by Kai-Fu Lee
Recently, several “China Short Sellers” have developed a scheme to make themselves rich. First, short a US-listed China stock. Then, write a negative report on that company. After the stock drops, cover the short, and pocket a huge profit. This practice itself is already questionable, but what is despicable is how these short sellers take advantage of the information asymmetry between China and the US, and write reports full of holes and lies, knowing that their American readers have no way of verifying them. This paper dissects one such example, Short Seller Citron Research’s report “Qihoo’s entry into search puts SOHU in play” (August 24). This paper will show that Citron lacks even the most basic understanding of the Chinese Internet/Search market, yet it fabricates and distorts information to deceive investors. It is not my intention to support or challenge Citron’s recommendations, but only to expose Citron’s ignorance and deception, and raise the question whether any investor should ever trust them.
Citron lacks basic understanding of search
The most ludicrous part of Citron’s report is its faulty analysis of search engines and basic misunderstanding search engine Sogou’s strategy and products.
First, some background for those unfamiliar with the Chinese market:
- Sogou is a company majority owned by Sohu, and produces three products:
- Sogou.com search, comparable to Google.com search.
- Sogou browser, comparable to IE or Chrome browser.
- Sogou Pinyin IME (input method editor). An IME is a “soft keyboard” that converts typed roman character input (like “beijing”) into Chinese characters (like “北京”). IMEs are installed in Windows/Mac and are general purpose text-entry tools (not just for search).
- Sogou IME is the leading IME in China, with about 74% penetration.
- Sogou browser is an emerging browser that has increased its user penetration from 5% in 2010 to over 20% recently.
- Sogou search has had about 1% market share until Sogou Browser became successful. As Sogou Browser increased its penetration to over 20%, Sogou search also increased its share to 3-4.5%.
- Browser market share can increase search market share, because many Chinese users have a habit of searching from the browser directly. Only about half of the search queries are entered on a search engine’s webpage.
- Pinyin IME is a software product basically detached from search, and has no direct relationship with search engines. (Note that a few IMEs including Sogou have experimented with a feature to encourage users to search directly from the IME, with disappointing results, as it is not natural.) Empirically, search market share and IME market share can be shown to be virtually uncorrelated.
The above points are validated by the following table, showing search market share (from iResearch), as well as Sogou Pinyin and Sogou Browser market penetration (from Sohu):
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