China Slams Qihoo 360 Technologies For Faking Microsoft Patch

| About: QIHOO 360 (QIHU)

Though not widely reported, the Chinese government has issued a warning letter to Qihoo (NYSE:QIHU) for unfair competition. The letter alleges that the company used its '360 Defender' security software to trick users into downloading its browser.

The official warning letter, which was handed to Qihoo last week, has been made public by China's State Administration for Industry and Commerce (NYSE:SAIC).

The warning letter reveals all the tactics Qihoo tried to trick people into installing its software. Here are some of the examples, all from the SAIC warning statement:

  • Making uninstalling the anti-virus software difficult.
  • Faking incompatibility to prevent the installation of competitors' software.
  • Giving users of non-Qihoo browsers warnings that their browsers are unsafe.
  • Applying default settings in order to trick users into installing the 360 Browser along with Qihoo's security software.
  • Unnecessary upgrades to change users' browser and homepage preferences.
  • Tricking users into believing that the 360 Browser download is an official update patch from Microsoft (NASDAQ:MSFT).

Qihoo pulled the Microsoft-patch trick this past August. Through its '360 Defender' security software, it sent users what claimed to be a Microsoft Internet Explorer update patch titled KB360018 to fix an extremely dangerous security leak. Users who downloaded the patch were then forced to install Qihoo's 360 Browser.

A warning letter from the government is better than nothing, but pretending to be Microsoft in order to spread your own software doesn't just sound like an unfair competition to me, it sounds like a deception.

The government is not the first to raise issues over Qihoo's anti-competitive moves. Another Chinese Internet company Tencent (OTCPK:TCEHY), also sued Qihoo for unfair competition in the September last year, claiming that 360's release of Qihoo's "KouKou Bodyguard" security software in 2010 targeted and made modifications to its QQ instant-messaging software, causing the company to lose income from its value-added services and advertisements. Qihoo was also accused of deliberately overstating the volume of traffic to its website in order to attract more advertisers. Even Apple (NASDAQ:AAPL) decided to remove Qihoo's apps from the iTunes store for violating its terms of service.

What's even more shocking is that Google (NASDAQ:GOOG) has set up a sales partnership with Qihoo. It will let Google, run ads alongside Qihoo search results. I can understand where Google is coming from; Baidu (NASDAQ:BIDU) has been its main competitor in China, so Google is likely looking to work together with Qihoo to take on Baidu, but that strikes me as very shortsighted. In the long run, Qihoo will be another competitor for the search giant. Google has attained a respectable ground in China's search market by refusing to censor its results, but the partnership with Qihoo, could potentially wash all of it away.

Regardless of what Google does, Chinese regulatory authorities should do more to safeguard users and shareholders from the trickery that is being perpetrated by Qihoo and other companies like it. I can understand that Qihoo is certainly not the only company that's pushing the regulatory envelope in China, but what Qihoo did in this particular case, was pretty aggressive.

To be honest, I can't think of a case where the Chinese government has shut down a whole corporation, and I doubt that the government will want to go that far, but there is a first time for everything and investors should be wary for any signs that China may shut down Qihoo and put them in the red.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.