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Qihoo 360 Technology Co. Ltd (QIHU) was at "war" with Tencent Holdings Ltd. (0700.HK) in the fall of 2010. Baidu, Inc. (BIDU) ‒ often said to be the Google of China ‒ has a Statistics page, and on it Qihoo's browser market share apparently falls off a cliff.

(click to enlarge)

However, at precisely this time period, Qihoo was approaching US capital markets with claims of strong growth.

"360 Safe Browser and 360 Personal Start-up Page, two of our key platform products, achieved stronger growth in their active user base than what had been expected for the January 2011 valuation. .... In connection with the January 2011 valuation, we forecast that the daily active users of 360 Personal Start-up Page would increase 55% from the end of December 2010 to 45 million at the end of 2011."

(Prospectus March 2011: All emphasis here and in other citations are mine.)

Which is it? A market share disaster or stronger than expected growth?

And the "Personal Start-up Page" is the default page for the browser. If the browser gets hurt, doesn't the other feel the pain?

Could it be that I misread Baidu's statistics? That my paid translator and the Google translator both got the description wrong? Or perhaps there is some data-gathering quirk on the part of Baidu?

It's a small matter, because even if we discarded Baidu's statistics, it would still be difficult to draw a different conclusion: the fact that there was a disaster and that it affected revenue is supported by other sources … including Qihoo itself.

Here is a mention of the October 2010 fight in Qihoo's latest SEC 20-F filing.

"In October 2010, Tencent Technology (Shenzhen) Company Ltd. and Shenzhen Tencent Computer Systems Company Limited, or Tencent, brought an unfair competitive practices claim against us in the Chaoyang District People's Court of Beijing, alleging that we misled users with statements that Tencent's QQ instant messaging program invades users' privacy and seeking retraction of the statements and RMB4.0 million in damages. In September 2011, the court ruled that our actions constituted unfair competition and awarded RMB0.4 million ($63,553) as damages to Tencent."

So there was definitely something going on here. News reports out of China also mention a tit-for-tat battle, with legal suits, public smearing, and some technical dirty tricks. It was widely reported in Chinese, but you can read about it in English in the 2011 QIHU SEC filed 20-F (from page 81) and at Caixin Online. (Put "Qihoo" in the search box.) The war reached a climax with Tencent's popular messaging product, "QQ." According to Caixin Online,

"Tencent announced in November 2010 that because Qihoo's antivirus software was destroying QQ's ability to protect user information, the company was shutting down QQ on any computers with Qihoo software installed, forcing users to choose between the two companies. According to Tencent, about 15 million users removed Qihoo software as a result." (here)

What had begun as a spat between a messaging service and anti-virus software apparently escalated into an attempt to shut all of Qihoo down. As the Wall Street Journal reported:

An attempt by The Wall Street Journal to run QQ on computers with 360 products Wednesday night resulted in a window reading: "360 malware damages the safe operation of QQ, and therefore threatens the safety of QQ accounts. We urge you to uninstall all 360 products before normally running QQ." (here)

According to Baidu's statistics page the damage lasted until April 2011. And what was Qihoo saying in its prospectus? The browser (and its default startup page) played a "key" role in the prospectus and supposedly, the business. (emphasis mine)

We have achieved significant business development since January 2011, which we believe contributed approximately 70% to 85% of the increase in the fair value of our ordinary shares.

  • 360 Safe Browser and 360 Personal Start-up Page, two of our key platform products, achieved stronger growth in their active user base than what had been expected for the January 2011 valuation. …. As of March 10, 2011, 360 Personal Start-up Page's daily active users reached 40 million in less than three months, which suggests that we had underestimated the success of this product at the time of the January 2011 valuation. We expect that the increase in the active user base of these two platform products will generate more revenue and net income in 2011 and future periods.

(click to enlarge snapshot of the above SEC filing)

We have heard very different messages from Qihoo 360 Technology Co. Ltd when it finds itself under contrasting circumstances.

For example, when Qihoo needed capital from the US markets it needed to present itself as strong and growing. They "achieved stronger growth in their active user base than what had been expected for the January 2011 valuation."

