Analysis on the Anti-monopoly Dispute Filed by Qihoo against Tencent, I

(By Luo Yanjie) Starting today, we will have three posts introducing the decision in China’s most closely followed anti-monopoly case. Today’s post will first introduce the facts of the case. Qihoo 360 Technology Co. Ltd. (NYSE: QIHU) (“Qihoo”) is a company whose primary business is security software. In October of 2010, Qihoo released software named “360 Privacy Protector,” which was claimed to prevent QQ, the instant messenger of Tencent Holdings Limited (SEHK: 700) (“Tencent”), from uploading the user’s personal information. Tencent was very dissatisfied with this claim, and believed that Qihoo actually intended to steal QQ users’ information and then replace QQ with its own product. For this reason, Tencent issued a notice to its users, demanding that users who installed QQ not install any of Qihoo’s software. At the same time it took technical steps to check the computers of its users to see whether they had installed Qihoo’s software. If any Qihoo software was found, the user was not allowed to sign in to QQ. This led to a large dispute on the internet in China. After the Ministry of Industry and Information Technology (the “MIIT”) intervened, Qihoo recalled its 360 Privacy Protector, and Tencent revoked its regulation prohibiting QQ users from using Qihoo.

In April of 2011, Tencent sued Qihoo, claiming that the 360 Privacy Protector constituted unfair competition, and the court held that Qihoo must stop distribution of the protector and pay Tencent CNY 400,000 yuan in compensation. Afterwards, Qihoo filed a lawsuit against Tencent for forcing its users to uninstall all Qihoo software, claiming that Tencent abused its dominance in the market and demanding CNY 150 million yuan in compensation. Recently, the Guangdong High People’s Court issued the first instance judgment and denied Qihoo’s claim of monopolistic behavior on the part of Tencent because Qihoo had mistaken the relevant product market. The court therefore refused all of Qihoo’s claims. As of the writing of this essay, it remains unknown whether Qihoo will appeal to a higher court. The following is a brief analysis of the case.

Case summary:

On November 3, 2010, the defendant (Tencent) published “A Letter to All QQ Users,” which explicitly banned its users from using the plaintiff’s 360 software; otherwise, users could no longer sign into QQ. It then refused to provide service to the users who had installed the 360 software and forced these users to delete Qihoo’s software. Using technical means, it also prevented users with the 360 software installed from visiting the QQ Zone, and during that period, many numbers of users uninstalled Qihoo’s software. According to Qihoo, Tencent had a dominant position in the relevant market for instant messenger software and services, and its actions restricted trade. Additionally, using QQ upgrades to force installation of QQ Guanjia, Tencent’s security software, could be deemed abuse of market dominance, which damaged Qihoo’s interests and should incur liability.

On the other hand, Tencent claimed that Qihoo was incorrect about the relevant market, and the relevant market for instant messenger service included, at the very least, instant messaging software such as QQ, MSN, and Skype; instant messaging by email, such as Yahoo, and 163; instant messaging on SNS websites, such as, and; instant messaging on Weibo, such as Sina Weibo and Sohu Weibo; instant messaging on other pages such as; and mobile instant messaging such as Miliao and Kouxin. Moreover, the disputed software in this case, QQ, is a comprehensive platform product; in addition to Tencent’s instant messaging service, it also carries Tencent’s value-added and advertising services. The relevant market involved in this case is larger than the instant messaging software and service as claimed by Qihoo, and the relevant regional market in the case should be the global market.

Tencent also claimed that it did not hold a dominant position in the instant messaging market. The market data provided by Qihoo could not be used as a basis for determining the market share owned by Tencent. The upgrade of “QQ software management” and “QQ Doctor” to “QQ Computer Guanjia” did not constitute a tie-in sale. Tencent provided a disclaimer before the upgrade, and the upgrade could not be made until the user agreed with it, so the user was not forced to upgrade. According to Article 17 of the Anti-Monopoly Law, software upgrades do not constitute tie-in sales.

