Any semblance of harmony between Sohu’s (NASDAQ:SOHU) Sogou online search engine and spurned suitor Qihoo 360 (NYSE:QIHU) has quickly disappeared with a new series of lawsuits between the 2 sides for unfair competition and defamation. I’m not too surprised by this latest development, since Sohu and Qihoo are headed by two of China’s most opinionated and difficult Internet entrepreneurs, Charles Zhang and Zhou Hongyi. But I am somewhat surprised by how quickly relations have soured between these two companies, following Zhang’s decision last week to sell a strategic stake in Sogou to leading Internet firm Tencent (HKEx: 700). That decision, which came after months of talks, was a sharp rebuke to Qihoo, which had also been aggressively courting Zhang and Sogou.
From the broader perspective, this new series of lawsuits sets the stage for what should become an interesting and intense 3-way battle for China’s online search market. Longtime leader Baidu (NASDAQ:BIDU) is in the lead with around two-thirds market share, while Qihoo is making a serious challenge with its year-old So.com search engine. Meantime, the combination of Sogou with Tencent’s Soso.com has created a strong contender for third place, with about 10 percent of the market and strong growth potential.
I was somewhat intrigued last week when the initial atmosphere between Sohu and Qihoo seemed somewhat cordial, after Sogou announced it was selling 36.5 percent of itself to Tencent for $448 million. (previous post) Zhou Hongyi later wrote on his microblog that Sogou had notified him before the official announcement in a display of respect and courtesy, and he even went so far as to offer his wishes for success to the new Sogou-Tenent partnership.
But that veneer of cordiality has suddenly evaporated with the new lawsuit by Sogou against Qihoo for unfair competition, followed by Qihoo’s own countersuit. (Chinese article) In its initial lawsuit filed in the interior city of Xi’an, Sogou asks for 45 million yuan ($7.4 million) in damages. The suit accuses Qihoo used its popular free security software installed on many Chinese computers to change the default Internet browser on those computers from to Qihoo’s own product from Sohu’s. The suit says Qihoo made that change without receiving consent from users of the computers.
This kind of action by Qihoo is quite typical, and has resulted in similar lawsuits against the company in the past. One of the highest profile cases came in 2010, when the company was sued for using its security software to highjack Tencent’s popular QQ instant messaging browser. A court ruled in Tencent’s favor in the case in April, forcing Qihoo to pay 5 million yuan in damages and post an apology on its website. (previous post) The miniscule amount of the damages cast a spotlight on one of the major shortcomings of China’s legal system, namely that fines for economic crimes are often set so low that they often have little or no deterrent effect.
I’m sure Sogou is currently scrambling to find ways to “fix” this problem created by Qihoo, and that the actual case will take several years to resolve. I would expect to see an eventual verdict in Sohu’s favor, though the damages are likely to be insignificant and won’t really deter Qihoo from future similar actions. In the meantime, China Internet watchers like myself can look forward to some entertaining times in the next few years, as some of the industry’s biggest names embark on a intense and colorful battle for dominance of China’s massive search market.
Bottom line: Sogou’s lawsuit against Qihoo marks the start of an intense and heated 3 way battle for China’s search market.