1 Company Killing Google and Raking in Profits

Baidu (NASDAQ: BIDU  ) is scrambling, Google (NASDAQ: GOOGL  ) is dying -- but Qihoo is just getting started in China.

Although the company was a relative unknown  for many U.S. investors a few months ago, they're now clamoring to get in on Qihoo (NYSE: QIHU  ) . Over the past six months, its stock has jumped 32%.

Before you jump on the bandwagon, here's what you need to know about this new search competitor, and how it subverted China's search market.

The winners and losers in Chinese search
Since Qihoo 360 launched its search engine in August, Baidu and Google have seen their search market share recede. Data from The Next Web and Investors.com suggests that Qihoo has captured the No. 2 spot in Chinese search.

Company

Page Views Before (Q2 2012)

Page Views After (Q3 2012)

Baidu

79.5%

73%

Qihoo 360

0%

9.6%

Google

16.2 %

4.7%

Sources: Investors.com and CNZZ via Fool.com.

After losing 6.5% of the market in a few short months, Baidu's once-enviable market share no longer seems impenetrable. Beyond Qihoo, Baidu is battling domestic competitor Sohu (NASDAQ: SOHU  ) , whose Sogou search engine now commands 7.8% of the market (Sohu's Q2 2012 market share is not listed). However, Baidu has nothing to worry about. I've mentioned before how Baidu is making the necessary investments to win China through mobile.

The only company that needs to worry is Google. In just one quarter, the company lost more than 10% of China's search market.

How Qihoo beat Google
Capitalizing on its brand as an antivirus-software maker, Qihoo has marketed itself as a purveyor of Internet safety products. In the process, the company has created one of the most popular desktop browsers in China. And through its browser, Qihoo has driven users to its homepage, where it sells ads and links.

Up to the second quarter of 2012, Qihoo had long used Google as the default search engine on its browser. But seeing competition intensify across the Chinese Internet, Qihoo decided to once again diversify. By creating its own search engine, Qihoo intelligently and quickly converted its browser users into search engine users. Qihoo has continued to build out network effects across its services. Recently, the company launched a music search engine, a mobile optimized site, a map function, and even low-end smartphones.

Given Baidu's dominance, Qihoo CEO Zhou Hongyi has continued to pitch its new strategy as a fight between David and Goliath. Though the statements were targeted at Baidu, Hongyi's PR actions have probably also helped its fight against Google.

Altogether, the company's moves have severely hampered Google's operations, while helping Qihoo far outstrip its competitors' quarterly revenue growth.

Company

Q3 2011 Sales

Q3 2012 Sales

Change

Baidu

$645.7 million

$994.6 million

49.7%*

Qihoo 360

$47.5 million

$84.0 million

76.8%

Sohu

$232.9 million

$285.4 million

22.5%

Google

$9.7 billion

$14.1 billion

45.1%

Yandex (NASDAQ: YNDX  )

$166.8 million

$235.2 million

41%

Sources: company 10-Qs. Yandex is shown here for comparison.*Baidu calculates change in yuan before conversion to U.S. dollars.

Keep in mind, Google's numbers here don't reflect its Chinese revenue, but its worldwide revenue. In the company's 2011 and 2012 Q3 10-Q, the search giant only disclosed that it received around 42% of its revenues from non-U.S. and non-U.K. operations. As a result, Google's revenue growth seems in line with other diversified search giants that dominate their country, like Baidu and the "Google of Russia," Yandex.

Google's China problems
Of course, perhaps the biggest reason for Google's failings is the Chinese government. In the past, China's government frequently disrupted Google's search, email, and other services. And by 2010, Google had enough; it decided to move its operations to Hong Kong to bypass Chinese censorship policies.

Many thought Baidu would profit most. Instead, it seems that Google fared better than expected. But with Qihoo's entry into the market and its competitive advantages as an evolving antivirus software maker, it may not be long before Qihoo hammers the final nail in Google's coffin.

Despite that bleak outlook, Google may be able to get back into the game. Right now, Baidu and Qihoo are trying to figure out how to adapt to mobile, while Google's Android owns 90% of the smartphone market. 

Regardless of your short-term view on the Chinese economy, there may be opportunity in Baidu. Our brand-new premium report breaks down the dominant Chinese search provider's strengths and weaknesses. Just click here to access it now.


Read/Post Comments (3) | Recommend This Article (5)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On December 13, 2012, at 6:32 PM, Mega wrote:

    I don't think it's a good idea to take Qihoo's numbers at face value. The CEO has been in extensive legal trouble in the past decade, and the ad rates and pageviews they report are just not believable.

  • Report this Comment On December 13, 2012, at 10:10 PM, vv234 wrote:

    I heard that Qihoo does not have a good reputation among Chinese users because of the sneaky/scaring tactic they used to get people to use their so-called antivirus product and browser, similar to MS with IE in the past. Not sure how long this tactic can last.

  • Report this Comment On December 14, 2012, at 1:31 AM, TMFKang wrote:

    Hi MegaShort and vv234,

    Mmhmm, I've read about the Qihoo CEO myself. Do you two happen to have any articles, documents that I can use for further research into the CEO?

    Thanks,

    Kevin

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