News reports say that there was a great deal of testiness in the conversations among top managers at Google (GOOG) about whether it should threaten to pull out of the Chinese market or be kicked out for quitting the Chinese program to censor its results.

Google gambled and failed to get support from other large US tech companies, particularly search rivals Microsoft (MSFT) and Yahoo! (YHOO). The two smaller search operations may simply be willing to trade “ethics” for share in the world’s largest internet market.

Google, it seems, is after just two days, at a crossroads where it can make good on its threat to leave China or negotiate an accord with the People’s Republic to stay. The communists have not backed down because of the Google threat. They have, in fact. said the foreign companies can only operate in China if they abide by the laws, no matter how restrictive those laws may be.

Google may be able to give up on the Chinese search market now because it is dominated by local firm Baidu (BIDU). Baidu’s revenue was only $161 million in the last quarter, a tiny fraction of Google’s. But, Baidu has a market cap of $15 billion, a sign of anticipation that it will continue to have explosive sales growth.

Google knows that the search market in China could eclipse that in the US sometime in the next decade. Ten years from now, Google could be getting a very large part of its revenue from China. It cannot afford to let Microsoft and Yahoo! overtake its global dominance in the search engine business and China may be the final battle ground which determines the eventual leader.

Google can offer its search services to the Chinese from outside the country, but China can block most traffic to servers outside its borders.

All of these factors leave Google in the unenviable position of a challenge to the Chinese which has garnered it no allies. China sees that the advantage has moved its way. Google can make peace with China, which would involve humiliation and a clear repudiation of its slogan that it will do no evil. To do this, Google would at the very least have to agree to the censorship of its results that it accepted in the past. But, for shareholders, the greatest evil of all would be for Google to walk away from one of the keys to its future.

Douglas A. McIntyre

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