Internet titan Tencent (OTCPK:TCEHY, HKEx: 700) is wasting little time in its search for synergies with its growing stable of strategic partners, with word of a new tie-up between its popular WeChat instant messaging service and its search partner Sohu (Nasdaq: SOHU). The new partnership will see WeChat provide exclusive access to its huge volumes of user-generated content for indexing by Sohu's Sogou search engine. The alliance comes just 9 months after Tencent and Sohu announced an equity tie-up that saw the 2 companies combine their search businesses to form China's third largest player.
From the broadest perspective, this move continues Tencent's M&A pattern that sees it buy major strategic stakes in other Internet firms without making outright acquisitions. Tencent then combines its own related assets with its strategic partner's, and looks for synergies with its own core social networking and online game businesses. In the case last year, Tencent combined its Soso search engine with Sohu's larger Sogou. As part of the deal, Tencent also purchased 36.5 percent of Sogou for $448 million.
Now the pair have formed a new alliance that will see Sogou roll out a new platform where users can search the huge volumes of information generated on WeChat (English article). The move marks the first time Tencent has opened up its content on WeChat, whose base of active users now totals a massive 400 million.
The reports are a bit unclear on what exact content WeChat will open to Sougou for indexing. It's relatively obvious that material from public accounts will be included, since such accounts by nature are open to all WeChat users and thus no one will complain if such content is included in search results. I also expect that articles posted and forwarded by WeChat users will be available for indexing.
Beyond that, it remains unclear if Tencent will make content traded between individual users and private user groups available for indexing. Such a move seems unlikely due to the private nature of such material, though Chinese companies have tried similar things before with little or no regard for user privacy. Such a move would almost certainly drive big new traffic to Sogou, but it would also lead to user protests that could seriously undermine WeChat's credibility.
Over the short term the tie-up could help breathe some much-needed new life into Sogou. The search engine hasn't made much traction in since the Tencent tie-up last fall, with its share remaining relatively constant at about 12 percent. By comparison, the more aggressive Qihoo 360 (NYSE: QIHU) has seen share for its So.com service rise to 26 percent from 22 percent over the period, while search leader Baidu's (Nasdaq: BIDU) share has dropped to 60 percent from 62 percent.
This latest Tencent move looks similar to another one by the company in its recent equity tie-up with JD.com (Nasdaq: JD), China's second largest e-commerce firm. Tencent purchased 15 percent of JD earlier this year and later boosted that stake to 20 percent, and merged its own Yixun e-commerce unit with JD's larger business. Following that tie-up, WeChat has begun to roll out an e-commerce platform that prominently features channels operated by JD.
We'll probably have to wait at least half a year to see if the WeChat tie-ups will make a big difference in the business of JD and Sogou. Execution is always important, and Tencent has a strong track record in that regard. But we'll have to see if WeChat users will want to buy things over the platform, and also if they'll accept having their content indexed on a search engine. But at the very least, I have to credit Tencent with taking innovative and interesting steps to try and find synergies with its growing stable of strategic partners.
Bottom line: WeChat's new tie-up with Sogou could help the latter gain market share, and is part of a broader search by Tencent for synergies with its growing number of strategic partners.
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