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Zhou Hongyi: Decoding Qihoo 360
Summary:2012 has been an eventful year for Qihoo. In April, the latest installment of a long string of litigation with Tencent over monopolistic practices began. Then in July, Qihoo was accused of falsifying its traffic volume and exaggerating revenue from certain platforms. Last week, new claims that the company had


By Yang Yang (杨阳) and Wang Fan (王凡)
Issue 582, August 13, 2012
Corporation, page 25
Translated by Wang Fan
Original article:

Wearing a black polo, CEO Zhou Hongyi (周鸿祎) sits leisurely in his office describing the twists and turns of the IT industry and how they affect his Qihoo 360 Technology Co Ltd, which deals in online platforms, gaming, anti-virus software and now mobile phones.

There's no desk in the office. What stands out is a huge stereo system and piles of CDs that take up half the room. Zhou hasn't turned the system on for over half a year though. Lately he's been preoccupied with launching his company's new smart phones, dealing with falsification of traffic data claims, and engaging in an online feud with Lei Jun, CEO of rival mobile phone giant Xiaomi Tech.

Across from the stereo system on a glass table sits a Xiaomi first-generation MI-ONE smart phone.

"I bought it myself," Zhou said, "I wanted to see how the phone worked."

Beside the MI-ONE is a toy penguin given to Zhou by a friend on the first anniversary of Qihoo's initial public offering. The logo of "OICQ" is printed on it, denoting the previous incarnation of Tencent QQ – another bitter rival of Qihoo.

2012 has been an eventful year for Qihoo. In April, the latest installment of a long string of litigation with Tencent over monopolistic practices began. Then in July, Qihoo was accused of falsifying its traffic volume and exaggerating revenue from certain platforms. When the group Anonymous Analytics made the initial accusation, Qihoo's stock price fell 7.5 percent. Last week, Qihoo's troubles continued with new claims that the company had "faked" a Microsoft security patch in order to force installation of its own browser.

Many of these issues have yet to be resolved, but they haven't stopped Qihoo from having a record year and launching several new initiatives. Zhou has attempted to quell doubts about his company by saying that Qihoo isn't mysterious, but it's not a simple story either.

Complicated Story

Before Qihoo went public, Zhou Hongyi highlighted the value of "security software" by explaining to his US investors that "after news, search, and e-commerce, 'security' is the next big thing of the internet age."

However, Qihoo's financial statements reveal that its main source of its revenue is online advertising rather than anti-virus software.

According to Zhou, Qihoo has only two major sources of revenue, which are both based on the 360 Secure Browser. One is advertising associated with traffic direction and searching activities on the directory page, and the other is web game recommendation within the browser.

To the confusion of many US investors, Qihoo doesn't use an advertising model quite like that of Yahoo!, which has revenue determined directly by page views. Qihoo enters users' computers through its free anti-virus software and relies on its 360 Secure Browser to monetize its web directory.

According to Xu Zuoli, the company's CFO, about 50 percent of Qihoo's browser users set the 360 web directory (hao.360.cn) as their homepage. Traffic directed to other websites via the web directory then generates advertising revenue for Qihoo.

Web gaming has also reportedly become an increasingly important source of revenue for Qihoo. However, this is the platform where much of the suspicion over exaggerating user statistics and revenue originated from.

Outstanding Performance

In the first quarter of 2012, Qihoo 360's revenue reached $69 million, which was 41 percent of 2011's total annual revenue. The increase in Qihoo's revenue is largely attributed to price inflation on the 360 web directory. Important links are currently sold at between 700,000 and 1 million yuan.

The price of popular links on Baidu's web directory (hao123.com) is even higher at over 1 million yuan. The surge in advertising link prices is mainly the result of e-commerce websites desperately trying to rope in more users by throwing money at directory pages and search engines.

This cut-throat competition in the e-commerce market has greatly benefited Qihoo. In 2010, the average price of an advertising link in the "top section" of the 360 web directory was only around 100,000 yuan. However, the price of some links approached 1 million yuan at the beginning of 2011, and by mid-year most links were being decided according to a new bidding system.

The 360 web directory stood out from other smaller competitors in 2011, narrowing the gap between itself and Baidu's hao123.com web directory. The web directory market has gradually narrowed its focus to these two giants.

Penetrating the Smart Phone Market

The number of advertising links is limited though and the price can't keep rising forever.

"It's still too early to talk about the ceiling of Qihoo's development," said Zhou Hongyi.

He explained that three things have been done to ensure Qihoo's stable growth: A customizable homepage, a vertical portal with video and other features to maximize the time users spend on the web directory and recommendations of other websites - which are displayed on the side of the screen while users are browsing.

What concerns Zhou the most is the supplanting of cable internet by wireless internet. Success on PCs may not be duplicated on smart phones.

In the mobile internet industry, Apple's iOS and Microsoft's operating systems are very exclusive, leaving little room for Qihoo 360 and other security software developers. It leaves cooperation with Google's Android as one of the only routes to penetrating mobile. Zhou didn't completely agree with this take though and deemed it shortsighted.

Some experts in the mobile internet industry argue that the real purpose of Qihoo 360 launching smart phones is to prevent competitors from getting into the industry. By cooperating with phone manufacturers, 360 security software can obtain a root certificate, which allows for mandatory installation of 360 apps (which can't be deleted) in smart phones. This would allow Qihoo 360 to uninstall mobile phone apps produced by other companies.

Zhou refuted this speculation, saying that users can freely delete apps of Qihoo 360 in specially-supplied smart phones.

"The most important task for the company is to open its platforms," Zhou said.

According to a research report released by CCID Consulting at the end of July, the number of active users in the Chinese mobile phone security market had reached 180 million by June 2012; of which Qihoo claimed about 70 percent.

CEO Without a Sense of Security

Zhou Hongyi is seen as a tough figure to many, but he admitted that he's never felt a sense of security, which he regards as pre-requisite for entrepreneurs to move forward.

"It has gotten better since we opened our platforms," said Zhou. "I've made more friends in the industry."

Monetization of Qihoo 360's more than 400 million users has never been a concern for Zhou. What really concerns him is the impact of wireless internet.

"When people start to surf the Internet wirelessly, changes will happen in terms of their browsing behavior and also when, how and how long they go online," Zhou said. "This is when the business model applicable to PCs may start to become useless."

Zhou regards Tencent as the only company that's earned a ticket on Noah's Ark since its smart phone messaging app WeChat (Pinyin: Weixin) has proven successful. Registered users of this app had reached 100 million by March 2012.

Zhou's sense of security won't come from the company's 400 million users, but rather a major mobile phone app with a solid user base ... if Qihoo can come up with it.

Compared to WeChat, 360 Mobile Safeguard as a security app, "still lacks some interaction with users," Zhou said.

Rumors have also been circulating that Qihoo 360 will launch search engine services, which might make Baidu the company's next major rival.

Zhou didn't directly respond to this possibility.

"We are still thinking about it," he said. "The number of 360 Security Browser users has exceeded 100 million, and it seems that Qihoo 360 has an advantage in providing search services."

This article was edited by Eric Fish


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