Ctrip, Qunar Go Their Separate Ways
What nearly became a blockbuster marriage between China’s 2 leading online travel sites has instead ended in divorce, with word that industry leader Ctrip (Nasdaq: CTRP) has formally yanked its hotel listings from the site of the second largest player Qunar (Nasdaq: QUNR). My use of the divorce metaphor here isn’t completely appropriate, since the 2 companies came close but never formally consummated a marriage. Still, the final split in this tie-up is probably the best ending for everyone, since it would have been a rocky road even if the 2 companies had agreed to merge their operations.
The latest reports are relatively straightforward, saying Ctrip decided to remove its hotel listings from Qunar’s online travel site because it believed that its rival wasn’t behaving as a neutral third party host for such listings anymore. (English article; Chinese article) The 2 companies use very different business models that would have been highly complementary if they had merged.
Ctrip’s model is similar to most of its global rivals, where it directly negotiates prices with hotels and then lists those properties on its site and takes a commission for each booking. By comparison, Qunar is simply a third-party operator of a platform where other travel agents can list their prices for hotels. Thus a customer can find a wide range of prices on Qunar’s site for a single hotel, and Ctrip was just one of many companies offering its products to the site’s customers.
Ctrip is accusing Qunar of giving preferential placement on its site to travel agents that paid additional fees to Qunar directly. I obviously can’t verify whether that claim is true since I don’t have access to inside information. But the practice is certainly consistent the business model of Qunar’s much larger parent, online search leader Baidu (Nasdaq: BIDU), which is regularly accused of giving preferential placement in its search results to paid advertisers.
Ctrip was probably hoping for similar preferential placement for its listings when the 2 companies were getting chummy, but then became disappointed when Qunar failed to give it any special treatment. Ctrip investors seemed to worry slightly about the development, with the company’s shares falling as much as 2.2 percent before ending the day down nearly 1 percent. Qunar shareholders were a little more worried, bidding the stock down as much as 3.4 percent before shares ended the day down 1.2 percent.
Things looked quite exciting when word first emerged that the companies might merge back in April, just months after Qunar made a highly successful IPO in New York. (previous post) But then the talks fell apart for unexplained reasons, most likely related to issues of control. As Qunar’s largest stakeholder, Baidu probably wanted to have final control over a merged company. But Ctrip’s fiercely independent management probably also wanted control, believing it had more experience and was far more profitable.
The loss of Ctrip as a customer certainly won’t help Qunar in its slow march to profitability that seems to be moving in the wrong direction recently. The company saw its net loss balloon by a factor of 10 in the second quarter, reaching $68 million, as revenue grew at a much slower rate of 127 percent. Qunar’s commissions from Ctrip probably weren’t huge, but I do expect that the loss of its business could wipe out as much as $1-2 million from Qunar’s quarterly revenue.
At the end of the day, the finalization of this separation is probably the best outcome for everyone. Qunar certainly has plenty of resources to survive as an independent company over the longer term, thanks to the deep pockets of its parent Baidu and also its own cash pile of about $200 million. It’s also quite possible that Beijing would have vetoed a marriage on antitrust grounds, and now the continuation of the 2 companies as separate financial entities will ensure long-term competition in the space.
Bottom line: Ctrip’s decision to remove its listings from Qunar’s site marks the formal end of a failed courtship, which could hurt Qunar slightly over the near term but will be good for the sector over the long run.
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