Climbing almost 100%, Qihoo 360 (NYSE: QIHU ) was one of China's hottest tech stocks in 2012. But due to a history of user disrespect, Qihoo may not continue its rapid growth. Even if it can, Qihoo shows a growing weakness in one area that it supposedly dominates. All in all, the company's dirty marketing tactics can't gloss over mediocre products. To save your investment, here's more on why you should stay away from this supposed tech giant.
One huge copycat
Once antivirus-software maker Qihoo began to make its move into the web and mobile products, Qihoo seemed to believe that copying was the only way it could beat China's tech giants.
Qihoo committed its dirtiest crime in the browser wars. Though it started 2008 with zero market share, the company quickly catapulted itself to the No. 2 spot by January 2011, second only to Microsoft's Internet Explorer (NASDAQ: MSFT ) . However, unlike competitor Sohu.com's browser (NASDAQ: SOHU ) or Google's Chrome (NASDAQ: GOOG ) , Qihoo didn't seem to believe its product could compete.
Instead, Qihoo decided that it would win with marketing. So CEO Zhou Hongyi snatched the Internet Explorer logo, and gave it a touch of green.
Luckily, China's top browser is made by Microsoft -- and foreign companies always seem to face greater legal barriers when operating in China. So far, Microsoft hasn't built a case against or even responded publicly to Qihoo. And that's saying a lot. Microsoft has a history of working with the Chinese government. For example, Chinese Skype actually lets the government monitor your chats. Had Qihoo stolen the logo of another Chinese company, you can be sure that that the Chinese company would have pushed a legal case to end the 360 Browser. (Note: Government backing is integral to your investments in this region.)
Unfortunately for Qihoo investors, any early gains in the browser market from stealing may be overstated. Despite claims from iResearch China that 300 million of China's 500 million Internet users connect via 360 Browsers, Statcounter calculated that the company only has about 4% of the market. It's difficult to discern the discrepancy in this data, but it's possible that "reach" does not mean regular "use."
For example, the average Chinese user may be like any American. We download several programs, but only use the best one for editing documents, listening to music, and browsing the Internet. If that's the case, then Google Chrome and Apple's (NASDAQ: AAPL ) Safari are actually the second and third most-used browsers in China -- not Qihoo's 360 Browser. As Qihoo does what it can to catch up, Google and Apple should worry that Qihoo doesn't try to shut them out by hijacking their own intellectual property -- be it logos, app icons, or something else.
Combat marketing can't make up for poor, disrespectful products
There are a host of other issues with Qihoo products. If you use the company's antivirus software to rate the "safety" of your computer network and you haven't downloaded the 360 Browser, you'll see false, lower safety scores. You'll also be prompted to use 360 Browser, and nagged to make it your default. Once you do, you'll see even more pop-ups reminding you that the 360 Browser is safer than Internet Explorer.
It's never a great strategy to annoy customers. No respectable company would do that, right? But with Qihoo's share price where it is, investors seem content with their investment. Maybe it's because they like the pirate-like attitude Hongyi brings to marketing and sales.
In November, The Wall Street Journal published a glowing article about Hongyi. And it's clear that Hongyi likes being seen as an underdog founder-entrepreneur. In the article, Hongyi said, "The reason we are always fighting with giants in the Internet space is because we are trying to play a role as a monopoly breaker and change the landscape for good."
To achieve that end, Qihoo has moved into search, maps, and smartphones in the past year. Essentially, Qihoo is trying to unseat Baidu (NASDAQ: BIDU ) as the de facto "Google of China." In addition to reigning as the king of search, Baidu has made huge investments into 3D mapping, a new Lenovo smartphone, and a $1.6 billion cloud computing center. Baidu has shown that it can ship high-quality products. So if Qihoo wants to overtake Baidu, it must do the same. .
Judging by Qihoo and Hongyi's actions, "great products" don't seem to be the company's focus. Even if you forget that Qihoo stole Internet Explorer's logo, it's still clear that Hongyi is a marketer at heart. Just search Hongyi's Weibo ( the "Twitter of China") account, and you'll see him shout down detractors and competitors alike, including Baidu, to his 4.3 million followers. These fights have helped Qihoo garner more attention, and with it, more users.
Hongyi's marketing can only take Qihoo so far. If Hongyi really wants to change China's technological landscape for good, then he has to follow his own advice: respect customers and make better products. He must forget the "mistake" of a career when he once built spam toolbars, get rid of his annoying marketing tactics, and let his browser and other products speak for themselves.
One thing you need to do
If you have shares in Qihoo, I'd seriously consider selling them. If your buy thesis for Qihoo is that it can beat out Baidu and become the Google of China, then you're probably betting on a lot of mainstream media and Wall Street hype. So far, I have yet to see Qihoo make any innovative strides in any of its products.
Ultimately, I see Baidu as a better bet for your investment dollars. The company's 2012 moves into the cloud, mobile operating system, and maps show that it is a quality-focused company, deserving of its throne. Moreover, since Baidu lost 14% of its share price in 2012, I think right now is the perfect time to pick up a great company on the cheap. We've further broken down the dominant Chinese search provider's strength and weaknesses in our brand new premium report. Just click here to access it now.