Baidu, Tencent Challenge Qihoo In Security
Security software has remained a relatively quiet product area in China despite its huge potential, largely due to the domination of the market by early entrant Qihoo 360 (NYSE: QIHU). But that looks set to change soon, with the latest reports indicating that search leader Baidu and social networking giant Tencent (HKEx: 700) could be preparing to enter the market with their own rival products.
Qihoo’s early arrival to the market is partly the reason for its dominance in the software security space, but equally important is the fact that its flagship 360 Safe Guard product is free. That reality has made it extremely difficult for foreign security software makers to get a significant piece of the China market, as these specialists make most of their money from product sales.
Qihoo, by comparison, uses its product as a loss-leader to drive customers to its other products, such as its popular web browser and its fast-rising online search site. I also suspect that that Qihoo uses its Safe Guard product to load other unwanted software onto users’ computers to monitor their habits for data mining. Most of the western companies wouldn’t dare to engage in these kinds of practices, since loading unwanted and even invasive software onto customers’ computers would contradict their main mission of making those PCs more secure.
As a result of this reality, the security software space in China has become closed to both foreign companies and most start-ups. The only ones who can challenge Qihoo’s dominance are well-funded big names like Baidu and Tencent, which can also subsidize the security software business with their other money-earning operations.
All that said, let’s take a look at the latest news starting with Tencent, which is investing $47 million to boost its stake in Kingsoft’s (HKEx: 3888) Internet security software unit. (HKEx announcement; Chinese article) After the investment, Tencent’s stake in Kingsoft Internet Security Software Holdings will rise to 18 percent from the previous 10 percent, valuing the unit at nearly $600 million.
At the same time, media are reporting separately that Baidu has launched a beta version of Baidu Guard, a software security product similar to Qihoo’s 360 Safe Guard. (English article) The reports point out that the Baidu product is still in the trial phase, and that only 1,000 downloads are being allowed per day so far.
Baidu’s product is free so far, though it’s unclear if the official version later might carry a price tag. Likewise, the Tencent announcement doesn’t say what role, if any, Tencent will play in the future development of Kingsoft online security products. But I wouldn’t be surprised to see both companies eventually launch free software security products to challenge Qihoo.
Neither Tencent nor Baidu has much love for Qihoo, which would make any future rivalries all the more interesting. Tencent recently won a lawsuit against Qihoo stemming from a major dispute involving Qihoo’s Safe Guard. Baidu has also sparred with Qihoo over much of the last year, after Qihoo launched its so.com site to challenge years of Baidu dominance in China’s online search market.
At the end of the day, I’ll admit that the chief motivation for Tencent and Baidu to launch their own security products is probably more commercial than personal. Both probably realize that Qihoo has gained huge advantage for its other products by offering free security software, even if the company has also become quite controversial.
Baidu probably realizes it could use a similar product to drive traffic to its desktop and mobile search sites, while Tencent could use such a product to drive traffic to its online games. With so much upside potential, it’s no surprise both companies might enter this area. Accordingly, I’d look for Baidu to launch a rival security product bythe end of this year, and for Tencent to follow not long afterwards.
Bottom line: Both Baidu and Tencent are likely to launch free computer security software products in the next 12 months, posing a major challenge to Qihoo’s dominance.
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