Caixin
Jul 29, 2020 06:42 PM
TECH TALK

Tech Talk: Could Tencent Turn ‘Search Dog’ Sogou Into Baidu-Killer?

First it was internet stalwart Sina that launched a privatization bid earlier this month. Now another one of China’s oldest internet names, Sohu, is making its own privatization headlines, this time with its announcement of a buyout bid for its separately listed Sogou search unit, a longtime second- or third-fiddle to 500-pound gorilla Baidu.

What makes this headline interesting is the company offering to take Sogou private, which is internet titan Tencent. Also of interest is what this might signal about Sohu’s own future, given this kind of a sale looks quite unusual for Sohu’s control-freak founder Charles Zhang, who, like myself, is now in his mid-50s and perhaps might be starting to think about retirement.

The bigger picture in this story is that yet another company appears to be stepping up to try and challenge Baidu’s decade-long stranglehold on China’s search market. Sogou, whose name means “search dog,” as well as the So.com search site owned by security software specialist 360, are the only two companies to make serious challenges to Baidu over the last decade, with very little success.

A Chinese version of Microsoft’s Bing has also been a longtime player in the market, but has very little to show for all the effort. Google was once the market’s leader way back when, but was already running second to a surging Baidu when it pulled out from China in 2010. Many will remember Google was planning to make a second go at the China market in 2018 when it suddenly had second thoughts after the plan was outed and controversy erupted.

Others have come and gone, including a challenge by Alibaba long ago and a more recent one by up-and-comer ByteDance. But this latest one by Tencent could be one of the more serious ones we’ve seen in quite a while.

Sohu announced the privatization bid earlier this week, saying Tencent was offering a handsome 56.5% premium to its latest closing price. This looks like effectively a done deal, since Tencent currently holds 52% of Sogou’s voting rights and 39% of its shares. That means it would have to buy the remaining 60%, of Sogou’s shares, which at the company’s current market cap would translate to about $2 billion — a drop in the bucket for Tencent.

What surprised me slightly was that Charles Zhang, who previously always liked to call the shots and probably would have rejected such a deal a few years ago, said he would also vote his modest 0.9% of Sogou’s voting shares in favor of the Tencent offer.

China internet historians will recall that Tencent got its big Sogou stake after it combined its own internet search engine Soso with Sogou back in 2013. Many predicted at the time the combined entity could become a major new force, though it has yet to realize that kind of potential.

Still far behind

I did a bit of research about Sogou’s latest market position, and most of the stats are pretty consistent. Sogou is still about a tenth the size of Baidu, though it may be closing the gap. Last year Baidu posted $11.2 billion in search revenue, almost exactly 10 times Sogou’s $1.1 billion. But while Baidu’s 2019 figure was down 5% from the previous year, Sogou’s was up 5%. That trend appeared to continue in the first quarter, with Baidu’s revenue falling 19% year-on-year while Sogou managed to eke out a 1% gain during the difficult Covid-19 pandemic.

Data from online research house Analysys paints a similar picture, with Sogou hosting 31.5 million monthly average users in June, compared with Baidu’s 387 million.

All that said, I did an informal poll on WeChat to see what average people were saying, and was slightly surprised at what I found. Whereas in the past almost everyone would say they used Baidu exclusively and had been for a while, quite a few said they now use a combination of Baidu and Google, even though the latter still requires special software to skirt China’s infamous firewall.

Equally surprising was the number of times Sogou’s name came up in my highly limited sample, often in connection with its ability to search content on WeChat, most notably WeChat public accounts. This appears to be one of Sogou’s biggest edges over Baidu, and one that could grow considerably if Tencent moves to further integrate Sogou into its WeChat ecosystem.

Search is a huge business, as we can see from Baidu’s numbers. Accordingly, Tencent would have every reason to feature a new-and-improved Sogou prominently in the WeChat ecosystem to try to entice people to do their searching there. I’m a classic case of someone who might consider using such a function. I’m too lazy to download too many individual apps, and typically do my shopping on JD.com and call Didi’s car service on portals inside the WeChat ecosystem.

It seems I’ve given good odds to most of the other challengers over the years, even though all ultimately failed. So perhaps my credibility is a bit shot by now. But I would still give a Tencent-Sogou combo a relatively high chance of taking share from Baidu with this latest move — especially given the constant complaints you hear about Baidu’s pervasive stealth ads and other deceptive and annoying habits.

I’ll close out this column with a few quick thoughts on what the Sogou sale might mean for Sohu and its founder Charles Zhang, which I previously mentioned at the outset of this column. As I said at the top, Zhang was an internet pioneer when he took Sohu public on the Nasdaq around the turn of the millennium, right around the same time as China’s other two internet stalwarts, Sina and NetEase.

NetEase has easily been the most successful of those three, though Sina has also had some success with its Twitter-like Weibo service. Sohu has been the least successful, despite Zhang’s many efforts in areas like video, games and search, in addition to its original portal business.

Part of the problem is that Zhang just doesn’t know when to call it quits, which is why this decision to sell Sogou to Tencent looks like a major shift in his attitude. He already privatized his game unit, Changyou earlier this year. This latest move could signal that he might finally be thinking of passing on the torch by perhaps privatizing or selling what remains of his Sohu empire, which is now valued at just $680 million and could be easily acquired.

Doug Young has lived in Greater China for two decades, including a 10-year stint at Reuters, where he led China corporate news coverage. Send your questions or comments to DougYoung@caixin.com

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