China’s Baidu Strikes Back Against Web-Search Upstart

Posted: August 31, 2012 in Internet

BEIJING—A battle is emerging between Baidu Inc. BIDU -0.96% and upstart Qihoo 360 Technology Inc., QIHU -2.41% underlining the high stakes in China’s growing Web-search market.

Qihoo’s emergence as a real player in search just a few weeks after unveiling its search engine has rattled Baidu—long the country’s dominant search provider. Google Inc.’sGOOG -0.92% market share has fallen steadily here since the U.S.-based Internet giant moved its services to Hong Kong two years ago.

China is home to more than 500 million Internet users, and second-quarter search advertising revenue reached more than $1 billion, according to research group Analysys International. So Baidu acted swiftly to protect its turf.

Qihoo, which has built a strong user base on the popularity of its Internet security software and secure browser, in early August started a search engine to compete with Baidu. But search results on Qihoo (pronounced chee hoo), listed links from Baidu results and services, such as maps, music and photo search.

Baidu responded by making it difficult to click through to Baidu services from Qihoo’s site, providing links to older, cached results—rather than fresh results—or directly to a Baidu page.

Investors reacted strongly. Baidu’s American depositary receipts have dropped 15% on the Nasdaq Stock Market over the past two weeks, while Qihoo’s ADRs have climbed 18% on the New York Stock Exchange.

“We’re not worried, we are doing the right thing,” Qihoo Chief Financial Officer Alex Xu said. “Basically, the search market before we launched was underserved by Baidu.”

Baidu declined to comment.

Though other Chinese Internet companies have tried in vain to cut into Baidu’s nearly 80% of search-market revenue, analysts project that Qihoo could take 10% of the market in coming quarters. Google is China’s No. 2 search engine, with 15% of the market.

J.P. Morgan analyst Dick Wei said Qihoo is likely to take market share from both Baidu and Google as inexperienced users of Qihoo’s portal use its own default search engine. According to Baidu statistics, Qihoo’s browser supplies 21% of Baidu’s traffic, meaning Qihoo could take even more market share from Baidu.

Google didn’t respond to a request for comment.

Although little known outside of China, Qihoo has capitalized on the volume of viruses and malware on China’s Internet to attract users to the company’s secure browser and portal. According to Qihoo, its browser had 270 million monthly users in the first quarter, while its website had 77 million unique daily hits.

The company was founded in 2006 by Zhou Hongyi and Qi Xiangdong, Qihoo’s current chief executive and president, respectively. Mr. Zhou is the former head of Yahoo Inc.YHOO -1.15% in China and one of the most outspoken of China’s tech tycoons, frequently at odds with other leaders of China’s biggest Internet companies.

With the introduction of its search engine, Qihoo aims to funnel much of its large user base into its own search, giving the company a piece of China’s highly profitable search advertising.

Qihoo has battled other Chinese Internet companies before. In 2010 the company accused online-games maker Tencent Holdings Ltd. TCEHY -2.38% of scanning the private data of Tencent’s users. Tencent retaliated by cutting off its QQ instant-messaging service for users of Qihoo antivirus software. The spat earned each company a rebuke from China’s Ministry of Industry and Information Technology.

Analysts warned that it will be no easy task for Qihoo to break into Baidu’s core market as Baidu has more cash and significantly larger engineering resources at its disposal.

Mr. Wei, of J.P. Morgan, wrote that the most valuable high-end users eventually would be wooed back to Baidu’s search engine by its array of products, such as maps and streaming music search.

By PAUL MOZUR

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