INTERNET: Ctrip Joins Open Platform Crowd, Oversight Needed
Bottom line: China is positioned to become a global leader in development of open platforms as an Internet business model, but regulators should take a more active role in overseeing these marketplaces.
China is quickly becoming a global leader in a type of online business that uses an open platform model at its core, with travel stalwart Ctrip (Nasdaq: CTRP) becoming the latest entrant into the space after years of operating a more traditional closed platform service. While traditional closed platforms see website operators sell products directly to consumers, open platforms let operators simply manage online marketplaces where consumers can shop for products from a wide range of third-party merchants.
Such an approach creates greater competition and consumer choice, but can also lead to scams, misleading sales practices and other problems that undermine confidence and create chaos in the marketplace. Platform operators have a responsibility to maintain order in their marketplaces, which is in their own best interest since scams and chaos would ultimately hurt their own reputation.
But China’s regulators also have a role to play, and should work more actively to create guidelines and rules that all open marketplace operators must follow. Such an approach will ensure orderly development of this growing area of the Internet, where China has already produced several global leaders, most notably e-commerce giant Alibaba (NYSE: BABA).
Ctrip is one of China’s oldest listed Internet companies, and now generates some 8 billion yuan ($1.3 billion) in annual revenue. But until recently nearly all of that came from its original closed-platform business model, which saw Ctrip directly negotiate ticket and room prices with airlines and hotels and then offer those products directly to consumers on its site.
That model has been challenged with the rapid Qunar (Nasdaq: QUNR), which uses an open platform strategy that allows independent travel agents to post their own air ticket and hotel room rates on Qunar’s site. In response to that threat, Ctrip recently launched its own open platform and said in its most recent report that part of the business now hosts some 2,400 agents selling hotel rooms, air tickets and other travel services.
But the platform was in the headlines last week for more negative reasons, as media said some airlines were growing increasingly frustrated at the increasingly chaotic ticket pricing created by independent travel agents. (Chinese article) Many such agents often sacrifice their own commissions to offer lower prices, shaking up an old system where prices were relatively unified and creating one where prices can vary widely.
Such widely varying prices for a single product isn’t necessarily a bad thing, but could ultimately cause problems and disruptions for Ctrip and Qunar if the airlines ultimately rebel and withhold their tickets or create other conditions for the travel websites. Such widely varying prices could also create consumer confusion and discontent because they may come with hidden costs, such as unpublished fees from travel agents.
Ctrip is hardly the first company that has to deal with such issues. Alibaba was one of the first major online firms to use the open platform approach, and has had to deal with a wide range of issues from merchant reliability, to the presence of counterfeit goods on its popular Taobao and Tmall sites.
Both Alibaba and Qunar have also had to deal with uprisings on their sites, usually by groups of merchants unhappy at changes to fee structures or other conditions imposed on them. But Alibaba has shown it can overcome most of those problems to create vibrant and extremely popular marketplaces. Its huge success was on display earlier this year when it hosted the world’s biggest-ever IPO in New York, raising $25 billion in a listing that has valued it at twice the level of Amazon, often considered the world’s leading e-commerce company.
Most of China’s e-commerce companies that originally launched with a closed platform model have followed Alibaba’s example, with Dangdang (NYSE: DANG) and JD.com (Nasdaq: JD) now operating hybrid models that include both approaches. The peer-to-peer (P2P) lending business has also exploded in China using a similar approach, which sees website operators set up platforms where individuals can meet to lend and borrow money with each other.
The latest rumblings from the airlines towards Ctrip, together with a regular stream of scandals involving P2P platforms and periodic troubles on the e-commerce sites, reflect the inevitable growing pains in this newer approach to online selling, where China is emerging as global leader. While many platform operators often do an adequate job of controlling problems, relevant regulators should also step up their efforts to also get more involved and create unified standards and procedures. That will ensure the healthy development of this innovative business model for everyone.
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