The Chinese search engine market just got a lot more interesting.
Mobile gaming and online chat giant Tencent is shelling out $448 million for a 36.5% stake in Sohu.com's (NASDAQ:SOHU) majority-owned Sogou platform.
Sogou is a distant third in China's search market, but it was widely assumed that Qihoo 360 (UNKNOWN:QIHU.DL) would be the one gobbling it up to have a clearer shot at market giant Baidu (NASDAQ:BIDU).
Sohu's stock naturally opened higher on the news. Qihoo's shares opened lower. The moves make sense. Rumors were swirling earlier this summer that Qihoo would pay up for Sogou, and now Sohu's scoring a major investment without having to give up majority control. Qihoo will now be destined to remain a distant second in this race.
The only marginal surprise here is that Baidu opened slightly higher on the news. It's true that Qihoo becomes a weaker competitor without Sogou to leverage its recent monetization initiatives. However, won't Sogou become a force to reckon with here?
Qihoo was able to get up to speed so quickly in search -- from zero when it launched last summer to as much as 15% of the market by some counts today -- because it merely parlayed its success operating China's leading Internet browser and security software suite. Won't the same thing happen now with Tencent funneling traffic to Sogou?
There's plenty room for several relevant players in the world's most populous nation.
J.P. Morgan made that clear last month when it established bullish ratings and lofty price targets on Qihoo and Baidu last month. Both of those companies are growing faster than the search stars closer to home for stateside investors. Tencent's arrival doesn't necessarily have to be a bad thing. It's not as if search needs any validation. The merits of reaching folks online at the moment that they're looking for something is clearly the sweet spot of online marketing. However, Tencent's grip on young Internet users may make paid search more inviting for a new wave of marketers.
Investors in Baidu and Qihoo don't need to panic just yet. Qihoo's been posting stellar growth from its non-search business, and Baidu's been able to post healthy growth in all competitive climates. Sohu is the clear winner in this deal -- especially if associating itself with Tencent makes Sogou more prolific. However, just because there's a clear winner doesn't mean that everybody else is a loser.