A Close Look At The Strengths & Challenges Of Baidu's O2O Ecosystem

摘要: Will Baidu's O2O ecosystem be built up one day? What strengths and challenges does Baidu have?

(Chinese Version)

On October 30th, Baidu, the leading Chinese language Internet search service provider, announced its unaudited financial report for the third quarter. According to the report, total revenues in the third quarter of 2015 were CYN 18.383 billion ($2.892 billion), a 36.0% increase from the corresponding period in 2014. Gross merchandise value (GMV) for Transaction Services totaled CYN 60.2 billion ($9.5 billion) for the third quarter of 2015, an increase of 119% year-on-year. After the report was released, Baidu’s stock price jumped by 7.57% to $185.98 per share, the closing price also reached $169 per share, making the total market value hit $59.1 billion. The stock price continued to rise and as of November 1st, the closing price had reached $187 per share, making the total market value hit $65.0 billion.

Even so, Baidu’s stock price remained much lower than the peak in 2014. When compared with the other two giants Tencent and Alibaba, Baidu was still lagging behind: Tencent’s market value had jumped to $177.0 billion, 1.7 times higher than that of Baidu, while Alibaba’s market value also hit $164.0 billion, 1.5 times higher than Baidu’s.

Nevertheless, the revenue margin dropped by 35.9% year-on-year and 45.82% quarter-on-quarter, due to a 32% decrease in margins of products including Qunar.com, Nuomi, Baidu Takeaway, Zhida.com, Baidu Wallet, etc. and a 5.4% decrease in margins of Baidu’s video streaming service platform iQiyi.com.

Now let’s have a closer look at the financial report and even get a glimpse of Baidu’s future.

Li Yanhong, the founder and CEO of Baidu

Li Yanhong, the founder and CEO of Baidu

What are the strengths of Baidu?

In the Q2 Financial Report, Baidu, for the first time, vowed to shift its focus to O2O businesses and invest CYN 20 billion in its O2O sector, including Nuomi. What exactly drew Baidu to make such decision?

Up till now, Baidu has established, through various rounds of investment, merger, interior research & development and split, an entire ecosystem with a diverse range of products in different sectors of the Chinese O2O market, including online travelling, online car-hailing, local service(take-away delivery service especially), etc. These products all served to become some of the key strengths of Baidu.

Strength One: The No. 1 provider of online travelling service

Representative companies: Ctrip, Qunar
Market share: 80%
Formation: merger
Stake: 25%

In the evening of October 26th, Baidu used its share in Qunar to exchange for Ctrip’s share. After the deal was completed, Baidu held 25% of Ctrip’s total voting right, making Baidu the biggest shareholder of Ctrip. In the meantime, Ctrip would be holding 45% of Qunar’s total voting right. Sure enough, this was the largest merger Baidu had initiated in 2014 in the O2O travelling sector. Through this merger, Baidu had reached the top of the food chain in O2O travelling sector, accounting for 80% of the market share. As a matter of fact, this was the first time Baidu had become the number one player in a segment O2O market.

The merger was also embraced by investors. The day the merger became official, Ctrip, Qunar and Baidu’s stock price all jumped a great deal, with the peak increase rate hitting 34.52%, 26.52%, and 11.04% respectively. Up close, Ctrip’s stock price jumped by 22.11% on that very day while Qunar’s and Baidu’s stock price roared 7.92% and 5.53% respectively. By that measure, the total market value of these three companies would have achieved $77.0 billion. In addition, Goldman Sachs raised its rating over these three companies’ stocks to “buy”.

What benefits did Baidu reap through the merger?

1. Shifting its focus to other segment O2O markets

Since Absolute Valuation Method was adopted to Baidu’s stock, profit became a key factor in determining the valuation result. Statistics suggested that the profit of Qunar and iQiyi had both been declining steadily: while iQiyi pulled back Baidu’s profit margin by 5.4% in Q3, Qunar also lost CYN 1.53 billion in the first half of 2015. To continue to invest in the O2O sector, Baidu had got to give up its shares in Qunar and increased its profit in a short time.

2. Indirectly dominating the O2O travelling market

Through this merger, Baidu has become not only the largest shareholder of Ctrip but also the dominant player in the O2O travelling market. While Baidu surpassed Priceline and owned 25% voting rights of Ctrip, which took up 40% of market share, Ctrip also became the largest shareholder of Qunar, which accounted for another 30% of the market share previously. Furthermore, Ctrip was the shareholder of several other online travelling agents, including Tujia, eLong, Tuniu, LY.com. In other words, Baidu has indirectly accounted for around 80% of the market share and dominated the O2O travelling market. As a matter of fact, this was the first time Baidu had become the number one player in a segment O2O market. However, it’s worth mentioning that the relationship between Baidu and Tencent might get a little bit trickier since Ctrip and Tencent held LY.com’s and eLong’s stocks together.

