Weibo: Xiaomi, Kingsoft Join Anti-Qihoo Campaign

Oct. 2.13 | About: QIHOO 360 (QIHU)

After seeing its stock price quadruple over the last year on huge expectations for its online search service, Qihoo 360 (NYSE: QIHU) must be feeling some pressure to start delivering returns to investors who have are betting on the company's strong growth potential. That's the most positive explanation I can find for a sudden slew of complaints against Qihoo from other Internet executives, who accuse the company of tinkering with their software. Those accusations have produced an entertaining war of words on the Twitter-like Weibo service between Qihoo Chairman Zhou Hongyi and top executives from smartphone maker Xiaomi, software maker Kingsoft (HKEx: 3888) and web portal operator Sohu (Nasdaq: SOHU) (previous post).

While it's entertaining for an observer like me to watch, these matters can hardly be entertaining for Xiaomi, Kingsoft or Sohu, which are seeing their software get hijacked by Qihoo 360 products. What this case really underscores is the fact that Chinese firms can't depend on legal protection when they encounter this kind of unethical and often illegal behavior from rogue companies like Qihoo.

While Chinese companies can file lawsuits to try and stop such behavior, such suits usually take years to reach a conclusion, by which time the plaintiff has already taken action to address the matter. Even if the courts find in favor of the plaintiff, financial damage awards are often so small that they have no deterrent effect on companies like Qihoo, which continue to commit similar offenses.

All that said, let's take a closer look at the new war of words and the actions that first Sohu, and now Xiaomi and Kingsoft, have taken against Qihoo. The war began last week when Sohu's Sogou search engine filed a lawsuit accusing Qihoo of using its software to change the default browser on Sogou users' computers to Qihoo's rival browser, which favors Qihoo's So.com search engine.

Now Xiaomi CEO Lei Jun is taking an unusual break from his usual promotional talk on his microblog to announce that his company is formally removing all Qihoo products from its online apps store. I won't go into the details of Lei's complaints, but they involve allegations similar to Sohu's and accuse Qihoo of hooligan behavior and maliciously misleading users.

Kingsoft CEO Fu Sheng has leveled similar accusations, saying his company has also taken all Qihoo products out of its mobile phone assistant software. To be fair, I should point out that Xiaomi and Kingsoft have a close relationship, and that Lei is a major stakeholder in Kingsoft. Finally, Sogou CEO Wang Xiaochuan has been keeping up his series of verbal assaults on Qihoo and Zhou Hongyi, also accusing both of hooligan behavior.

Qihoo is certainly accustomed to these kinds of accusations, and has been sued by just about every major Internet company, including social networking giant Tencent (HKEx: 700) and search leader Baidu (Nasdaq: BIDU). Tencent even won a major lawsuit against Qihoo earlier this year, forcing Qihoo to pay some minor damages and issue an apology. But clearly that victory has had little or no effect on Qihoo.

So, what's next in this ongoing war of words that is causing very real business disruptions for companies like Sohu and Xiaomi? The most likely answer is that these companies will need to keep protecting themselves as they find little protection from Chinese law against Qihoo's behavior. If they are smart, companies like Tencent, Baidu and Xiaomi should combine forces to complain to Beijing. Chinese regulators could then openly confront Qihoo with the threat of real consequences, such as confiscation of business licenses or criminal charges against Zhou. Perhaps that will finally happen, though I suspect that Qihoo's victims will simply fail to unite and business will continue as usual.

Bottom line: Frustration is building among China's Internet firms against Qihoo, following the latest complaints about questionable behavior from Xiaomi and Kingsoft.