Chinese internet firms forced to apologize over privacy spat

A bitter dispute between two leading Internet firms in China has caused the Chinese government to step in, with authorities ordering an investigation of the two companies and forcing them to make a public apology.

Tencent, the operator of China’s top IM client called QQ, has been locked in a feud with Chinese security firm 360 over alleged claims of privacy breaches and unfair business practices. But earlier this month, the dispute threatened to affect millions of Chinese users when Tencent announced that its QQ client would no longer operate on computers installed with 360 security software.

China’s Ministry of Industry and Information Technology intervened on Sunday by releasing a notice that demanded the companies apologize and ensure their software is compatible with one others’. The ministry added that the two companies had “adopted unfair competition practices,” and that it will investigate the two companies for suspected violations of laws and regulations. Tencent and 360 have issued the apologies on their websites, and say they accept the criticism made from the ministry.

“We understand that our responsibility is becoming larger and larger,” Tencent said in the statement. “In facing this responsibility, we will have higher demands of ourselves, and do better.”

Tencent is one of China’s largest Internet companies, with more than 655 million active users of its QQ client, according to Beijing-based research firm Analysys International. The company controls 76 percent of the instant messaging client market in China. As for 360, the company offers free security software and has more than 300 million users.

360 has reported that the company’s software is now completely compatible with Tencent’s, but analysts have said the dispute has put a dent in the companies’ reputations, as well as highlighted the need for stricter regulations on the business practices of China’s Internet companies.

The Ministry of Industry and Information Technology had no choice but to intervene, given the allegations the companies made against each other, said Duncan Clark, chairman at Beijing-based technology consultancy BDA. “Like two kids scrapping in the playground, the teacher had to step in,” he added.

As a consequence, the dispute could also hand more regulatory power to China’s Ministry of Industry and Information Technology. “I imagine it gives MIIT more say and power in acting as a tollgate for them in the future or for other market entrants,” Clark said. “Question is, will this make it more difficult for entrepreneurs in the future? It certainly doesn’t help. Could this perhaps strengthen the hand of state-backed players?”

In another country, disputes like these would have been handled in the courts, said Mark Natkin, managing director of Beijing-based Marbridge Consulting. But because China can have weak legal penalties, companies are willing to engage in unfair business practices, seeing that the benefits can outweigh the costs, he added.

“The fact that the government is getting involved underscores the still immature nature of the legal system” he said. “And until the system matures I think you will continue to see these kinds of disputes.”