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PUBLISHED : Wednesday, 10 April, 2013, 12:39pm
UPDATED : Wednesday, 10 April, 2013, 12:39pm

Baidu's Qunar hit by merchant revolt

A revolt by agents on Qunar's online travel platform will get settled in the next one to two months, but could delay the company's IPO plans by a year or more

BIO

Doug Young has lived and worked in China for 15 years, much of that as a journalist for Reuters writing about Chinese companies. He currently lives in Shanghai where he teaches financial journalism at Fudan University. He writes daily on his blog, Young’s China Business Blog (www.youngchinabiz.com), commenting on the latest developments at Chinese companies listed in the US, China and Hong Kong. He is also author of a new book about the media in China, “The Party Line: How the Media Dictates Public Opinion in Modern China.”
 

Former high-flyer Qunar is quickly discovering the risks of using third-party agents to provide many of its travel services, as many of those agents are suddenly leaving the platform in a mass uprising. The revolt in many ways looks similar to what happened two years ago to e-commerce leader Alibaba, which saw a similar uprising of smaller third-party merchants on one of its B2C e-commerce platforms after changing some of its pricing policies.

All of this underscores the dangers of operating an online platform where third-party merchants and agents supply the actual products and services being sold to consumers. By comparison, more traditional players like travel services leader Ctrip (Nasdaq: CTRP) deal directly with hotels and airlines to offer room reservation and ticketing services, in a process that requires more labor but cuts out third-party agents.

Qunar's model works well by allowing website operators to focus on building and running efficient online platforms, while industry specialists get to provide actual goods and services. But the model also can backfire if conflicts develop between the platform operator and its third-party merchants, which appears to be what's happening with Qunar.

I've written several times in the past about Qunar, which received a big vote of confidence in 2011 when it received a US$300 million investment from leading search engine Baidu (Nasdaq: BIDU). I've previously been critical of Baidu for its inability to develop new business areas outside its core search business, but this Qunar investment looked like a good bet on a company with strong growth potential. Now it looks like I may have to revise my assessment slightly.

Local media have written about this latest conflict several times in the last week, including the latest report that says a number of major third-party agents that provide hotel booking services have abandoned Qunar's platform after the company changed its operational model. Qunar confirmed the exodus, but said it is talking with the parties about returning to its platform.

There's no explanation on why the agents have left Qunar, but in this instance the obvious reason is money. Qunar has been talking about making a New York IPO since last year, and wants to show investors some nice profits before making its first public filing for such an offering. I suspect the company recently raised prices for agents that use its platform in a bid to squeeze more money out of them to puff up revenue and profits.

Clearly the agents weren't pleased, which has resulted in this mass exodus that looks like a bargaining ploy. As I wrote at the beginning of this commentary, Alibaba experienced a similar merchant revolt on one of its popular shopping platforms in 2011 after it changed its rental fees for merchants that used the site. In that case, the merchants complained that the new fee structure discriminated against smaller vendors on the site, and favoured bigger, more profitable retailers.

That uprising resulted in numerous headaches and bad publicity for Alibaba, before quietly fading into the background. Nothing was ever written on what concessions Alibaba offered, but I suspect it probably quietly eliminated some or all of the original price hikes that sparked the uprising in the first place.

In this latest case, Qunar is likely to follow the same route since it won't want to lose its major suppliers at such a critical time in its development. I doubt we'll see any major announcements when the current uprising is settled, and business on Qunar's site will probably return to normal in the next month or two. But the resulting roll-back in recent price hikes means Qunar's drive into the profit column might get delayed for a year or more, meaning its planned IPO could see similar delays.

Bottom line: A revolt by agents on Qunar's online travel platform will get settled in the next one to two months, but could delay the company's IPO plans by a year or more

To read more commentaries from Doug Young, visit youngchinabiz.com

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