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Will Tencent’s partnership with Sogou threaten Qihoo?

Puneet Sikka

Can Tencent's WeChat compete with WhatsApp as it grows? (Part 5 of 5)

(Continued from Part 4)

China’s Internet search market is dominated by Baidu, but Qihoo is gaining fast

The Chinese Internet search market is dominated by Baidu (BIDU). According to CNZZ, as of August, 2013, Baidu had a market share of 63%. However, in the last one year or so, it has lost market share to Qihoo 360 (QIHU), which only entered into this market in 2012. Qihoo has quickly scaled to take market share of 18%. Google (GOOG), Microsoft (MSFT) and Yahoo (YHOO) are relatively smaller players in this market, with each having market share of less than 3%.

Tencent’s investment in Sogou will make them a strong player

In September 2013, Tencent (TCEHY) invested $448 million in Sogou, the search engine arm of Internet company Sohu (SOHU), for a 36.5% stake. We believe this move has the potential to change the Internet search landscape in China. Sogou is third in the Chinese Internet search market and has a market share of about 10%. Tencent’s Soso is a relatively small player, with a share of 3.6%. After the combination of Sogou and Soso, they will have a combined market share of 14%, which will make them a strong contender to Qihoo. Although Qihoo has grown rapidly to take market share of 18%, it’s still new to this market. Tencent is a big company and can pump in resources to strengthen Sogou.

The investment will benefit both companies

Through the combination, both companies are looking to leverage each other’s strength. Dr. Charles Zhang, chairman and CEO of Sohu, stated, “This partnership will immediately expand Sogou’s market presence and significantly elevate its position in the highly competitive PC search market, and even more so in the rapidly evolving mobile search market.”

Wang Xiaochuan, CEO of Sogou, said, “Sogou remains a key strategic asset of the Sohu Group, generating synergies with our other businesses and creating significant value for Sohu shareholders.” He further explained, “We are very excited about our combination with Soso and strategic partnership with Tencent. By accessing Tencent’s strong innovation capabilities and deeply integrating with Tencent’s core platform, Sogou will herald a new era of relentless innovation in the mobile world.” On growth opportunities, Xiaochuan commented, “For example, the optimization of Sogou Pinyin for Tencent’s mobile IM services will deliver superior user experience, while the interaction between search and social network will bring a multitude of opportunities.”

Ma Huateng, chairman and CEO of Tencent, said, “We believe Sogou is the ideal partner for Tencent to further develop search opportunities within China. This reinforces our ‘open, win-win’ philosophy of working with leading teams to create innovative products for users, and build a healthy, diversified ecosystem for the industry.” He further states, “We have high regard for Sogou’s strong innovation capabilities and successful execution track record. We are confident that Sogou, after combination with Soso, will deliver superior search experiences to users on our social, browser and content platforms, especially on the mobile front.”

To learn more about investing in mobile technology stocks, see the Market Realist series Apple versus Samsung: Could the iPhone lose US market share?

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