Google and China

A lot of the discussion in the media has focussed on the political aspects of the Google-China dispute, so I thought I'd try to focus on the economic aspects.  Is it just about freedom of information flows and such, or is there more to the story?

As I've discussed earlier, Google's revenue stream comes primarily from online advertising, and in this area it has considerable market power in determining prices. It's market power in online advertising owes a lot to its ability to "lock-in" users by its (ever-increasing) range of free complementary products such as Gmail, GoogleVoice and Video, Picasa, Docs, Maps, etc. etc. As we become ever more reliant on Google's suite of free software and products, we become less likely to switch to alternative products. Switching costs are an insightful way to think about market power for many of the digital/online products that are ubiquitous these days.

If Google is prevented from deploying the full range of its complementary products, such as seems to be the case in China, then the brilliance of its business strategy loses lustre. It is thus not so surprising that as a pure search engine (and a censored one at that), it is behind Baidu, the leader in China.

Given Google's lack of success in developing market share in China in the face of impediments to the implementation of its business strategy, Google's announcement about the possibility of withdrawing entirely from China may be part of larger strategic gamble with an eye toward the future of cloud computing.

Cloud computing refers to the move toward storing and accessing data, software and services via the internet. This is believed to be a major trend for the future and of great commercial potential. [Background on cloud computing here and here].

While the trend toward cloud computing is believed to have great commercial potential, there are serious concerns about security and privacy that need to be addressed. Google's public dispute might help buttress Google's credibility in this area.