Why does Tencent wants to buy search engine Sogou? – Ashley Dudarenok

Observers got alerted when internet giant Tencent said it wanted to take search engine Sogou private, even tough Soguo is smaller than market leader Baidu. Marketing specialist Ashley Dudarenok explains to KR-Asia why the move makes sense, “Sogou lacks Baidu’s larger market share but possesses better search technology and algorithms, allowing for better user experience,” she says.

KR-Asia:

Sogou has performed well with a 21% market share in the Chinese search engine market. If Tencent was marking its territory in the search engine sector with its previous investment, a potential bold acquisition now plants a flag.

“It is probably in Tencent’s best interest to gain a secure share of the search market. By doing so, Tencent has to increase the width and depth of its contents,” told KrASIA Ashley Galina Dudarenok, marketing expert and founder of ChoZan and Alarice.

“Tencent would be able to improve ad performance and potentially benefit from higher revenue in ads, as Sogou’s search contains a large amount of users’ baseline data,” she added.

According to Dudarenok, Sogou lacks Baidu’s larger market share but possesses better search technology and algorithms, allowing for better user experience. In particular, its ability to scour specific verticals such as WeChat, Mingyi (Medical), Xueshu (Scholar), and Zhihu (China’s Quora) are core differentiators.

The privatization also makes sense for Sogou since its performance on the public markets has not been ideal. Since Sogou’s listing in 2017, its stock price has fallen below intrinsic value. Privatization under Tencent would offer a modicum of financial assurance to push forth with its extensive R&D ventures.

In addition, Tencent’s ecosystem of apps already contributes to over 35% of Sogou’s traffic, while competition is increasing Sogou’s traffic acquisition costs. As of the first quarter of 2020, this remained the primary driver of Sogou’s costs of revenues, increasing by 27% year-on-year (YoY) and representing 70.5% of total revenues compared to 56.6% the previous year.

Sogou’s acquisition is an anomaly in Tencent’s playbook, however, as Tencent is known to shy away from outright acquisitions and instead favor strategic partnerships, in contrast to other giants such as Alibaba (NYSE: BABA) and Baidu (Nasdaq: BIDU).

Yet, the high stakes behind the search engine market might be the reason behind Tencent’s move. “Internet companies have now very tight control over their own content and data, and have very clear-cut strategies in locking users in their own platform,” suggests Dudarenok, emphasizing the security perspective as essential in this acquisition.