At the end of last week, Tencent Holdings, the world’s third largest internet company (next to Google and Amazon), agreed to buy a 15.7% stake in Kingsoft Corp, a major player in the Chinese security software market, for HK$892 million (US$115 million). Tencent will purchase 111.5 million shares from Kingsoft CEO Kau Pak-kwan and 66.9 million shares from non-executive director Cheung Shuen-lung. According to Kingsoft, the deal is scheduled to be completed on July 21. The purchase is believed to boost Tencent’s leadership in China’s online gaming and instant messaging markets through the cooperation with Kingsoft, which has an established significant R&D capability. But, is this all?
Tencent’s Move onto Qihoo 360′s Turf
Kingsoft and Tencent together account for more than 20% of the local market for security software, following Qihoo 360 Technology Co., according to Morgan Stanley. With this Kingsoft deal, Tencent is positioning itself to become further engaged in the computer security market while Kingsoft expects to return to the mainstream market with its security products. Given the history of disputes and public drama between Tencent and Qihoo 360 with their “3Q war” of last year, and their recent “2nd season of the 3Q war” involving word-battles on Sina Weibo, this $115 million purchase can only be a strategic move aimed at challenging Qihoo 360 on their own turf by strengthening Tencent’s internet security shortcomings through its cooperation with Kingsoft.
Morgan Stanley believes Kingsoft and Tencent’s strategic alliance is positive for the latter, and the importance of Internet security has become increasingly important in China. The China Internet Network Information Center data shows that about 46% of Chinese Internet users have encountered malicious software and computer virus attacks, and Tencent hopes to benefit from Kingsoft’s 14 years of experience in Internet security in its competition with Qihoo360. iResearch data shows that Tencent Internet security software consists of only about 12% of the market share. If combined with Kingsoft, the software packages together will cover both about 20% of Chinese Internet users – pulling up as second to Qihoo 360.
Tencent’s Power Plays
This deal is Tencent’s fifth investment this year. The company has made a series of investments this year valued at more than RMB 2 billion.
- In January, Tencent officially established a fund worth RMB 5 billion for investing in “high quality” companies in the internet and entertainment industries over the next 3 years. In April, it used RMB 500 million of that fund to create a film and television fund.
- On May 9th, Tencent completed a strategic investment worth an aggregate RMB 450 million in Huayi Bros Media Group. (300027.SZ), one of the biggest entertainment companies in China, acquiring 4.6% of the company’s shares.
- On May 17th, Tencent, made a strategic investment in a leading local online travel service provider, eLong Inc. (NASDAQ:LONG), acquiring 16% of the outstanding shares for a total purchase price of $84.4 million.
- On May 30th, it invested $50 million in the C-round financing of OKbuy.com, a leading online footwear store in China, and a month later invested RMB 700 million in a fund operated by Innovation Works to support early stage Chinese internet companies.
- On the 10th of June, Tencent invested RMB 10 million in online mother community, Mama Network.
- On the 21st June, Tencent invested $10 million in online diamond B2C platform, Kela.cn.
It is clear that Tencent is on its way to building an Internet empire, and Internet security is one of the major pieces of the puzzle. It is also clear that after the dispute with Qihoo 360, it has become a strategic mission for Tencent to “take captive the Internet security market”. On the other hand, with Qihoo 360’s launch of its open platform last month, it becomes not only the major competitor in Internet security, but also to Tencent’s Open Platform strategy. What we’ve seen so far, the dispute between Tencent and Qihoo 360 has only begun, and we can expect to see many more power plays from both sides of this battle.