Rise of the underdog

A dog and pony act: Sogou’s Wang

One of the first people to introduce a Pekingese to America was John Pierpont Morgan. The famed banker received a pair of the lap dogs as a gift from Empress Dowager Cixi during a visit to China in the early 1900s. Recently the investment bank founded by Morgan helped bring another canine-of-sorts from Beijing, underwriting the New York IPO of Sogou, an internet search company whose name translates as “search dog”.

Sogou was created in 2005 by Chinese internet firm Sohu – literally “search fox” – to power onsite searches. The company has since brought in more powerful shareholders, scoring investment from Alibaba in 2010; and Tencent became a major shareholder in 2013 by acquiring a 38.8% stake (plus 52.3% voting rights).

Sogou debuted on the New York Stock Exchange last week after raising $585 million from a public offering. Now carrying a $5.3 billion market value, the search engine is more than 2.5 times more valuable than Sohu, its NASDAQ-listed parent.

Following the fundraising, Wang Xiaochuan, Sogou CEO, made it clear that the company will focus on artificial intelligence. Sogou is already the primary competition for China’s leading search engine provider, Baidu. According to iResearch Sogou occupies 17.8% of the market with 483 million monthly active users (MAU) as of September.

Its plans to drill deeper into AI present yet another threat to Baidu, whose CEO Robin Li is betting on a growing prowess in the technology to counter slower sales in search.

As a search engine, Sogou’s unique selling point is its strategic partnership with Tencent, which gives it access to the latter’s “walled garden” – the exclusive ecosystem of products offered (and data gathered) from WeChat’s 800 million users. This enormous online community produces or shares a vast amount of news everyday and Sogou is the only search engine allowed to mine data on the WeChat platform.

However Huxiu, a news portal, reckons the search engine is overly dependent on its partner for traffic, garnering over 50% of customer flow from Tencent’s ecosystem. As flow rate determines how much a search engine provider can earn from advertising – the primary source of revenue – Huxiu argues Sogou’s value would plummet if it ever became estranged from Tencent.

When it comes to AI, Wang argues Sogou’s competitive edge is its strength in natural language processing, which he describes as the “crown jewel” of artificial intelligence. Sogou operates a keypad interface for mobile users that, according to the Financial Times, has 300 million users, allowing it to collect vast data on language usage. However, Baidu also provides a keypad service with a similar number of users and it has invested heavily in AI thus far. According to the Economic Observer, Baidu put $5.67 billion into AI between 2014 and the third quarter of this year. For the same period Sogou spent $504 million, or about 8% its competitor.

Baidu’s coffers are also substantially larger: it reported $10 billion in revenue for the 2016 fiscal year, while Sogou listed revenues of just $660 million in its IPO filing.

Speaking to the Global Times Wang remained bullish on Sogou’s chances of surpassing Baidu, suggesting that “their competitor” (implying Baidu) had stretched itself too thin. Baidu has a thicker portfolio of AI products in the pipeline, incorporating smart home appliances and driverless cars, but Wang asserts his firm has “done a better job” on developing the core components.

Nevertheless, in a separate interview Wang conceded that Sogou would still have some things to learn from foreign tech players. “This IPO has opened a window for our globalisation,” he said. “We will look at M&A and partnerships with companies who have the technology to improve our AI.”

© ChinTell Ltd. All rights reserved.

Sponsored by HSBC.

The Week in China website and the weekly magazine publications are owned and maintained by ChinTell Limited, Hong Kong. Neither HSBC nor any member of the HSBC group of companies ("HSBC") endorses the contents and/or is involved in selecting, creating or editing the contents of the Week in China website or the Week in China magazine. The views expressed in these publications are solely the views of ChinTell Limited and do not necessarily reflect the views or investment ideas of HSBC. No responsibility will therefore be assumed by HSBC for the contents of these publications or for the errors or omissions therein.