April 12th, 2012
Qihoo 360 Technology Co.
This case was jointly prepared by Prof. Bingsheng, CKGSB YANG CKGSB Center. and Guchuan, Case TENG
On March 30th, 2011, Qihoo 360 Technology Co. (hereinafter referred as “Qihoo” or “Qihoo 360”), founded less than 6 years ago, started to trade on the New York Stock Exchange (NYSE: QIHU). On the first day of trading, Qihoo 360 opened at $27, a massive 86.2% above the issue price, and closed at $34, generating a first-day yield of 134.5% and raising $175 million. At the end of its first day of trading in the US, Qihoo 360 had a market capitalization of $3.96 billion and ranked 6th among all Chinese firms listed in the U.S., higher than New Oriental, Sohu, and Shanda.
According to its prospectus, Qihoo 360 claimed to be the 3rd largest Internet company in China as measured by active user base; the 2nd largest Internet browser provider in China by user penetration rate; and the largest Internet and mobile security product provider by active user base. Its user penetration rate in China exceeded 80%, with more than 300 million monthly active users. Compared with other Internet security giants in China, such as Rising (founded in 1991), Kingsoft (entered Internet security in 1997) and Jiangmin (established in 1996), Qihoo was only set up in September 2005 and did not launch its first security product 360 Safe Guard until July 2006. How did it sweep the market so quickly? On gathering a lot of users with its security products, Qihoo 360 expanded its product line and transformed itself into an Internet platform operator. How did the company implement the transformation? And what is the company’s business model, given that it offers all its security products free of charge?
Qihoo at its Early Stage
In September 2005, Qi Xiangdong founded Qihoo. In March 2006, Sequoia Capital, IDG and Zhou Hongyi jointly invested US$20 million in the company. And in August 2006, Zhou Hongyi joined Qihoo as Chairman. At the beginning, Qihoo was positioned as a search technology provider, yet its efforts in the sector were not successful. Zhou later concluded, “At that time, Qihoo was too far ahead of the game in terms of its ideas and strategy. While the concept may have been right, it was the wrong moment. Moreover, Qihoo failed to figure out the key drivers of user need.” In 2006, Qihoo entered the field of Internet security, as Zhou recognized that Internet security
would be a great area. “Internet security may become a basic service, similar to search engines, emailing and instant messaging, each of which is an integral part of everyone’s life.” Thus, he set up a team inside Qihoo, which focused on the development of an application “to detect and remove malicious software”. Interestingly, Zhou used to be known as the “Father of Malicious Software”, as he had previously founded a firm making software that was difficult to uninstall. This time, Zhou decided to clear his name.
360 Safe Guard: A Step into the Security World
Malicious Software Cleanup
Years ago, after Zhou came up with the idea of “malicious software,” it was soon copied by peer software firms. This widespread practice made the public furious. Despite user needs, no firm developed products to clear up malicious software, for two reasons. First, it was difficult to make users pay for a malicious software cleanup service. Second, it would offend many large software firms that relied on this kind of software. “The fact that the Internet industry in China was overrun by malicious software made me decide to develop something to remove them,” said Zhou Hongyi, “If I didn’t do it, I would always be deemed as the creator of malicious software. I admit I made some mistakes, but the mistakes could be corrected.” Therefore, Zhou set up an internal team to work on an application that would clean up malicious software. In July 2006, 360 Safe Guard was officially released, a freeware dedicated to the...