The public row between Tencent (0700.HK) and Qihoo 360 has been a melodramatic affair. Highlights included a Tencent PR rep breaking down in tears at a press conference, claims that Qihoo uses pornography to peddle its products, and a Qihoo statement accusing Tencent and its allies Baidu (BIDU.NASDAQ) and antivirus competitor Kingsoft (3888.HK) of "jointly conspiring to do evil."
Not satisfied with jeremiads in the press, both companies also attempted to coerce their users into abandoning each others’ products. Had a consortium of regulatory authorities led by the Ministry of Industry and Information Technology (MIIT) not stepped in, the issue seemed destined to be settled at dawn by gangs of ax-hurling thugs.
The trouble began with Tencent’s aggressive move into the mainland antivirus software market, previously dominated (at 70%) by Qihoo’s 360 Guard product. Qihoo’s antivirus software is free, and therefore popular, but Tencent’s QQ instant messaging client automatically installed its competing antivirus product, QQ Doctor, on users’ machines. QQ Doctor quickly snatched up a 40% share of the antivirus market, mostly at Qihoo’s expense.
Qihoo’s response was panic. It claimed (with some justification) that the QQ chat client doubles as spyware that records users’ private information; it then updated its software to block QQ operations, including the advertising delivery channel. Tencent responded in kind, requiring QQ users to uninstall 360 Guard.
In the end, both companies lost. Qihoo and Tencent finally backed down from blocking each other, but opinion polls show their reputations have taken a sizable hit. Tencent has come off worse: Users have begun to migrate to QQ’s main competitor, Microsoft’s (MSFT.NASDAQ) Live Messenger chat client. Compounding Tencent’s woes, a consumer rights organization has filed a US$186 million anti-monopoly lawsuit against the firm.
The wider software and internet sector also lost face. State media pundits have used the issue as a basis for lobbying for increased regulatory control of the sector. Government meddling in such a technologically nuanced arena would inevitably be clumsy, and an obstacle to overall growth.
But if Chinese firms continue to focus on punching below the belt instead of providing a better product to customers, it will be difficult to argue that intervention is unnecessary.