down for such devices -- known as smart phones because they combine the features of a regular phone and a computer.

Google offers its platform for free to pass savings on to developers and trump competitors such as Microsoft, which charges a licensing fee to adopt its cellphone software.

The company also made Android an open-source system to allow manufacturers and mobile providers to modify the platform as they see fit.

China's leading telecommunications company, China Mobile Ltd., already has outfitted a line of third-generation, or 3G, signal devices named OPhones.

China's two other state-run telecommunications companies, China Unicom and China Telecom, also have included Android-based phones in their strategies to attract users of smart phones, though to a lesser extent.

Though mobile users represent only 1% of China's search-engine advertising, Google is one of many companies preparing for staggering growth in the coming years.

"It's a small percentage of revenues with great growth potential," Benchmark Capital analyst Clayton Moran said.

China has about 800 million cellphone subscribers, and many are expected to upgrade to smart phones as the nation's 3G network expands.

The share of the high-end devices is expected to double by 2013 to 36%, or 122.3 million units, according to technology research firm BDA China Ltd.

Also driving demand is the relative affordability of smart phones compared with personal computers. Though there are 384 million Internet users in China, there are only an estimated 100 million to 150 million PCs.

According to the government's China Internet Network Information Center, 76 million people used their handsets exclusively to access the Internet last year.

The percentage of Chinese who used desktops to go online fell from 89% in 2008 to 73% in 2009. In the same period, those using cellphones grew from 40% to 61%.

"The handset is on track to overtake desktop PCs as the most popular device in China to access the Internet" this year, said CK Cheng, an analyst for CLSA Asia-Pacific Markets.

Ma Jia, a commuter in Beijing headed to work Wednesday morning, said she preferred surfing with her Nokia E71 than firing up her desktop at home.

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