Authored by Dr. Zhan Hao (zhanhao@anjielaw.com), Annie Ying Xue (xueying@anjielaw.com)

The simmering war between two Chinese giant internet companies Qihoo 360 Technology Co., Ltd. (Qihoo 360) and Tencent Inc. (Tencent) culminated in Qihoo 360 losing the first antitrust litigation involving instant messaging services (IM services) in the trial of first instance. On March 28, the Guangdong High People’s Court (Guangdong High Court) declared that Tencent did not commit the abuse of dominance as defined in the PRC Anti-Monopoly Law (AML). The Guangdong High Court further held Qihoo 360 responsible for the 790, 000 RMB litigation costs. Qihoo 360 expressed that it would retain the rights to appeal.

In November 2011, Qihoo 360 filed a lawsuit with the Guangdong High Court under the AML against Tencent’s two subsidiaries: Tencent Technology (Shenzhen) Co., Ltd. and Shenzhen Tencent Computer System Co., Ltd.. Qihoo 360 accused Tencent of abusive practices and claimed damages of 150 million RMB.

Given the current stage of the development in PRC private antitrust litigation, Qihoo 360 v. Tencent is a landmark case. The social influence of the plaintiff and the defendants, the claimed amount of damages, and long-term hostility between the two parties are unprecedented.

This article seeks to highlight the key issues presented by the recently issued decision. 

Defining Market

As noted by presiding judge Zhang Xuejun, market definition is the key issue of the case and also the most challenging part. Unfortunately, in the previous PRC antitrust litigations, judge seldom elaborated on relevant market.

With regard to the product market, the collegiate bench held that in addition to the IM services, Tencent QQ software also provides advertising, information sharing, and micro-blogging platforms. Translation and email services are available with MSN private messaging and micro-blogging services can be accessed from Sina Weibo. All of these are comprehensive platforms that aim to attract consumers by offering free products in mainland China. The real competition at issue takes place in the value-added services and advertising. This is essentially why the 3Q war can be triggered between two internet companies providing different products. 

In terms of the geographic market, the court reasoned that the openness of the internet has blurred the boundaries between countries, and that the disputed definition of market in the current case is a global market but not a PRC mainland market as proposed by Qihoo 360.

In balancing all these considerations, the Guangdong High Court decided that Tencent does not hold a dominant position in the respective market in terms of its market share, and market power to block potential entry and substantially control upstream and downstream undertakings.

It is noteworthy that as a methodological innovation, the Guangdong High Court applied the small but significant and non-transitory increase in price test (SSNIP, also called the hypothetical monopolist test) in order to define the relevant market. Such application was the first time courts applied SSNIP in China.

Does market share and network effect matter?

In contending Tencent’s dominant market power, Qihoo 360 provided two key supporting reports. iResearch’s Report on the Development of the Instant Messaging Industry of China indicates that Tencent positioning accounts for 76.2% of the total marketplace. According to CNNIC (China Internet Network Information Center)’s 2009 Report on the Instant Messaging Service Users of China, Tencent controlled 97% of the market.

Nonetheless, the Guangdong High Court held that the market definition used in compiling the reports was different from the real relevant market, as defined in this case. The Guangdong High Court reasoned that the product market in reports did not include mobile, tablet PC, micro-blogging and SNS social network websites in its overall evaluations. Moreover, the geographic market was confined to mainland China. The Guangdong High Court further stated that the technical and financial barriers in providing IM services are not insurmountable—allowing significant entries every year.

Additionally, the CNNIC report indicated a high substitutability of instant messaging services. The results demonstrated that in less than six months, the users who registered more than two instant messaging services accounted for 63.4%. Therefore, the Guangdong High Court concluded, QQ software lacks strong control power and its network effect is not an insurmountable barrier for entry.

Exclusive dealing and tying

Qihoo 360 accused Tencent of exclusive dealing by means of asking QQ users to either keep using QQ or uninstall Qihoo 360 software, and the tying of QQ Doctor and QQ Manager.

Given that Tencent does not possess dominant power in the relevant market, and it provides uninstall options for users of QQ Doctor and QQ Manager, the Guangdong High Court rejected the argument for exclusive dealing and tying. However, the court did not agree with Tencent’s self-remedy either.

Introduction of expert witnesses

In Qihoo 360 v. Tencent, both parties brought in expert witnesses to assist in clarifying facts before the court. Qihoo 360 presented David Stallibrass, former official of the Office of Fair Trading of the UK and currently a Special Consultant of RBB Economics LLP. (RBB), and RBB’s staff Yu Yan. On the Tencent side, Jiang Qiping, Secretary-General of the Center for Informatization Study of the Chinese Academy of Social Sciences, and Wu Tao, associate law professor of the Central University of Finance and Economics were engaged.

Antitrust analysis usually involves intricate economic and legal issues. The Supreme People’s Court in its Provisions of the Supreme People’s Court on Several Issues concerning the Application of Law in the Trial of Civil Dispute Cases Arising from Monopolistic Conduct, makes it clear that the parties may introduce experts who are able to offer testimony that is technical in nature. The Guangdong High Court intended to conduct a pilot implementation of the expert witness system in the Guangdong Province. Zhang confirmed the usefulness of expert witnesses in clarifying facts, and suggested cross-examinations of expert witnesses.

Cautious attitudes to intervention

In Qihoo 360 v. Tencent, it seems that the Guangdong High Court took a very cautious stance in defining the dominant position of an internet company. This observation was further evidenced by an interview with the presiding judge. Zhang said that the Internet industry is characterized by frequent innovation and easy reproduction, so we should take a dynamic view when considering alleged violations of the AML. The Internet industry is in particular need of protection on account that it is tightly related to high-tech, does not produce air or water pollution, and does not consume huge amounts of energies. Thus, it is better left to market mechanism rather than outside intervention for any necessary adjustments.

Some experts comment that compared with the former PRC antitrust private litigations filed after the entering into force of the AML, Qihoo 360 v. Tencent is indeed the first substantive and serious antimonopoly case handled by PRC court. From now on, the PRC court, together with MOFCOM, NDRC and SAIC, will begin to challenge monopoly behaviors with muscle.