China's internet wunderkind in the dock over alleged fraud

Chinese internet darling Qihoo 360 Technology has been accused by the research arm of hacktivist group Anonymous of deliberately overstating the volume of traffic to its site in order to attract advertisers, allegations which if true could see it kicked off the New York Stock Exchange.

Qihoo has had a spectacular impact on its domestic market since it broke onto the scene in 2006, and now claims there are over 410 million active users of its AV software and web browser offerings.

The firm also followed rival Chinese web giants Baidu and Alibaba recently in announcing plans to launch an own-brand smartphone in an attempt to attract more users to its online services.

The firm makes most of its money out of advertising, but according to a new Anonymous Analytics report it is exaggerating traffic stats in order to charge exorbitant fees.

Qihoo’s primary revenue generator is directory page hao.360.cn. A small percentage of money comes from Google, thanks to a search box embedded on the page, with the majority coming from direct links, said Anonymous.

Qihoo states that on average it can charge approximately 320,000 yuan to 350,000 yuan [£32-35,000] per month, per link on its directory page. In some cases, Qihoo claims it can charge up to 1 million yuan [£100,280] per month per link in its “Famous Sites” section.

These figures may seem like exorbitant monthly sums to charge clients to simply place a link on a crowded directory page – and they are. As we previously mentioned, we know of no other company, public or otherwise, that has generated material revenue by selling links on a directory page, much less created a sustainable business from this model.

Given that so much rests on the authenticity of Qihoo’s apparently huge user base, analysts and investors called on the firm to verify the stats via a third party, so it reached out to comScore, according to the report.

However, after adding a comScore tag to the HTML source code of hao.360.cn at the beginning of the year, Qihoo abruptly removed it again last month without explanation because it didn’t like what it saw, claimed Anonymous.

The report then reveals what it claims to be data collected during that time which shows traffic to the directory page less than 50 per cent that of Baidu’s own directory site – despite Qihoo claiming to have more visitors than its web rival.

“The reality is that Qihoo is an internet company whose primary prospect is a delisting,” the report alleges. “We have uncovered smoking gun evidence that Qihoo is grotesquely exaggerating its traffic volume, and in the process committed securities fraud.”

This is not the first time Qihoo has been in the dock over alleged fraud. Online short seller site Citron Research produced a lengthy and damming assessment of the firm in December last year.

For a counter-argument, take a look at this blog post from Bill Bishop, the founder of financial news site MarketWatch.

Qihoo has also been in trouble with Apple most recently, when its web browser, security suite and instant-messaging client were all chucked out of the Chinese iTunes store for a few days.

The Register contacted comScore and Qihoo for a response to the allegations but none was forthcoming at the time of writing. The Chinese firm did deny all allegations to Bloomberg as innacurate, however.

“This report is basically a repetition of what other short sellers said before,” the firm’s CFO Alex Xu told the newswire. Shares in the firm apparently dropped 7.5 per cent on the news.

On this point, it’s worth noting that Anonymous admits that some of the contributors to the report may have a vested interest in besmirching Qihoo:

You should assume that certain contributors to this report, as well as their members, partners, affiliates, colleagues, employees, consultants, clients and investors, as well as our clients have a short position in the stock of Qihoo 360 and/or options of the stock, and therefore stand to gain substantially in the event that the price of the stock declines.

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