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Is It Time to Sell Qihoo 360 Technology Co Ltd (QIHU)?

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On Jan. 24, the Chinese government finally admitted it: It doesn’t like Qihoo 360 Technology Co Ltd (NYSE:QIHU).

In its official warning, Beijing listed six “acts of unfair competition” that the company must stop, or it might face sanctions or even a shut down. Although that may seem unlikely, Qihoo has hurt the whole Chinese tech economy more than any other company in recent memory. Here’s why the government stepped in, and what it means for Qihoo’s future as a business and investment.

Qihoo 360 Technology6 “Acts of Unfair Competition”
The Chinese government dealt a huge blow to Qihoo. By warning that it must stop its “acts of unfair competition” in the desktop browser space, the government reprimanded Qihoo for abusing its power as an anti-virus security suite. Here are the six tactics that the government denounces:

  1. Making its security suite difficult to uninstall.
  2. Preventing users from installing competitors’ software by noting (fake) incompatibility.
  3. Warning users that their non-Qihoo browser is unsafe.
  4. Tricking users to install Qihoo’s 360 Browser through default settings.
  5. Forcing security updates to change users’ browser and homepage settings.
  6. Tricking users into downloading the 360 Browser as an official patch from Microsoft Corporation (NASDAQ:MSFT) .

As if out of the twilight zone, the Chinese government warning mirrored last year’s complaints by Digital Due Diligence — an American firm! Of course, I doubt Beijing really meant to acknowledge an American perspective. Rather, the pro-domestic-business government was saying that Qihoo really pushed the limits. And it better stop soon, or else Beijing might step in. At that point, who knows? China might shut down Qihoo.

Could this be the end of Qihoo?
To be honest, I’m hard-pressed to think of a case where the Chinese government has shut down a whole corporation. And I doubt that the government would do something like that; Qihoo has done wonders for China.

First off, Qihoo search has crushed Google Inc (NASDAQ:GOOG) in China. Since Qihoo’s foray into the space last summer, Google’s search market share dropped from 16.2% to 5%; in the process, Qihoo captured 10.4% and the overall market share of Chinese search companies has increased, too.

Qihoo has also dented Microsoft’s dominance in the browser space, according to iResearch China. Right now, roughly 300 million Chinese users have Qihoo’s 360 Browser (though how often it’s used is debatable). How? Qihoo just took Internet Explorer’s logo and made it green, thereby tricking users to think the 360 Browser was from Microsoft. Although Beijing’s new warning may put an end to this, the government hasn’t talked about the situation since Qihoo stole Microsoft’s intellectual property over a year ago. All in all, the whole ordeal shows that China will let its domestic companies run amok even if you have cooperated with Chinese Internet rules and let the government monitor, say, Skype calls. At the end of the day, China is domestic-first.

And that’s the crux of the problem: Qihoo is hurting Chinese tech companies, too. The warning detailed that the browser deemed “unsafe” by Qihoo was that of Sohu.com Inc. (NASDAQ:SOHU)‘s Sogou . Now, it’s unlikely that Qihoo only attacked Sohu. The company probably did the same with Internet Explorer, but Sohu was explicitly pointed out because it’s Chinese.

If Qihoo doesn’t cease and desist from hurting other Chinese tech players, I’m not sure what might happen. But, there is a first time for everything and investors should be wary for any signs that China may shut down Qihoo and put them in the red.

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