The following is the holding made by the court of first instance, the Guangdong People’s High Court, after the hearing:

I. The relevant market

As regulated in Article 2 of the State Council’s Anti-Monopoly Committee’s Guidelines for Determining the Relevant Market (the “Guidelines”), any competition (including any conduct that does or may exclude or restrict competition) occurs within a certain market’s scope. To decide whether the defendant has dominance, it is necessary to first accurately determine the relevant market for the QQ software and its service. According to Article 12 of the Anti-Monopoly Law, relevant market refers to “the range of the commodities for which, and the regions where, undertakings compete with each other during a given period of time for specific commodities or services.” Therefore, the relevant product market consists of a set or class of products with a substantially close relationship as perceived by the consumer based on the nature, purpose, price, and other elements of the product. If such products appear to be strongly competing, this can be taken as the products competing among businesses for the anti-monopoly law enforcement. The given region means the geographical region in which the consumer can obtain substantially similar products. If these regions show relatively strong competition, this can be taken as the given region in which the businesses compete with each other for anti-monopoly law enforcement.

(1) The definition of the relevant product market

As stipulated in Article 4 of the Guidelines, the size of the relevant market’s scope is determined by the product’s level of interchangeability. What directly and effectively restricts businesses in market competition is consumers’ thinking that the there could other alternative products or that the region is able to provide such products. Therefore, to determine the relevant market, it is necessary to do a demand replacement analysis from the perspective of the consumer. According to Article 5 of the Guideline, demand replacement refers to the determining the degree of interchangeability from the perspective of the consumer by looking at demands on the function of the product, recognition of quality, acceptance of price, and difficulty of acquisition.

When consumers decide on their volume of use for certain instant messaging software, the opportunity cost consumed will be one of the elements considered in whether to acquire the product. But, once the product begins to charge, the first choice is whether to switch to other products instead, even if the opportunity cost consumed is much higher than using the paid product. In other words, the time-consuming ads play a more prominent role within the relevant market definition of “free of charge” products. For this reason, whether an instant messaging product can constitute a relevant market considers whether an assumed monopolist who controls all the instant messaging software will gain extra profit through the reduction of quality or a long-term increase of the product price. Additionally, it considers whether there will be substantial replacement once the alleged monopolist begins to charge for a short period.

In terms of the opinions not disputed by either side the three classes of the instant messaging software belong to the same market, and QQ is a comprehensive instant messaging service, which can transfer text, vice, video. It can also send text to mobile phones, perform offline document transfer, and deliver other non-instant messaging service. Also, QQ has also assembled other Internet functions in addition to the aforesaid messaging services. As argued by Qihoo: according to a research report by CNNIC published in 2009, instant messaging software and service could be classified as the comprehensive messaging services like Tencent’s QQ and Microsoft’s MSN, cross-platform messaging services like China Mobile’s Fetion, and cross-network messaging services like Tom’s Skype. The above three kinds of the instant messaging products are closely linked to each other and could replace others in terms of both technology and service. Tencent did not object Qihoo’s claim; therefore, the court confirmed that these three kinds of instant messaging could be taken in the same product combination.

According to the first instance court, as regards demand replacement, consumers can switch among the three services of text, voice, and video conveniently, immediately, and without any extra charge. Looking at supply interchangeability, most service providers can provide these three services at the same time. Basing on these reasons, the text messaging, voice, and video communication are not distinguished based on function, which is to take three products or services as the independent messaging services. Instead, they are a part of the broader market, and none of them could establish an independent market since it is difficult to divide the market into the smaller functions without any market overlap. Qihoo’s expert claimed that consumers only use comprehensive instant messaging software to replace single function services but not vice versa. But, this claim only considers the difference in function but does not consider the current conditions of free Internet service and therefore is not acceptable. Comprehensive instant messaging has close interchangeability with single functioned text, voice, or video instant messaging, and could be considered as a product combination in the same market.

When Weibo and SNS websites provide instant messaging in web page forms, it means they have taken the instant messaging as one of the core functions in their product. Does this mean there is interchangeability between QQ and Weibo, and SNS websites? The court held that it has reasons to believe that if Tencent switched its service from free of charge to a small charge for an extended period (perhaps one year), consumers are very likely to use Weibo and SNS services instead, so Tencent’s charges would not produce any profits. For this reason, QQ and social networking or Weibo services are product combinations in the same relevant market.

(2) The definition of the relevant regional market

The first instance court held that: first, operators and users of instant messaging are not limited to mainland China. Second, consumer language preferences and usage habits cannot serve as the sole basis for distinguishing the regional market. Third, when the participants in instant messaging software and service can provide and obtain instant messaging service, it does not produce any extra transportation cost, price cost, or other costs. So far, a standard has not been formulated, either technically or in the law, to restrict the supply or use of such services worldwide. In conclusion, the regional market of this software is the global market.

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