3. Outperforming its rivals

In terms of Gross Merchandise Volume, although Baidu’s GMV totaled CYN 60.3 billion ($9.5billion) in Q3 and was higher than that of Dianping Meituan’s, the gap was quite close. Coupled with Qunar, however, Baidu’s GMV would surpass that of Dianping Meituan’s, making Baidu the number one player in the Chinese O2O market. If we take Jia.com, Baidu’s O2O decoration platform, into consideration, then Baidu will certainly become the largest O2O giant in China.

In addition, the merger could pose a threat to Dianping Meituan’s online hotel-booking business. According to Analysys International, the total transaction volume soared to CYN 3 billion in the Chinese online hotel-booking market during the first half of 2015, among which Meituan took up 75%, Dianping took up 9%, while Baidu Nuomi took up 13%. That is to say, Dianping and Meituan together took up 84% of the market share and would probably enjoy a transaction volume of over CYN 5 billion in 2015. However, since both Dianping's and Meituan’s library of hotels was both from Ctrip, Qunar, eLong, etc., all of which now belonged to Baidu after the merger. If Baidu wished to do some trick, then Dianping Meituan would certainly suffer a great deal in its online hotel-booking business.

Strength Two: The benefits of online car-hailing service

Representative company: Uber
Market share: 12%
Formation: investment
Stake: 1.5%

The market value of Uber, the fastest-growing and most promising online car-hailing platform in China, has doubled within less than a year. When Baidu just decided to cash in near the end of 2014, the market value of Uber was merely $40 billion, yet that figure has surpassed $70 billion by now. In addition, Uber could drive Baidu to build a close-looped O2O business ecosystem with two of its O2O products.

One is Baidu Map, an important gateway to O2O services

Clothing, food, housing and transportation are not only the basic necessities of life, but also key components of Baidu’s O2O ecosystem. In terms of clothing, Baidu has already been penetrating this market by acquiring a series of online retailers and integrating Wanda Plaza and other means; In terms of food, Baidu Nuomi has also been providing related services; In terms of housing, Ctrip and Quanr have become the most popular hotel-booking service platform in China; In terms of transportation, Baidu filled in the gap by integrating Uber to Baidu Map and providing users with navigation and car-hailing services within one app.

For Baidu, mobile maps are the best gateway to O2O services. According to Q2 Financial Report, among the 15 billion search requests on Baidu Map every day, 70% were related to life services. The enormous volume of information (including restaurants, hotels, entertainment places, banks and gas stations, etc.) must be the natural advantage of Baidu’s O2O services.

The other is Baidu Wallet, and Uber would provide a great scenario for users to adopt Baidu’s own e-payment tool

The lack of an effective mobile payment tool has always been the central subject of criticism over Baidu’s O2O services. As a matter of fact, e-payment is the key to a closed-loop ecosystem. Although Baidu released Baidu Wallet in 2014, it encountered a series of obstacles, such as substantial difference from Alipay in terms of user scale, high cost in obtaining new users, low user retention rate, etc. Statistics suggested that the number of active users was merely 45 million, 7.6% of Alipay and 11.2% of WeChat. Baidu Wallet lagged far behind Alipay and WeChat Wallet in terms of both range of scenarios and user frequency. In this sense, integrating Uber could bring Baidu Wallet more users and an entire new user scenario.

Promoting e-payment tools by means of scenarios has proved to be quite effective as can be seen in Tencent’s success in promoting WeChat Wallet via Didi Dache. Before Didi merged with Kuaidi, Didi could create as many as 3 million user scenarios for WeChat Wallet, which contributed to a great number of new users of WeChat Wallet. It seemed that Baidu was attempting to do the same by collaborating with Uber, yet it remained to see if Baidu could catch up when it already fell far behind. On the other hand, however, Baidu had to succeed if it wished to build an encompassing O2O ecosystem.

Even so, it seemed that Baidu’s plan didn’t quite work out, at least for now. Statistics suggested that only 1 out of 100 users who hailed cars via Baidu Map paid the bill via Baidu Wallet. In this sense, Uber could only help American investors know Baidu’s O2O business adventures better at present, and nothing else. It remained to see when Uber would bring Baidu some real benefits.

Strength Three: Takeaway and group-buying service are the cores

Representative companies: Nuomi, Baidu Takeaway
Market share: 10%
Formation: Split
Market value: CYN 1.9 billion

Since takeaway and group-buying services are needed more frequently, Baidu Takeaway and Baidu Nuomi are inevitably at the core of Baidu’s O2O ecosystem, while Baidu Film, Baidu hotel-booking services are all part of the entire plan. If Baidu Nuomi and Baidu Takeaway succeed, then Baidu’s O2O ecosystem will almost succeed, too.

As a matter of fact, Baidu’s Internet products, including Baidu Search, 91 App Market, Mobile Baidu, Baidu Map, Baidu Browser, Baidu Wallet, have all been paving way for Baidu’s O2O businesses.

Since Baidu Takeaway and Baidu Nuomi are at the core of Baidu’s O22 ecosystem, Li Yanhong, the founder and CEO of Baidu, would certainly attach more importance to market share than profit margin. Although the profit margin has dropped from 53% to 29%, Baidu Nuomi and Baidu Takeaway do have opportunities to play a role in the future with the full, unconditional support of Baidu (though Baidu seemed to have no choice but to support them), professional technology development team in Baidu and a high-end positioning strategy.