But now in the ongoing legal battle with Tencent, Qihoo needs to present itself as vulnerable and damaged. From the current legal battle, information is just now emerging about Qihoo's apparent catastrophe at precisely the time it was also preparing its prospectus. Here's an article that appeared in the Chinese media April 20, 2012 and which sums up the situation:

Tencent announced they had made "a hard decision": they would force users to "choose one or the other." If users wanted to install the 360 software, they could not use QQ. 18 hours later, through mediation by the Ministry of Industry and Information Technology and other government departments, the guns on both sides fell silent. A year and a half later, during hearings at the Guangdong Supreme Court, Qihoo revealed that during those 18 hours, their user base shrank by 20 million, resulting in enormous losses. (Translated. Original is here)

The only difference between the two accounts is the extent of the damage. Did they lose 15 million users or 20 million? The fact however that severe damage was inflicted is affirmed by both parties. How does Qihoo reconcile this damage with the prospectus?

As of March 10, 2011, 360 Personal Start-up Page's daily active users reached 40 million in less than three months, which suggests that we had underestimated the success of this product at the time of the January 2011 valuation.

This is not the only confusion surrounding Qihoo's browser. Wasn't Qihoo supposed to have dominated the market last September? Qihoo, in their 2011 third quarter announcement:

Our browsers' user penetration hit a record high of 57%, effectively becoming the market leader in September.

What does Baidu's statistic's page have to say about Qihoo's market share for September 2011?

(click to enlarge)

Not even close. Qihoo's misleading claim was first brought to my attention by Citron Research, using different sources. However, if I played the Devil's Advocate, the only explanation that makes sense to me is that Qihoo's browser statistics were supposed to refer to software sitting on the hard-drive along with other bundled software, most of it unused -- while Baidu's statistics refer to actual use.

The title to Baidu's statics page reads, 浏览器市场份额. Google translates this as "Browser market share" (here) while Qihoo often speaks of "user penetration." If "user penetration" means "market share," it is difficult to see how Qihoo did not lie to investors. If it does not mean market share, Qihoo has still misled investors with their September statement.

I have to say this because the latest 20-F filing puts the matter differently:

360 browsers, which together had 255 million monthly active users and a user penetration rate of 59.5% in China in December 2011, according to iResearch. The user penetration rate for 360 browsers is second only to Microsoft Internet Explorer in China.

This is a very different statement from the one made last September. First, Qihoo and Microsoft cannot both have more than 50% market dominance -- which brings us to the question: Was Qihoo referring to data other than market leadership last September? ... while claiming market leadership? Also note that Qihoo now drops the claim of being the market leader and leaves open the possibility that we are speaking of software sitting on hard drives, unused. But there are still problems with this attempt to excuse Qihoo:

First, it would mean the actual use of their browser is not anywhere near what investors at large believe it to be.

Second, just as no software brags about being a "memory hog" how can you brag about hogging space on the hard-drive?

And then, if the word "penetration" does not mean "usage", why should we trust what they have to say about the market "penetration" of their other products?

And lastly, the September statement did not leave much room for ambiguity and which clearly aided the belief that we were indeed talking about market share.

"Market leader" ... means market leader, and not software sitting dormant on a hard drive. Qihoo needs to explain exactly what they mean by "user penetration" and "market leader." Microsoft was clearly the market leader at this time.

Our browsers' user penetration hit a record high of 57%, effectively becoming the market leader in September.

The second half of this sentence is simply untrue, and it renders the first half not merely incomplete, but clearly misleading.

And if we dial the clock back a bit more, we remember the statements made in the prospectus, where Qihoo had clearly been referring to the "Monthly Active Users" of its browser and claimed that its "percentage of the then total Internet users in China" came in at 44% for January 2011:

The following table shows the monthly active users for our primary security products and platform products, both in an absolute number and as a percentage of the then total Internet users in China as reported by iResearch:

Monthly Active Users of:

December 2009

January 2011

(in millions, except percentages)

360 Safe Browser

106

35.8%

172

44.1%

This is difficult to reconcile with Baidu's statistics.

(click to enlarge)

Source: Qihoo's Browser: Rosy Claims In The Middle Of A Crisis