24/7 Wall St.

Google (GOOG) seems ready to extend its plan not to censor the results of its search engine results in China, which would anger the local government. The People’s Republic expects tech companies based abroad to abide by the same rules that Chinese companies do.

China warned Google today that it could not violate Chinese laws, which sets up what may be the final battle between the government and the American company. Google claims that hackers, probably based in China, broke into its servers and compromised the privacy of its e-mail system. The search company seems to believe that the action gives it the right to be more liberal in the way that it displays its search results in China.

Google’s CEO Eric Schmidt has said publicly that his company is close to a settlement with the Chinese government, but it turns out that he was probably wrong. China’s Minister of Industry and Information Technology, Li Yizhong, told Reuters, “If you don’t respect Chinese laws, you are unfriendly and irresponsible, and the consequences will be on you.”

The fight has again boiled down to who will blink first. The Chinese government almost certainly has the advantage. The local search engine Baidu (BIDU) has about 60% of the Chinese market, and Yahoo! (YHOO) and Microsoft (MSFT) have said they have no intention of leaving China and will follow local laws. If Google leaves, much of its piece of the market, which is second only to Baidu’s, will go to competition. China does not need Google.

But, Google does need China. Its internet population is now the largest in the world and by most estimates is approaching 400 million people. Google may have 70% market share in the US and most of Europe, but the number of people online in those nations is growing slowly and the the company’s revenue growth in regions has slowed as well. That leaves Google with two opportunities which are to dominate the relatively new mobile search market which runs on handsets, and to gain ground in the Third World which is dominated by China.

Google is the more likely of the two parties to back down. That will do some damage to its reputation as a company that acts for the public good as well as for its shareholders. The “public good” will have to be left behind and that will make Google like almost any other large corporation in the world.

Douglas A. McIntyre