CELLPHONES: Qihoo Challenges Alibaba, Xiaomi With Mobile OS
Bottom line: Qihoo’s new smartphones, including its self-developed mobile OS, could perform well due to its strong software development record, potentially bringing some excitement back to its stock later this year.
I don’t usually have lots of positive things to say about Qihoo 360 (NYSE: QIHU), but I’ll admit I’m quite intrigued by the latest word that the security software specialist is preparing to roll out its own mobile operating system (OS). The new system, to be called 360 OS, will be based on Google’s (Nasdaq: GOOG) popular Android OS, so in that regard it will vie with many other Android variations in the market. But regardless of that, I would expect this new OS could quickly become a major player in the fiercely competitive space, drawing on Qihoo’s record as one of China’s savviest and oldest software and Internet product developers.
Qihoo made headlines late last year when it pumped $410 million into a new joint venture with Coolpad (HKEx: 2369), a company that is one of China’s leading homegrown smartphone makers but one that is also struggling due to fierce competition at the low end of the market. This new OS was clearly in the works before that deal was announced, but appears to be part of Qihoo’s broader strategy to deliver its popular Internet and security software products over its own-branded phones.
Word of the OS first appeared in comments during the company’s quarterly earnings call last week, and now company executives have been quietly providing more details in a build-up to the release of the first Qihoo phones. The comments from an executive only say the first phones are likely to come out in the next few months and don’t provide more concrete details, focusing instead on the strategic reasons for developing Qihoo’s own OS to load on its smartphones. (Chinese article)
I’m not sure if I agree with the argument that any serious Internet company needs its own smartphones and mobile OS, though other Chinese giants like Alibaba (NYSE: BABA) are following a similar strategy. Search leader Baidu (Nasdaq: BIDU) was also following a variation of that strategy by developing its own OS, though it could soon abandon that path after a core group from its OS team jumped ship earlier this month to go to domestic smartphone maker Meizu. (previous post)
All that said, let’s return to why I’m so positive on the chances of success for Qihoo’s foray into the smartphone OS business. The reason is simple, namely that the company’s founder Zhou Hongyi has one of the industry’s best track records for creating top-notch software products and Internet services, despite his outspoken nature and sometimes ethically dubious business practices.
Zhou first rose to prominence more than a decade ago as founder and creator of 3721, a search engine that was the country’s leading player when it was purchased by Yahoo (Nasdaq: YHOO) in 2003. Later Zhou left that company and founded Qihoo, which now produces some of China’s most popular security software and one of the nation’s top Internet browsers. Most recently, he has launched a search engine, Haosou, which has risen rapidly to pose a serious challenger to entrenched leader Baidu just 2 years after its founding.
Very few companies in China can boast such a track record for consistently developing hit software products and services. One of the few that comes close is Tencent (HKEx: 700), though even there the company’s strength lies mostly in social networking and gaming-related products. By comparison, Zhou and Qihoo seem to have a broader ability in many different areas, and also a good understanding of where industries are headed.
Qihoo’s shares have gotten battered lately, losing more than half their value over the last 7 months as investors grow impatient over monetization for its search business. Positive reviews and strong early sales for its new smartphones later this year could bring some much-needed excitement back to the company, perhaps providing a boost to its stock in the second half of the year.
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