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

(By Luo Yanjie) Today we will continue our introduction of the opinions of the Guangdong High People’s Court, the first instance court in the anti-monopoly dispute, concerning the facts in the case as well as its judgment.

II. About the dominant position of the defendant in the relevant market

As held by the court in the first instance, the plaintiff had a much narrower definition of the relevant product market and regional market, and the plaintiff calculated the market share based on the relevant product and regional market as it advocated, and that could not truly reflect the share and position of the defendant in the relevant market objectively. Especially taking into account that the product scope shown was the plaintiff’s most important evidence; more importantly, that the report from the Ai Rui research institution presented data contrasting with the scope determined by the court.

Furthermore, the first instance court also held that even if it were to determine the relevant instant messaging market in the narrowest way imaginable, namely the relevant market being Mainland China, it could not then determine that Tencent occupies a dominant position in the market simply based on the assumption that it has more than 50 percent market share. On that note, the specific reasons are as follows:

(1) The Defendant doesn’t have the capability to control prices, amount or other transaction conditions of the product

First, the Defendant does not control the market in such a way as to be able to control the price of the product in the instant messaging market. And as mentioned above, nearly all instant messaging software and services are free for the end user; moreover, the vast majority of end users are not like to pay any fees for basic \ instant messaging software services. Taking these factors into consideration, the leading position of the Defendant in the relevant market does not justify granting it pricing power exceeding that of other competitors. Second, the Defendant has no capability to control the amount of product in the market or conditions placed on transactions. Third, from the point of view of those depending on the Defendant’s software, the transacting party could easily choose to take their business to other companies, and therefore determining one’s place in the market based upon user dependence seems to be a poor standard by which to make such measurements.

(2) The Defendant does not have the capability to hinder or influence other operators entering the relevant market

First, there is a very low threshold for new operators or proprietors entering the instant messaging market. Instant messaging services demand less in regard to funding and required technology, whether it be for an Internet company, terminal company or software operator. The top three telecommunications operators look upon the market as a promising one, and every year a number of new operators enter the market. Second, an operator may enter the market through various ways. Third, newly entered companies have a strong capability to induce market expanSion, and in many cases have demonstrated the current weak resistance to market expansion.

As for the loyalty of QQ users, the Court first found that most users would contact other relatives or friends through the instant messaging service, namely their “core circle,” and that Internet influence had been weakened significantly. Second, in the Microsoft/Skype case, the EU committee found that many users would switch among instant messaging service providers; and in this case, QQ software faces the same reality. At the same time, due to users building overlapping social networks through different instant messaging software, this switching among various types of software reduces the influence of “user loyalty” within the market. Third, at the very beginning of the Defendant’s development of the QQ software, MSN had the biggest market share in the instant messaging market. But the Defendant extended the scale of its operations quickly by providing a superior product and quality service, and we have seen a large number of users being attracted to that. Up to this point, QQ’s market share in instant messaging software has vastly surpassed that owned by MSN in a relatively short period of time. From these facts, we can conclude that the effect of the Internet and user loyalty is not necessary an insurmountable gap for instant messaging software and services thereby provided.

Based on the above discussion, the Court thinks that due to the unique conditions of the Internet industry at present, it would not be proper to consider the market share of an operator as a key element in determining a player’s dominance within the relevant market. Even in the narrowest market advocated by the Plaintiff, echoing what CNNIC’s report stated, Tencent’s leading position in the market has not prevented or reduced growing space for other instant messaging software’s development, and it would not prevent the overall development of the market as a whole. The defendant, therefore, has no dominant position in the market.

III. Abuse of the Defendant’s dominance in the market and competition exclusion and restriction

The Court in the first instance determined that the defendant had forced the end user to choose to use one of two pieces of software. Apparently, it allowed the end user to make their own choices, but once the Defendant became the dominant player in the market, the end user is far more likely to abandon Qihoo and choose QQ. The “one or the other” choice forced upon the end user by the Defendant to make was not a refusal to enter a transaction with the user, but rather to force the to make a transaction with it instead of Qihoo. What the Defendant has done is actually a kind of transaction limitation. (Note from the author: despite the court determining Tencent having been involved in the transaction restriction, considering the fact that no dominant position in the market could be found, naturally it would not result in a kind of monopoly). But as for tie-in sales, the Plaintiff had no evidence to prove the Defendant’s packaged installation had resulted in a decrease of the Plaintiff’s market share of certain products. In addition, it could not prove that it would restrict or exclude competition from other competitors. For this reason, the Plaintiff’s claim that the Defendant had abused its alleged market dominance could not be supported.

Based on the above discussion, the Court thought the plaintiff had mistaken the definition of “relevant market” as it pertains to the market, and the evidence submitted was not adequate to prove the defendant had a monopolistic position in the market. It was for these reasons the Plaintiff’s claims were rejected.

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