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Gmail Under China Attack: What Next?

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Google Inc. has announced that the Chinese government appears to be tampering with its email services in China. According to Google, the Chinese government has started partially and intermittently blocking user accounts, so users would experience access problems.

Media reports indicate that the problems started in January this year and have continued to date. Google has made a thorough investigation, discovering no technical faults, according to company officials.

Google’s problems in China started last year, when the company discovered the hacking of several customer accounts that appeared to be government-engineered. At that time, it decided to stop self-censoring its website. But it is impossible to operate in a country if you do not play ball with its government. Accordingly, the Chinese government forced Google into a difficult position and the company started redirecting its customers to Hong Kong, which had a more conducive operating climate.

However, Google decided to keep its foothold in China and in July last year, it agreed to the Chinese government’s terms. This included the creation of a landing page, from which Google search was to be offered as a choice only. Going by the law of numbers, some users would no doubt click on the other option, helping Google lose potential users.

But apparently, this wasn’t enough. If Google’s claims are to be believed, then the Chinese government is resorting to extremely sneaky tactics to create dissatisfaction among Google users.

The Chinese government’s tactics have worked extremely well so far. Google’s 35% share in the Chinese search market in 2009 has now shrunk to 19%, according to Beijing-based research firm Analysys International. At the same time local player Baidu Inc. (BIDU - Free Report) has seen its market share jump to 75%. If things continue the way they are, Google’s foothold could fast be reduced to a toe-hold and then disappear into oblivion. Android and the mobile revolution notwithstanding.

Ostensibly, the Chinese government is trying to control pro-democracy movement in the country. Some market watchers have tied these activities to recent uprisings in the Middle East. Since Google helps communication and spreads information, the Chinese government is clipping its wings. Whatever the reason or cause, it looks like a gain for China Inc.

We have a short-term Hold rating on Google shares, as indicated by the Zacks Rank of #3.

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