China: A tiny piece of a massive pie

The Wall Street Journal reports:

Analysts at Calyon Securities offered a blistering take on Google Inc.’s threat to walk away from China, saying the “decision to stop filtering searches, though maybe moral, may turn out to be a poor one.” In a note, subtly entitled “Suicidal Decision,” Calyon analyst Elinor Leung suggests that the current conflict means Google will see additional difficulties, even if it chooses to stay on in the People’s Republic.

Meanwhile Xinhua has this piece, titled China seeks clarity on Google's intentions:

Guo Ke, professor of mass communication at Shanghai International Studies University, said it was "almost impossible" for Google to quit China and also impossible for the Chinese government to give up its management right over the Internet.

"It will not make any difference to the government if Google quits China, however Google will suffer a huge economic loss from leaving the Chinese market," Guo said.

Methinks Leung and Guo, and many others, protest too much. They are over-estimating the size of the Chinese Internet ad market, and more importantly, overestimating the potential for foreign companies to take a significant share of it.

If one chooses to believe numbers from iResearch, China's online advertising market size was USD 3.01 billion (20.61 billion yuan) in 2009, and looks to reach around USD 4.3 billion (30 billion yuan) by the end of 2010.

In both 2008 and the annus horribilis of 2009, the U.S. online ad market was well over USD 20 billion dollars, and set to grow significantly this year (here's an old but handy chart).

Estimates of the global online advertising market in 2009 tend to be between 40 and 50 billion dollars.

So let's remove the probably optimistic projection of China's 4.3 billion dollars online ad revenue from the total pie, and and assume the global market will not grow and remain at USD 50 billion this year:

Without China, Google is the dominant player in a market worth more than 45 billion dollars.

Why should Google bother to fight a dirty fight that they will never win, for a fraction of China's 4.3 billion dollar market?

By the time China's online ad market is worth fighting over, government policies may be completely different. If Google withdraws, it will undermine the global competitiveness of Chinese Internet companies, while Google itself will be playing against the best of them in all major global markets.

Google's technology will be ready to come back to China as soon as the regulators back off enough to make it pleasant to play here again. Google may even benefit from the good will their current move has gained them amongst elite users (Thanks to Bill Bishop for that phrase).