While there are billions of dollars to be made in online video, search, and online portals, the spoils -- given the fast pace of technology -- often go to the top dog in each industry. Unfortunately for Sohu (NASDAQ:SOHU), it competes in each business but dominates in none of them. No matter which industry you're analyzing, it seems that giants Baidu (NASDAQ:BIDU), Qihoo 360 (UNKNOWN:QIHU.DL), Youku Tudou (UNKNOWN:YOKU.DL), and SINA (NASDAQ:SINA) are dominating the competition.
Here's what you need to know about China's tech landscape before you invest in Sohu or any of its competitors.
1. Online video is consolidating.
Back in the company's fourth-quarter report, Sohu reported great traction for its TV segment. Online viewership jumped about 136% quarter over quarter thanks to demand for foreign TV -- shows like America's Breaking Bad. Unfortunately, any traction Sohu may have hoped for may soon halt.
Recently, Baidu snatched up Shanghai-basied video provider PPS for $370 million. While the company's video site iQiyi already has a great selection of domestic, long-form content -- which helped it earn its name the "Hulu of China" -- it didn't have many foreign shows. With this deal, Baidu can now squeeze out competitors like Sohu out of the foreign content realm.
While you may think Sohu has other niches to go into, it really doesn't. On the other end of the online video market is Youku Tudou. Not only is the company the largest place to watch user-generated content, but it is also building out a library of long-form content akin to Baidu iQiyi ! As Youku Tudou and Baidu iQiyi mimic each other for dominance, it's clear: The online video market is consolidating fast and fringe competitors like Sohu seem unable to capture the content libraries needed to draw in eyeballs.
2. Baidu and Qihoo dominate search.
You may have read differing statistics on China's search market, but one thing is for sure: Baidu is still the top dog in search. Over the past year, its market share fell as low as 50%. Whatever the case, Baidu still leads with about 80% of the search market.
Coming in second is Qihoo with about 12% of the search market. While that may seem like a huge difference, it's not. About a year ago, Qihoo had 0% of the market share. So, the fact that the company came into this industry and zoomed past Sohu's Sogou.com is nothing to sneeze at. As Qihoo looks to further increase its search market share, you can bet that Sogou.com is going to lose even more. Who knows, soon it'll go from 5% to zip.
3. Online portals are evolving.
Now, it may seem that Sohu's old bread-and-butter -- it's online portal business -- may have something going for it. According to Alexa.com, Sohu ranks as the 10th most visited website in China. Unfortunately, Tencent and SINA have even better online portals. Tencent's QQ.com is the second, while SINA.com is fourth. .
That in and of itself may not mean much. But keep in mind that China is moving to mobile fast. Mobile penetration already outpaces desktop Internet penetration. Put it all together and you can see how Sohu is in deep trouble.
Unlike SINA and Tencent, Sohu doesn't have a popular mobile channel.
SINA has its microblogging platform, Weibo, while Tencent has WeChat, a social network and communication app. Each of these platforms is reported to have at least 400 million registered users. With such great mobile adoption, Tencent and SINA will soon be able to offer content on mobile more easily. Once they do, Sohu investors may lose even more profits.
Is it time to buy?
Despite a 50% run-up in its stock over the past year, Sohu doesn't seem to be "killing it" in any market. It has no competitive moat. So, if I were you, I'd sell a couple of Sohu's shares and look closer into buying one of Sohu's competitors.
Fool contributor Kevin Chen owns shares of Baidu. You can follow him on Twitter at @TMFKang or on Google+. The Motley Fool recommends SINA and Sohu.com. It recommends and owns shares of Baidu. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.