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Tencent defeats Qihoo 360 in first instant messaging antitrust case - International Law Office

International Law Office

Competition & Antitrust - China

Tencent defeats Qihoo 360 in first instant messaging antitrust case

April 11 2013

Introduction
Defining the market
Do market share and network effect matter?
Exclusive dealing and tying
Introduction of expert witnesses
Comment


Introduction

The simmering war between two large Chinese internet companies – Qihoo 360 Technology Co, Ltd and Tencent Inc – has culminated in Qihoo 360 losing the first-ever antitrust litigation involving instant messaging services.

In November 2011 Qihoo 360 filed a lawsuit with the Guangdong High People's Court under the Anti-monopoly Law 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 Rmb150 million. On March 28 2013 the court held that Tencent had not committed an abuse of dominance as defined in the Anti-monopoly Law. The court further held Qihoo 360 responsible for Rmb790,000 of litigation costs. Qihoo 360 expressed that it would retain its right to appeal.

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

Defining the market

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

With regard to the product market, the collegiate bench held that in addition to instant messaging 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 competition at issue occurred with respect to the value-added services and advertising, one of the few areas that could account for such a dispute 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 this case was a global market and not a Chinese market, as Qihoo 360 had proposed.

In balancing these considerations, the court held that Tencent did not hold a dominant position in the respective market in terms of market share, nor did it have sufficient market power to block the potential entry of competitors or substantially control upstream and downstream undertakings. As a methodological innovation, the court applied the small but significant and non-transitory increase in price (SSNIP) test (also called the 'hypothetical monopolist test') in order to define the relevant market. This was the first time that Chinese courts have applied the SSNIP test.

Do 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 indicated that Tencent positioning accounts for 76.2% of the total market. However, according to the China Internet Network Information Center's (CNNIC) 2009 Report on the Instant Messaging Service Users of China, Tencent controlled 97% of the market.

Nonetheless, the court held that the market definition used in compiling the reports was different from the actual relevant market as defined in this case. The court reasoned that the product market in the reports did not include mobile, tablet PC, micro-blogging and social network websites in its overall evaluation. Moreover, the geographic market was confined to mainland China. The court further stated that the technical and financial barriers to providing instant messaging services were not insurmountable and allow for 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, 63.4% of users registered more than two instant messaging services. Therefore, the court concluded that the QQ software lacked a strong control over the market and its network effect was not an insurmountable barrier to entry.

Exclusive dealing and tying

Qihoo 360 accused Tencent of exclusive dealing by asking QQ users either to keep using QQ or uninstall the Qihoo 360 software, and by the tying of QQ Doctor and QQ Manager. Given that Tencent did not possess dominant power in the relevant market and provided uninstall options for users of QQ Doctor and QQ Manager, the 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

Both parties brought in expert witnesses to assist in clarifying facts before the court. Qihoo 360 presented both David Stallibrass, a former official of the UK Office of Fair Trading and currently a special consultant for RBB Economics LLP, and RBB employee Yu Yan. On the Tencent side, Jiang Qiping, secretary general of the Centre for Informatisation 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 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 clarifies that parties may introduce experts who can offer testimony that is technical in nature. The Guangdong 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.

Comment

It seems that the Guangdong court took a cautious stance in defining the dominant position of an internet company. This observation was further evidenced by an interview with the presiding judge. Zhang stated that the internet industry is characterised by frequent innovation and easy reproduction, so a dynamic view should be taken when considering alleged violations of the Anti-monopoly Law. The internet industry is in particular need of protection, as it is closely related to the high-tech industry, does not produce air or water pollution and does not consume large amounts of energy. Thus, necessary adjustments are better left to market mechanisms than relying on outside intervention.

Some experts have commented that compared with previous antitrust private litigation filed after the entry into force of the Anti-monopoly Law, Qihoo 360 v Tencent is the first substantive and serious anti-monopoly case handled by a Chinese court. Henceforth, Chinese courts – together with the Ministry of Commerce, the National Development and Reform Commission and the State Administration for Industry and Commerce – will begin to challenge monopoly behaviours with more muscle.

For further information on this topic please contact Zhan Hao, Michael Gu or Song Ying at AnJie Law Firm by telephone (+86 10 8567 5988), fax (+86 10 8567 5999) or email (zhanhao@anjielaw.com, michaelgu@anjielaw.com or songying@anjielaw.com).


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