Can Google afford to leave China?

Can Google afford to quit China?

The numbers seem to say no. But the increasingly difficult politics, along with the idiosyncrasies of China's Internet habits, suggest otherwise. On Tuesday, the Internet search company threatened to pull out of China because of censorship and cyberattacks against rights activists that it said originated from China.

Strictly looking at the numbers, such a move looks foolhardy. This past June, China had 338 million Internet users, according to that nation's official Internet Network Information Center. By contrast, the United States had just under 200 million Internet users through 2008, according to a study done by Mediamark Research and Intelligence. And the potential growth in China is huge.

Furthermore, Google has already made strong inroads into the Chinese search space, accounting for somewhere between a quarter and a third of search traffic, which is boosting its projected earning from China to $600 million this year. Google.cn, the firm's Chinese site, is the third most popular site in the country, according to Alexa.com, a website that tracks Internet traffic, and the site's American version, Google.com, is sixth. However, there has been some speculation that Chinese search engine Baidu has recently cut into Google's share of the search market considerably.

But there are more than a few reasons why a Google exit makes a lot of sense.

First, 155 million Chinese access the Internet through mobile devices, a number that Mark Beccue, an analyst at ABI Research expects to rise at a steady clip for the foreseeable future. The question for Google is whether search, its cash cow, will be able to compete with Baidu and a host of China's other favorite web destinations, sites that sell virtual goods, for time on Chinese Internet users' handheld screens.

Second, the increasingly difficult political environment may not only knock Google out of China but portend a much riskier future for the entrance of other American Internet firms.

"This is a no-win situation for an American [company's] entrance," says Richard D'Aveni, professor of strategic management at Dartmouth University's Tuck business school. "I think China is going to want control over the Internet, and I think the fate of any search engine or Internet-based company in China is one that they are either going to have to corporate with the government by allowing espionage or they are going to have to get out if they want to live by American values."