Is Qihoo a threat for Baidu?
Ashish is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Qihoo 360 Technology (NYSE: QIHU) announced last week that it is replacing Google’s search service with its own search engine, so.360.cn, for its Website and browser. Investors seem to be concerned by this development as Baidu (NASDAQ: BIDU) saw a decline of ~10% following the announcement with a further ~6% following the downgrade from Deutsche Bank. We believe that investors are particularly worried about Qihoo’s large browser user base (51% of the Chinese Internet population,) and the possibility that Qihoo’s search engine could provide better user experience relative to Baidu. While we see this as a potential threat in the future, we believe that Qihoo has much to learn about the search industry and investors have overreacted to the news. Although Qihoo may derive initial market-share gains from its browser user base, we believe that search is a one player game requiring a complex algorithm and a large user database. We believe that Baidu is positioned quite comfortably in the search market compared to Qihoo given its expansion in mobile, ongoing work in the futuristic cloud infrastructure, and as it incorporates content from its associates directly to its results.
We believe that search is a difficult business. It requires a good algorithm plus a large database with historical user search behavior. Even if Qihoo develops a good algorithm (which we believe would take a lot of time), it would be difficult for Qihoo to provide quality search content given its database is inferior to Baidu. We believe that Baidu’s platform has improved significantly over the past five years in term of predicting what users want and showing latest news and content. It would take around the same time span or more for Qihoo if it were to reach an acceptance level. Furthermore, Baidu provides its users with unique search experience as it incorporates content from its own investments, such as QiYi and Qunar, and partners, such as Tencent, and Sina (NASDAQ: SINA) directly to its search results. It also provides the users with the functionality to search for air tickets and hotels directly on Baidu’s site. Baidu has expanded its mobile platform with voice search, maps, location-based services and many other applications. Baidu has also invested heavily in cloud computing, which is the future of mobile. We believe that it will take considerable time and investment on Qihoo’s part if it seeks to reach the level Baidu is at now.
We will also like to quote an example from Baidu’s US counterpart Google (NASDAQ: GOOG) here. In the past, Microsoft (NASDAQ: MSFT) even with its leading browser market share (Internet Explorer), strong financials, and strong technology knowhow wasn’t able to challenge Google. Looking at Qihoo, we notice that it has a much smaller size than Microsoft, while Baidu has a larger market share in China than Google has in US. While Bing has become the second-largest search engine in the USA, it is a distant No. 2 as Google maintains a stable and dominant 70% market share. Furthermore, we believe that as Qihoo had Google as the original default search engine on its browser, it will mostly eat into the market share of Google, minimally effecting Baidu. We are inclined to even see this as a positive for Baidu as Qihoo is helping Baidu weaken its significant foe, Google which with its vast technology and capital could have been a long term threat for Baidu. Furthermore it is a positive for the Chinese search market as we expect to see offline ads increasingly migrating to search ads with more companies doing their part to educate the advertisers.
Qihoo’s annual investment of $65 million in 2011 is far behind Baidu’s investment of $212 million in 2011. We believe that it is a long way for Qihoo to catch up with Baidu’s products. Browser can draw traffic to search engine, but relevant and good search results can retain users, especially the high-end ones. Qihoo has a large market share in PC browser, but its market share of mobile browser is small. Its mobile investment is behind those of Tencent and Baidu. It has a tense relationship with other leading internet companies when open platform and partnerships are crucial to succeeding in the internet world. We believe that it is a reckless step on Qihoo’s part to challenge Baidu in its core competency and may result in a lot of investment and innovation in the long term on Qihoo’s part. We believe that this news provides investors with an opportunity to buy Baidu on weakness.
TheAnalystBlog has no positions in the stocks mentioned above. The Motley Fool owns shares of Baidu, Google, and Microsoft. Motley Fool newsletter services recommend Baidu, Google, and SINA . Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.