Sohu: Taobao-Related Revenue Worries Overblown

Xiaofan Zhang submits:

After Sohu.com Inc. (SOHU) reported strong 4Q10 earnings, some investors expressed concerns about the company's fast-growing search engine Sogou.com. The concerns have centered around Sogou's receiving significant revenue from C2C e-commerce website Taobao.com, which is owned by Sogou's 16%-owner Alibaba Group (ALBCF.PK). These investors believed that Sogou generated the Taobao-related revenue because of its relationship with Alibaba, not because of its own service quality. The underlining logic is that Sogou did not deserve Taobao's ad spending, and it would not have done well in Q4 without Alibaba's support. I believe such concerns are unnecessary. Here are the reasons:

If Taobao did not buy these ad slots, Sogou may still be able to fill the slots with other advertisers' ads. In Sogou's search result pages, Taobao's pay-per-click ads have occupied certain ad slots because Taobao has outbid other advertisers in the auctions. If Taobao did not make those bids, other advertisers may still bid for those slots, and Sogou may still generate revenues from the slots. It's like if one potential buyer quits an auction, the sale may still be completed. In other words, Taobao's purchase of certain ad slots does not mean these ad slots are not attractive to other advertisers. In fact, the big presence of non-Taobao advertisers on Sogou.com can be easily verified by doing searches on Sogou for popular Chinese keywords "Stock", "Cell Phone", "Computer", etc. This situation resembles the well-known trade-off between Baidu's (BIDU) Box Computing revenues and pay-per-click revenues: Box Computing partners have taken valuable

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