After an almost two-year litigation marathon, the Supreme People’s Court of China (Supreme Court), in October 2014, upheld the ruling of the Guangdong High Court (High Court) that Tencent QQ did not abuse a market dominance position under the Anti-monopoly Law of People’s Republic of China (AML).

Background

In 2010, Qihoo, an advanced and free computer security and antivirus software and solution supplier in China, claimed that Tencent, through its famous instant message software QQ, was invading and thieving the privacy information of its QQ users. Tencent retaliated against Qihoo by disabling the compatibility of QQ with Qihoo safe guard software, and published a letter to its QQ users asking them to take sides on behalf of either Tencent or QQ. As a consequence, some of the QQ users uninstalled Qihoo safe guard software. Additionally, Tencent also offered QQ Apps Manager, the security software developed by Tencent and integrated with QQ, without charge to its QQ users, which Qihoo claimed to be unlawful bundling sales.

Since the fuse was ignited and neither party was in the mood for burying the hatchet, Tencent and QQ started their lawsuits respectively, among all of which the most famous was the one brought by Qihoo based on the AML.

Questions

Before summarizing the appellate case heard by the Supreme Court, we draw your attention to the following issues, which are the pivots for the ruling in the case:

  • What was the relevant market, both in products and geography?
  • Did Tencent have market dominance in the determined relevant market?
  • Were there bundled sales activities when Tencent offered QQ together with QQ Apps Manager?
    • If so, did Tencent abuse its market dominance position to restrict free competition in the relevant market?

Case

Relevant Market. The Supreme Court narrowed down the perimeter of the relevant market defined by the High Court, determining that the relevant market was instant message services in China, including non-generic instant message service based on text, audio, and video or a generic combination of text, audio, and video on both personal computer ports and mobile ports. Pursuant to an SSNIP test (Small but Significant and Non-Transitory Increase in Price), the Supreme Court pointed out that instant message service in its fee-free model was supported by the revenue from advertisements and other add-value telecommunication service, which resulted in the competitors’ focuses on the quality, service, and creativity of their products, rather than their price. Even a zero SSNIP may possibly drive myriad users to flee to other competitors.

Market Dominance Position. Based on the evidence furnished by Qihoo and Tencent, the Supreme Court, ruled that Tencent didn’t have market dominance in the relevant market. The Court declared that. pursuant to the AML and related regulation, in order to determine whether a competitor has a dominant market position, the following criteria should apply:

  • Market share and the competition status quo in the relevant market;
  • Sales and sourcing capability in both upstream and downstream markets;
  • Financial and technology conditions;
  • Reliance of other competitors on the applicable competitor; and
  • Difficulty for others to enter the relevant market.

The AML and related regulation declare that when a competitor occupies at least a 50 percent share of the relevant market, the competitor can be presumed to have market dominance.

Even though Tencent dominated more than an 80 percent share of the instant message market on both personal computer port and mobile port, however, the Supreme Court controversially held that high market share in the relevant market didn’t alone mean that Tencent had a dominant market position. The Supreme Court declared that market share was a rough and sometimes misleading criterion to determine market dominance. Competition in the Internet industry was influx, and the boundary of the relevant market, compared with traditional industries, was vague and difficult to determine. In this circumstance, Tencent’s high market share may possibly not have been a direct indictor to infer market dominance.

Abuse of Market Dominancy Position. Despite determining that Tencent did not have-market dominance, the Supreme Court analyzed the effect on competition that would be caused by the claimed abuse of market dominance in order to test the correctness of the conclusion that Tencent didn’t have market dominance. Disabling the compatibility of QQ with Qihoo’s safe guard software restricted the system and environment where QQ might operate, but that did not mean that it restricted competition in the instant message market. The Court determined there are many fungible products in the instant message market, and QQ was not indispensable for its users. Therefore, the disability of compatibility would not cause material adverse effect to the users. The Court determined:

There was no corroborative evidence to prove that Tencent’s disabling compatibility against Qihoo was intended to keep other potential competitors from the instant message market. Instead, such behavior was only retaliation against the accusation of unfair competition by Qihoo; and, actually brought competitiveness to the instant message market because other instant message competitors achieved active user increases following the behavior.

As a result the Supreme Court held that Tencent’s disabling compatibility behavior was not abuse of market dominance, confirming that Tencent did not have a dominant position in the relevant market.

Qihoo also claimed that Tencent abused its market dominance by bundling the QQ Apps Manager to QQ, which was contrary to business custom and unreasonably restricted the users’ option right. The Supreme Court held that, in the absence of corroborative evidence, it was not proven that Tencent had leveraged its asserted market dominant position in the instant message market into the security software market. Also it declared that no evidence showed that Tencent’s bundling QQ Apps Manager resulted in a significant decrease in competition in the security software market, where Qihoo dominated 70 percent or more. In addition, the Supreme Court determined that the bundling of QQ Apps Manager with QQ was commercially reasonable, because these two forms of software can integrate together and serve users better as a result.

As a consequence, the Supreme Court held that Tencent didn’t have a market dominance position in the relevant market. Accordingly, the Supreme Court rejected Qihoo’s claims, and upheld the award made by the High Court that Tencent did not abuse a dominant position in the relevant market.

Qihoo vs. Tencent is the first Internet related anti-monopoly case heard by the Supreme Court. The analysis of relevant market, market dominance and bundling made by the Supreme Court may become the kind of analysis used by the enforcement authorities in China with respect to other markets.