(Yicai Global) Nov. 17 -- Two books published earlier this year, The Electronic Version of Tencent’s Story, and Disruptor, have shed some light on little-known stories related to the 3Q War, the tit-for-tat battle that took place between Chinese internet giants Qihoo 360 Technology Co. and Tencent Holdings Ltd. [HK:0700] (through its instant messaging platform, QQ), widely seen as a milestone in the history of the internet in China.
The first book was written by well-known Chinese financial columnist Wu Xiaobo from Tencent’s perspective, while the second is a first-hand account by Qihoo’s founder Zhou Hongyi, who was personally involved in the legal wrangle.
When the 3Q War broke out in 2010, Zhou initially targeted Baidu Inc. [NASDAQ:BIDU] as a means of vengeance for the defeat of his previous firms, 3721 and Yahoo China in the country’s search engine market. At first, he planned to ‘bring Baidu to justice’ for its unscrupulous pay-per-click ranking practices, but he changed the direction of his vendetta toward Tencent following the latter’s fierce assault on the antivirus software market.
Zhou was holidaying in Hainan during the Spring Festival 2010, when Qihoo president Qi Xiangdong called him saying that “QQ Doctor, Tencent’s copycat version of Qihoo 360 Safe antivirus software, has started bundling its package, preinstalled in personal computer,” and that all QQ users had been asked to install QQ Doctor when they connected to the internet. Antivirus applications are not compatible with each other by nature, meaning that running two antivirus programs side-by-side on a computer seriously slows down processing speeds, and the user has to uninstall one of them to avoid a crash. The move marked Tencent’s arrival in the online security market.
“QQ Doctor and 360 Safe have many overlapping functions, and even the user interfaces are very similar…if the situation continued, all PC security clients could have been replaced by QQ Doctor before the Spring Festival holiday season came to an end, bringing total destruction to the business model and user base that Qihoo established through many years of hard work and free service,” Zhou wrote in the book.
He called Tencent’s founder, Pony Ma, asking him to stop bundling the QQ computer safeguard with the messenger software. Ma sounded affable on the phone and promised that “Tencent will never be a fatal threat to Qihoo”, but his words carried a strong overtone that Tencent was determined to branch out into the antivirus business.
The conversation ended in discord. Zhou called back his employees to work out a countermeasure, and the team developed ‘360 privacy safeguard’ in the following week, a well-targeted add-on that monitors all background operations. In response, Tencent formed an alliance with several other companies jointly accusing Qihoo of “slanderously describing QQ’s safety check modules as user privacy scanning tools. They found that any third-party apps renamed as QQ.exe would trigger a privacy intrusion warning.
The 3Q War erupted and kept escalating. What started as technology rivalry evolved into a public relations battle and eventually became a legal wrangle. Zhou Hongyi spent his 41st birthday in the office all day and night. Zhou released his ‘nuclear bomb’ -- 360 Koukou Bodyguard -- on Oct. 29 that year, which happened to be the 40th birthday of Pony Ma, who is one year younger than Zhou. Offering privacy protection, anti-account theft, QQ ads filter and QQ junk clean-up features, the app was installed more than 10 million times within 72 hours after release. Furthermore, the program allows users to link the security button on the QQ dashboard directly to itself.
The rival app crippled Tencent’s ads operations, and Ma avowed that “all users may be wiped out in three days”. The firm declared “360 Koukou Bodyguard as an illegitimate add-on” in a public statement, and someone reported the case to the national police authorities alleging that “[Qihoo] 360’s countermove constituted a ‘criminal offense’ because the firm damaged the QQ software and computer systems.”
The situation escalated
More than 30 police officers appeared at Qihoo’s headquarters near the Sihui flyover in Beijing. On his way back to the office, Zhou got a phone call from Qi Xiangdong, who told him to leave the country as soon as possible. “Run wherever you can go now. We can sort it out later,” Qi said.
Zhou fumbled for his passport in the car and told the driver to go to the capital airport. At that time he had valid visas for Hong Kong, Japan and the US. The internet mogul had bought a house in Hong Kong, so he thought that Hong Kong was his best choice, and fled to the city on the next flight.
In the memoir, he described what happened on that day using a line from Silicon Valley venture capitalist Ben Horowitz’s book The Hard Thing About Hard Things -- “The hard thing isn't dreaming big. The hard thing is waking up in the middle of the night in a cold sweat when the dream turns into a nightmare.”
A few days later, Tencent published a ‘letter to all QQ users in the country’ in a QQ pop-up on the night of Nov. 3. It was an ultimatum given to tens of millions of QQ users -- “QQ will be disabled on all computers installed with Qihoo’s software”.
“This business crisis is worse than all the others that I came across in my entire life…the magnitude of the situation was beyond my imagination, and it seemed that we’d lost the final control on the matter…the rivalry between the two firms apart, it forced hundreds of millions of internet users to give up their habitual way of using their computers, and to make a choice between social media and security,” Zhou wrote in the book.
The ‘take it or leave it’ ultimatum led to a dramatic increase in the number of users uninstalling Qihoo’s products. The firm’s market share went into free fall. Qihoo’s vice president Tan Xiaosheng instructed all core staff members to change their phone numbers to avoid interceptors, and to communicate on Skype International via virtual private networks (VPNs).
User losses are not the worst part of it. After the spat, Qihoo had to abort its American initial public offering plan after the lead underwriter pulled out without any warning. Zhou and his colleagues did not have any prior experience of the capital market, and the situation threw the team into a panic. Realizing that it was a life and death situation, Zhou asked famous Chinese billionaire liberal activist Wang Gongquan to mediate, but Ma still refused to make peace.
Downloads of 360 Koukou Bodyguard hit 17 million on Nov. 4, but Qihoo compromised and announced its decision to delist the product in a public letter. Users were told to uninstall the software in a pop-up notification. At the same time, the co-underwriter UBS Group AG [VTX:UBSG] agreed to take over the lead underwriter’s position for the IPO, and Qihoo finally kicked off preparations for the stock listing.
On the following day, the Ministry of Industry and Information Technology and the Internet Society of China ordered both firms to put an end to the confrontation.
Compatibility between 360 software and QQ had been restored, Qihoo said in a statement five days later.
The 3Q War came to an abrupt end, but the companies were embroiled in lengthy litigation and counter-litigation in the following four years. In the end, Qihoo lost its antitrust suit against Tencent.
Despite the regrettable outcome, Zhou wrote in the book: “As soon as the 3Q War started, Tencent reflected upon its business model, and gradually transformed its old organic-growth-based ‘internet empire’ model into a business ecosystem in which Tencent, as the central player, could continuously grow through acquisitions, investment and mergers. The company became more open-minded, more powerful and more respectable. Today, it has established itself as the dominant player, throwing the competition into the shade.”
He summed up his experience of the 3Q War using a well-known saying by Silicon Valley venture capitalist Ben Horowitz -- “Building a company is a lot like boxing…you must be ready to be pummeled again and again…when the adrenaline is gone and you feel that pain…And then you fight the next round.”