Phocuswright, Maggie Rauch - The Lunar New Year is still a month away, but China's online travel industry started the 2016 calendar year with fireworks. In the space of just one week: Qunar's CEO announced his exit; Alibaba Group abandoned its corporate travel services partnership with Ctrip; and Qunar faced an airline revolt, with more than a dozen carriers closing their flagship stores on its platform. To close out the week, Ctrip announced it would invest US$180 million to become the biggest shareholder in Indian online travel agency (OTA) MakeMyTrip, with a 27% stake.
A year ago, Ctrip had two major competitors: Expedia's eLong, which appeared to be past its prime; and Baidu-controlled Qunar, which had taken the fight down the funnel and straight to Ctrip, morphing from a metasearch site into an OTA. Qunar's new strategy depended heavily on the online marketplace model popularized in China by Alibaba, and Ctrip made its own marketplace a bigger priority. Ctrip, Qunar and eLong were bleeding cash, thanks to rampant discounting to spur customer acquisition. That drag on profitability was certainly a factor in the two deals that reshaped China's online travel industry in 2015: Expedia's sale of eLong to Ctrip, and Baidu's forcing the consolidation that ultimately brought together Ctrip, Qunar and eLong.
With its two biggest competitors now neutralized, one might think Ctrip sits pretty. But in a hypercompetitive e- and m-commerce market, there is no rest for the weary. For starters, Ctrip will soon need to figure out how to leverage its new position vis-a-vis Qunar.
Ctrip holds a 45% stake in a company that is now facing a revolt from more than a dozen airlines, which shut down their flagship Qunar stores in reaction to Qunar's new "Pangolin" initiative. Pangolin lets travelers name their own price, and gives agents two hours to match it. The scheme was a hit with travelers, and drove up air ticket sales. But airlines saw a chaotic system that further undercut their fares, and often let unscrupulous agents bubble up to the top of the auction. It exacerbated practices that airlines have complained about for years – agents offer cut-rate tickets with exorbitant change policies and fees, especially on routes that are notorious for cancellations and delays. That creates a customer service nightmare for airlines, all the while forcing them to be displayed side-by-side on Qunar with much higher fares than agents offer.
The airlines did not cite Pangolin by name, but pointed to customer complaints about change fees and communication with travelers about delays. Qunar's public response to the situation has been that airlines are simply trying to negotiate for their fares to show up first, regardless of price. That allows the OTA to appear like a consumer advocate, instead of an online travel platform looking to grow bookings fast.
The skirmishes at Qunar underscore the competitive nature of the Chinese online travel market, and the challenges that Ctrip still faces. The country's stock market and currency stumbled last week, and investors in Ctrip and Qunar (both NASDAQ-listed) are surely putting pressure on them to show profits. Still, there is little doubt that it is a growth market for travel – especially for Chinese consumers' fast-growing outbound travel spend and for bookings via mobile devices, which will double as a share of China's travel market from 2015 to 2017. That upside has attracted the attention of wide-eyed entrepreneurs, as well as China's Internet giants. By wedding itself to Baidu to consolidate its leading position in travel, Ctrip has become fully engaged in the war between Baidu, Alibaba and Tencent – the country's trio of e-commerce giants also known as BAT.
The MakeMyTrip deal is a notable first big investment in an overseas peer for Ctrip, which has invested in or acquired a wide range of properties, from niche OTAs to hotel and car rental companies. It is also a move that Alitrip and Tencent are unlikely to counter with a sizeable stake in a foreign OTA. They are each having enough trouble lining up their strategies in the Chinese market – domestic and outbound. But they do see Ctrip's alignment with Baidu as a reordering of competitive dynamics, as evidenced by Alibaba's recent decision to have its 35,000 employees stop using Ctrip's corporate booking platform. An understanding of how travel fits into each BAT company's strategy is key to watching China's online travel market in 2016.
