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Qihoo Takes on Baidu in China's Search Engine Wars

Zhou Hongyi, co-founder of Qihoo 360 Technology

Photograph by Keith Bedford/Bloomberg

Zhou Hongyi, co-founder of Qihoo 360 Technology

In the past few years, Zhou Hongyi, the 43-year-old co-founder of Chinese antivirus company Qihoo 360 Technology (QIHU), has engaged in high-profile legal conflicts with Yahoo China (YHOO) and Tencent, which operates China’s QQ instant-messaging service. Zhou says he’s used to rubbing competitors the wrong way. “In China,” he says, “newcomers are normally viewed as troublemakers.”

Zhou’s company is now taking on the dominant player in the search business. Qihoo (pronounced CHEE-HOO) makes money by selling ads through its browser and its free antivirus software. But its browser didn’t have a built-in search engine until last August, when Qihoo released a search feature that lets it keep traffic from users’ queries instead of directing it to a rival. The move put Qihoo in competition with Baidu (BIDU), which last year controlled 80 percent of China’s search market by revenue, says Chinese Internet industry consulting group iResearch.

Baidu has increased its dominance since Google (GOOG), fed up with hacking and government censorship, curtailed its mainland China operations in 2010. In an interview at Qihoo’s new headquarters in Beijing, Zhou calls Baidu a monopoly that facilitates “frauds and fakes,” where “users just click and fall into the trap” of bogus websites. Because of Qihoo’s experience fighting malware and spam, Zhou says, that won’t happen with his search engine. Baidu spokesman Kaiser Kuo declined to comment about Qihoo but in a statement assailed “unfounded accusations” by competitors.

So far, Qihoo’s foray into the Chinese search market—valued at $4.4 billion last year, according to estimates compiled by Bloomberg—has been a huge success. The company has picked up about 10 percent of the country’s search traffic, says iResearch. It’s been able to make those gains thanks to the popularity of its Internet browser, which Qihoo says has more than 300 million users a month.

Qihoo’s search business isn’t profitable yet, but its progress has impressed investors. Its New York-traded shares rose 89 percent last year, the best performance of any major Chinese stock. Investors have also been cheered by news of a deal with Google. In a Jan. 17 report, Jefferies (JEF) analysts Cynthia Meng and Rui Hao wrote that Qihoo recently began using the American company’s advertising system, enabling it to earn money by running ads adjacent to search results. Qihoo’s chief finance officer, Alex Xu, confirmed the deal but would not give any details. Google spokesman Taj Meadows declined to comment.

Soon after Qihoo launched its search engine, Baidu appealed to China’s Internet regulator to keep Zhou’s company from searching Baidu’s online encyclopedia and other content. The friction is reminiscent of some of Zhou’s past battles. In 2006, Yahoo China, where he used to be CEO, sued Qihoo for unfair competition. A Beijing court ordered Qihoo to post a statement on its site retracting its allegations that Yahoo was distributing software that installs without users’ permission. Four years later, Zhou got into a dispute with Tencent over alleged anticompetitive practices regarding the rivals’ security software. Both companies have filed lawsuits in Chinese courts.

Qihoo has critics outside of China as well. Muddy Waters, a research firm that has made headlines highlighting alleged accounting irregularities at Asian companies, on Jan. 24 posted a series of tweets citing reports of a Qihoo boycott by Internet users. The firm, founded by short-seller Carson Block, also wrote that challenges to Qihoo’s browser revenue and traffic claims made by investigation team Citron Research were “convincing.” Muddy Waters is echoing a “widespread smear campaign” launched by Qihoo’s rivals, the antivirus company’s Xu said in an e-mail.

The same day as the Muddy Waters tweets, the Beijing Industrial and Commercial Administration Bureau, an agency that monitors industry in China, said on its website that it had issued Qihoo a warning about unfair use of its software. Xu says the warning is “very vague” and not unusual in China’s Internet business. Around the same time, Apple (AAPL) removed Qihoo’s apps from iTunes, according to Xu. Apple didn’t give a reason for the action, but it has done the same to other Chinese companies, he says. Apple didn’t respond to requests for comment.

As Qihoo tries to rebut its critics, it also needs to win over a lot more users. It was relatively easy for Qihoo to get people who were already doing searches through its browser, since they didn’t have to change their behavior. Expanding beyond that will be a challenge. “How many precedents have you found globally of end-users switching their search engines?” asks Michael Clendenin, the founder and managing director of Shanghai-based RedTech Advisors. “They just don’t do it.” Zhou disagrees. Qihoo’s 10 percent of Chinese search traffic, he says, “is just the beginning.”

The bottom line: Qihoo may join forces with Google—while also attacking market leader Baidu—to pick up ground in China’s $4.4 billion search business.

With Lulu Yilun Chen
Einhorn is Asia regional editor in Bloomberg Businessweek’s Hong Kong bureau. Follow him on Twitter @BruceEinhorn.

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