One of the reasons they back down on China was because they could not compete with Baidu. It's not just the ethical 'I won't censor my results' (which in my own view, is a good thing).
I'm not sure how their decision went, but I assume that they did their research first to see if their changes would really drop their marketplace share too much. I'm not sure if China will block Google... if they do I don't think it would be much different than Google censuring their own results (the censored content would not be accessible). When people try to go to Google they would notice it's censored too.
They ignore China because it was bad publicity and not worth the rounding error gain in net profits. There are plenty of obvious problems hosting a website in China but you need to add it's a poor country where it takes several times to traffic and several times the resources to make the same income.
PS: Don't believe me? in a country with 457 million Internet users... Baidu currently has a 75.8 share of China's search engine market, according to Beijing-based research firm Analysys International. Google is a distant second with a 19.2 percent share. And with that 75% share Baidu, had a net profits for the quarter ended March 31 were US$164 million. Compared to Google's $10,645 million last quarter. (http://www.pcworld.com/businesscenter/article/226507/chinas_...)
I agree with your analysis of the competitive aspect of Google's decision.
But by un-censoring the results Google removed the information about what was actually being censored, which is actually more available than the censored content itself (which, if it has any value, is likely readily available if you know what you are looking for).
I'm not sure how their decision went, but I assume that they did their research first to see if their changes would really drop their marketplace share too much. I'm not sure if China will block Google... if they do I don't think it would be much different than Google censuring their own results (the censored content would not be accessible). When people try to go to Google they would notice it's censored too.