BAIDU: SEARCH LEADER HOOKS DEEP INTO TRAVEL VIA CTRIP
Baidu, China's undisputed search leader, owns 25% of Ctrip, which in turn owns 45% of Qunar and 36% of eLong. This leaves Baidu with strong positions in the three biggest OTAs, in addition to wielding a search monopoly like Google's (but only in China). Baidu dabbles in a host of verticals, similar to Google, including online forums, online payments – and yes, self-driving cars. It also has a sizeable strategic investment in Uber China.
ALIBABA: E-COMMERCE BEHEMOTH KEEPS TRAVEL IN HOUSE
Alibaba showed it was serious about travel when it converted Taobao Travel into a site and app 100% devoted to the vertical in 2014. The resulting brand, Alitrip, is still small. However, its parent company has m-commerce scale and China's most popular payment platform (Alipay) and has created a social credit scoring system that could play an important role in Chinese e-commerce. Alibaba reported $394 billion in gross merchandise volume for its 2015 fiscal year, and 307 billion monthly active users on mobile in the month of June. Alitrip has stated a bigger commitment to outbound rather than domestic travel, which is reflected in Alibaba's travel investments (limited compared to Ctrip's). Baicheng (formerly known as ByeCity), Qyer and Zailushang are all outbound-focused trip-planning sites. Ties to one of the globe's hottest e-commerce players should give Alitrip access to strong reserves of both cash and data. But existing as a newly created brand within a huge company also comes with its challenges – namely, answering to management of a company that made its name as a mass retailer of physical products. Alibaba also has stakes in a ride-hailing app company and a group-buy/restaurant reviews site – more on that below, as those companies are also in the stable of China's third BAT company.
TENCENT: MOBILE MESSAGING LEADER TRAILS IN TRAVEL – FOR NOW
Tencent dominates messaging and social media with WeChat, the most widely used and misunderstood messaging app on the planet. It is unrivaled in China for user base and consumer engagement, and also has a robust ecosystem with many travel providers hosting apps within its platform. Purchases of air and rail tickets and taxi hailing are prominent features in WeChat Wallet. It also has a credit system that rivals Alibaba's, taking into account social network activity.
But Tencent's position in travel is awkward at the start of 2016. Everywhere it has dipped its toe into the vertical, the waters are polluted by the presence of competitors. It has stakes in eLong, OTA LY.com, and is linked to outbound/packaging OTA Tuniu (via JD.com). But Ctrip, which is now aligned with Baidu, also has investments in each of those companies. In August 2015, Tencent made a bid to buy out Ctrip's eLong shares, but that failed, leaving Tencent as the second-biggest shareholder behind Ctrip. Tencent also shares two travel-related tie-ups with Alibaba, thanks to mergers in the taxi-hailing space (Didi Kuaidi) and the October 2015 merger of group-buy site Meituan and restaurant review site Dianping. Alibaba has been rumored to be looking to sell its shares to go it alone in China's hot online-to-offline goods sector, much as it has in travel.
In the near term, Meituan-Dianping could become a disruptive force in online travel. The merger brought together a huge group-buying/deals business in Meituan, and a massive user base in restaurant review site Dianping. Meituan has sold travel-related products for years – restaurant deals, local activities, and hotels, primarily as Groupon-style group buys – and in August, it acquired travel site Kuxun from TripAdvisor. In December, Meituan-Dianping began selling standalone air, and invested in PMS provider BeyondHost to support standalone hotel sales. In the first half of 2015, Meituan booked a self-reported 33 million room-nights, which would make it the second-biggest online seller of hotels, behind Ctrip.
Looking at China's online travel business via the BAT lens is a necessary exercise (see below to view all three companies side by side). At the moment, Ctrip is the runaway leader – a fact punctuated by its investment in MakeMyTrip. But in the wild, wild East that is China's Internet commerce business, primacy can be fleeting. Each of the BAT companies has levers it can (and does) pull to squelch competition. The trio's biggest weapons – Baidu's search dominance, Alibaba's payment platform and e-commerce scale, and Tencent's ownership of a rich ecosystem made for the mobile age – each has a unique and powerful role in online travel.
BAIDU, ALIBABA AND TENCENT'S TRAVEL BRANDS, INVESTMENTS AND ACQUISITIONS
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