Internet & Tech

The search goes on

Qihoo challenge to Baidu grows, with new Google tie-up planned

Zhou Hongyi: the bane of Baidu

Qihoo’s chief executive Zhou Hongyi seems to relish confrontation with his rivals. Notoriously he scoffed that Tencent – China’s largest internet firm by market capitalisation – was running “scared” of Qihoo’s messenger product, a challenger to its QQ service. And when Qihoo launched a rival search engine to compete with industry leader Baidu, Zhou claimed that Baidu had responded by paying pundits to discredit his product.

So there was a sense of media expectation last week when Qihoo confirmed a new tie-up with Google. They were to be disappointed – Zhou stayed relatively quiet, and Qihoo said little to elaborate further on the deal.

Should it be inked, analysts believe that the partnership will give Qihoo, China’s largest anti-virus software provider, access to Google’s sophisticated advertising networks. Additionally, there is speculation that Qihoo’s search engine product (which was launched in November) could benefit from some of Google’s expertise.

In return, 21CN Business Herald says Google might benefit through a revenue-sharing agreement. Some analysts are already doing the numbers for the partnership. Juan Lin at Wedge Partners told Bloomberg it could contribute as much as $140 million in sales for Qihoo this year. Small wonder then that Qihoo’s shares rose 2.6% when the rumours emerged.

News of the partnership is also a vindication for Qihoo, the target of a well-publicised attack by Citron in December 2011. The short-seller claimed Qihoo was inflating its advertising revenues, as well as income from games played on its website. Qihoo stock sank, with the market already jittery at short-seller attacks on Sino-Forest (see WiC158). But Qihoo refuted the charges and has since bounced back, its shares jumping 89% in 2012.

What sounds good for Qihoo is less welcome for Baidu, the dominant force in China’s search market since Google withdrew in 2009. Its lead has been eroding: Qihoo’s share of search reached double-digits in December, at a little over 10%. That’s still well behind Baidu’s 72% share but solidly ahead of the third biggest player, Sohu’s Sogou, which had about 8% of the market after nearly a decade in operation.

Qihoo is making decent progress. In an interview with Snowball Finance late last year, Zhou announced that that he was targeting a 15-20% share of the search market. “If we can get to this market share, then the monopoly will have been destroyed. And the monopoliser may be forced to make improvements,” Zhou warned, clearly in soundbite mood.

What else does Google get from the deal? Revenues from the partnership will be a rounding error on Google’s bottom line, says Private Economy News. But by helping Qihoo to keep Baidu at bay, Google might be trying to keep the China market open for an eventual re-entry. In fact the deal may be a sign that Google has given up fighting the Chinese authorities and now regrets its withdrawal from the Chinese search market (see WiC69). Instead, it may be trying to curry favour with Beijing by assisting a local firm with technology know-how, says The Economist.

Still, don’t write off Baidu yet. While Qihoo may find it easier to win new users for its search engine – after all, many of its potential customers are already using other Qihoo products – it could be tougher to keep them as search engines evolve into new areas and go mobile, warns Investor Journal.

Baidu also seems poised to fight back. There were reports this week that the search giant is planning to become a strategic investor in security software company Kingsoft, the biggest rival to Qihoo’s anti-virus products. Young’s China Business Blog also believes a tie-up with smartphone maker Xiaomi (see WiC176) could occur, helping Baidu beat Qihoo in mobile search.

Keeping track: in WiC178, we speculated that a new search engine tie-up with Qihoo might mark the early stages of a new Google strategy to return to the China search market. The hypothesis was that Google was helping Qihoo in order to contain its main rival in China, Baidu. Might that even signal that Google was also considering a return to the Chinese search market?

If so, someone needs to tell Google chairman Eric Schmidt that slamming China as the world’s “most sophisticated and prolific hacker” probably isn’t going to help with the plan.

Schmidt’s comments were widely trailed in reviews of his latest book The New Digital Age (which WiC is yet to read). But the Chinese authorities aren’t likely to be impressed with his thoughts on the future of the web in China, nor the assertion shared with co-author Jared Cohen that the internet will come back to haunt them. “This mix of active citizens armed with technological devices and tight government control is exceptionally volatile,” the authors supposedly warn, suggesting that China will see “some kind of revolution in the coming decades.” (Feb 8, 2013)


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