Tencent Shakes Up Search, Group Buying 腾讯搜搜、高朋网巨

By newsdoug on May 2, 2012

Layoffs and resignations are the main story at Tencent (HKEx: 700) these days, with the head of the company’s group buying joint venture reportedly resigning as China’s Internet leader also makes large job cuts at its Soso search engine. Both of these developments should come as a surprise to no one, and reflect an ongoing consolidation gripping the overheated group buying space in the former case, and a rapidly slowing advertising market in the latter. Let’s look at the group buying situation first, which has reportedly seen the CEO resign at Gaopeng, the 1-year-old group buying joint venture between Tencent and global sector pioneer Groupon (Nasdaq: GRPN). (English article) In fact, Gaopeng has struggled almost from the start due to its relatively late arrival to China’s group buying space, which is now in the midst of a painful consolidation. Reports of mass layoffs at the company began to emerge as early as last summer, and rumors that the company may actually close or merge with another partner continue to bubble up from frequently, with one such report emerging just weeks ago. (previous post) Gaopeng is hardly alone in this sector-wide crisis, which has started to hit even the industry’s largest players. Late last week reports emerged that a number of top managers had resigned at LaShou, in the latest sign of trouble for the industry’s leader that is facing a major cash crunch. (previous post) Others that have shown signs of major distress include 55tuan, as well as Groupon.cn, a homegrown Chinese player that is no relation to the US Groupon. Meantime, Tencent also appears to be scaling back its plans for Soso, its search engine that it hoped would compete with industry titan Baidu (Nasdaq: BIDU) for a share of China’s lucrative market. (English article) The reports are relatively vague, saying simply that Tencent was wavering on whether to sharply reduce the size of the 6-year-old Soso, which employs about 1,300, or to simply close it altogether. In the end it decided on the cutbacks, which will begin when people returned from the May Day holiday, according to the reports, citing an unnamed industry source. This latest move spotlights not only the strong grip that Baidu has on China’s online search market, with more than 70 percent share, but also the fact that the online search sector is also on the cusp of a major slowdown, fueled in part by the loss of advertising revenue from struggling companies like Gaopeng. The advertising slowdown led Baidu to report disappointing results last week, and earlier this week Sohu (Nasdaq: SOHU) also reported a sharp slowdown in the growth of its own online search site, Sogou. (previous post) Look for the painful retrenchment to continue in the group buying space, and for the advertising slowdown to sharply hit the top line of search engines and other companies that depend on such revenues in the months ahead. As the situation deteriorates, I wouldn’t be surprised to see Tencent shutter either Gaopeng or Soso, or possibly both, by the end of the year and quite perhaps much sooner.

Bottom line: Shakeups at Tencent’s online search and group buying units reflect broader industry malaise for both, with one or both units set for potential closure by the end of the year.

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