HONG KONG - Qihoo 360, the most popular
anti-virus software provider in China, will be
going public with a share issue in the Nasdaq
stock market next month, said an investment
banking source. Citi, Deutsche Bank and UBS will
be underwriting the issue.
The
Beijing-based company, founded in 2005 by former
Yahoo China head Zhou Hongyi, jumped to public
prominence last year when it took on Tencent,
China's largest Internet company, in a
high-profile battle after their initially quite
different business interests started to overlap.
Qihoo offers free entry-level anti-virus
software for computer and mobile devices. It has
over 300 million users in China and more
than 70% of Chinese Internet
users subscribe to its services.
Tencent's
QQ instant messaging services are even more
popular. It has over 600 million users. In
comparison, China had 457 million Internet users
at the end of last year, according to
government-backed researcher China Internet
Network Information Center.
With such
large user bases, both Tencent and Qihoo have been
expanding their operations beyond their core
businesses. For example, Qihoo is developing a
browser and Tencent runs a popular portal, QQ.com,
as well as a number of hit online games. As both
expanded their business lines, they inevitably ran
into each other's territories. Conflict started
when Tencent tried to develop its version of
anti-virus software and bundled it with the QQ
instant messaging services.
Last November,
Qihoo retaliated by adding a new feature to its
basic service, called "KouKou Bodyguard". Its
function was relatively simple: it allowed users
to hide features of the QQ instant messaging
software that they did not want to use, and block
QQ's advertisements. Tencent found this alarming
and publicly stated that it would cease to provide
QQ services to anyone using Qihoo 360.
Most Internet users in China were affected
by this dispute. Discussions exploded on the
Internet, with furious reactions from end-users as
they were forced to take sides. They complained
that the two companies cared more about their
business interests than about their users, and
their computers became a battlefield for the two
companies.
In the midst of a media war of
words, Qihoo accused Tencent, whose market
capitalization is about US$50 billion, of abusing
its dominance in the market to crush anyone it saw
as a competitor. Zhou claimed Tencent's actions
forced 60 million users to uninstall Qihoo
software. Tencent accused Qihoo of a complete lack
of morality by going after Tencent's core product
with a program that crippled its core revenue
stream.
Lawyers and scholars commented
that the companies had violated China's laws
against unfair competition and on the protection
of the rights and interests of consumers, and that
Tencent's acts had violated the antitrust law.
Finally, the Chinese government
intervened. The Minster of Industry and
Information Technology (MIIT) took control by
holding internal meetings with the two companies,
and then issued an announcement, ordering the two
companies to stop the fight, resume their
products' compatibility, and apologize to their
users.
The two products have since been
able to work together, but the incident and the
conflict it generated have revealed serious
problems in the Chinese Internet industry.
"The issue of fair competition is
completely overlooked in China," said an industry
insider. "Large companies frequently bully smaller
ones, using their huge user base. Take Tencent as
an example: it repeatedly makes concerted and
coordinated efforts against anyone who could
threaten any one of its products. The company is
widely criticized for frequently and blatantly
plagiarizing others' products, and there is almost
no chance that a smaller company can compete or
even develop new products in a sector that Tencent
controls."
Since the incident, the
government has been looking into the issue of fair
competition and consumer protection. In January,
MIIT released interim measures on the Supervision
and Administration of the Internet Information
Service Market. The measures are a short document
with a challenging task: to maintain fair and
orderly competition in the Internet information
service market while protecting the legitimate
rights and interests of users.
The
measures overlap with several other laws and
regulations, including China's Anti-Unfair
Competition Law and its telecommunications
regulations. It is still too early to say how the
new law will change Chinese Internet industry in
the long run.
The fight with Qihoo 360
also had an impact on Tencent.
"Tencent
has become more open and more willing to cooperate
with third parties," said Lu Gang, co-founder of
Technode.com, an influential blog about Chinese
Internet issues. Tencent is working on its open
platform, and every one of its divisions, such as
QQ Zone, is doing something to allow third parties
to cooperate with it. "Tencent is moving towards
an open platform. In the past, the pace was very
slow, but since its fight with Qihoo, it has
realized the importance of open platforms and has
been speeding up the progress."
Tencent's
action has also made other major Chinese Internet
companies more willing to open their platforms.
The two leading social networks in China, RenRen
and Kaixin, are now more cooperative with
third-party social game developers.
The
willingness of Qihoo 360 founder Zhou to take on
bigger interests has not made his plans for an
initial public offering (IPO) easier, in spite of
his past successes as an entrepreneur.
"This is a tough IPO," said an investment
banking source. "No one [ie bankers] wanted to
take its business. Qihoo has offended so many
parties in the industry."
An industry
specialist said Zhou "is generally praised for his
ability to build hugely popular Internet services,
but the measures he takes can be dramatic. His
aggressive nature also offends many players in the
industry."
Zhou, 40, is a product of Xian
Jiaotong University where he studied systems
engineering. in 1998, he founded his first
venture, 3721, an online service that allows users
to access Internet websites using the company's or
the product's Chinese name. It was sold to Yahoo
for $120 million in 2004 and Zhou became head of
Yahoo China, but the relationship ended on a sour
note and he quit in 2005.
After being an
angel investor for a while and working for venture
capital firm IDG Capital Partner, Zhou was ready
for another startup and founded Qihoo 360 in May
2005. In two years, it became most popular online
network security services in China.
In the
past, Zhou's controversial nature has not stopped
him from raising enough capital from investors.
Qihoo 360 has undergone three rounds of financing.
In March 2006, investors including Sequoia
Capital, IDG VC Partners and CDH investments
pumped $20 million into the young company and it
raised another $25 million in November 2006 from
investors that included Highland Capital Partners,
Matrix Partners and Redpoint Ventures. In the
third round, it raised about $40 million to $50
million.
The banking source could not
indicate the amount of Qihoo's proposed IPO, but
companies of similar size might be expected to
raise around $200 million.
Despite the
Tencent controversy and Zhou's combative history,
Qihoo 360's IPO might prove to be another hot
issue, if the recent success of Youku, China's
leading online video site, is any guide. Youku's
share price surged 161% on its IPO debut last
December, although the company is still running a
loss.
Nor has the clash with Qihoo damaged
Tencent in the long term. Its Hong Kong-listed
shares have gained about 26% since the squabble
was settled at the end of last November.
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