Strength Four: Fast-developing overseas businesses and enriching experiences

Representative businesses: Overseas search, PeixeUrbano
Formation: Subsidiary and investment

Baidu started to go abroad in 2008 when it announced to enter Japan. Up till now, it has already established subsidiaries in seven countries, including the US, Japan, Brazil, Egypt, India, Indonesia and Thailand. Internet products such as Baidu Smartphone Input Method, Baidu News, have already won over 100 million users around the world. Although Baidu only expedited its internationalization process last year, the momentum has been gathering. In summary, there are two benefits of the overseas businesses:

1. Providing gateways for further expansion

According to Q2 Financial Report of Baidu, the number of monthly active users of mobile search service has achieved 629 million as of June 2015. Baidu has won over 700 million users across 200 countries and regions around the world with its various apps and software, including DU Battery Saver, DU Speed Booster, ES File, Mobo Market, etc., three of which has already gained over 100 million users. In addition, Baidu has won over 1 million users in over 30 countries and regions around the world. When we rank all these countries and regions in terms of the number of registered users, Brazil would rank the first, followed by the US and India. Although the influence of Baidu remains limited, its user base globally will certainly provide Baidu with some hints into overseas markets and help it further expand to overseas markets.

2. Developing models for further expansion

In October 2014, Baidu acquired the Brazilian O2O company PeixeUrbano, adding its market share from 35% to 55% and outperforming Groupon and becoming the number one service provider with 10 million users across Brazil. It is well known that although Brazil is the fifth largest Internet market around the world with a population of 200 million, less than 30% of Brazilians use smartphones, which indicates that Brazil could be a burgeoning and promising market. At present, Baidu is actively introducing Nuomi’s services, such as restaurant group-buying and movie ticket-booking services, to PeixeUrbano, the Brazilian version of Baidu Nuomi to some degree.

In addition, the number of Baidu Map’s monthly active users has surpassed 326 million, and Baidu has already taken up over 70% of the mobile navigation market. Baidu is also on the rise in other sectors of the O2O market, as can be seen in the following figures: Sequoia Capital joined Legend Capital and invested in Baidu ZY Bang, which is valued at $100 million; the number of registered users of Baidu Wallet has surpassed 45 million as of September 2015, an increase of 520%...

What challenges are out there?

Although Baidu owns the above four strengths, it still faces some fundamental challenges. Only when Baidu overcome these challenges can it really build an encompassing O2O ecosystem.

Challenge One: Baidu Map might not be an effective gateway for O2O services

As one of the two core businesses of Baidu’s O2O ecosystem, Baidu Map is a huge traffic-winner for Baidu and an important gateway for Baidu’s O2O services. Baidu has planned to provide users with a wide range of information concerning restaurants, theatres, KTVs and shopping malls, etc., develop separate apps for different usages, and build an entire O2O ecosystem based on logistics-based systems and map navigation services. However, it seems that Baidu Map fails to become a gateway, at least for now, and even in the near future. If so, then what else gateways to Baidu have to support its O2O ecosystem?

Moreover, Baidu has planned to connect its different O2O services with Baidu Map, but when Baidu Map can’t become an effective gateway, these different services will remain separate, and an encompassing ecosystem will be out of the question.

At present, Baidu Map remains a navigation tool, not an effective gateway for traffic. Although users might use Baidu Map to search for restaurants or theatres, few of them would use Baidu Map for further usages. According to CTR, a leading market information and insight provider in China, few users have the habit to use mobile maps to enjoy O2O services.

While aMap quietly transformed itself from a navigation tool to an Internet map data company and chose to collaborate with Alibaba, Tencent Map was also not treated as a potential gateway for traffic by Tencent. To wrap up, it remains to see if maps will become an important gateway for O2O services in the future?

Challenge Two: Baidu Wallet either

Then how about Baidu Wallet? As the other core business of Baidu O2O ecosystem, Baidu Wallet is the key to infiltrate Baidu’s O2O services into people’ everyday life and close of loop of Baidu’s O2O ecosystem. However, the user base and scenarios of Baidu’s finance tools such as Baidu Wallet, Baidu Finance, Baidu Micro-Lending remained limited. When Alipay and WeChat Wallet have already got users’ into the habit of paying via these two tools, it could be really hard for the late entrant Baidu Wallet to attract users to sign up another account on Baidu Wallet and grab a piece of the pie in the market.

While the number of Baidu Wallet’s active users has just surpassed 45 million, Alipay and WeChat have already won 600 million and 400 million active users respectively. On current trends, it could be really hard for Baidu Wallet to catch up. Of course, Baidu Wallet can join Alipy and WeChat Wallet and share their user base, but if so, Tencent and Alibaba will have the final say, not Baidu itself. To wrap up, whether Baidu Wallet succeeds or no, it will certainly have a huge influence on the development of Baidu’s O2O ecosystem.

Challenge Three: Little space for Baidu Nuomi to make a role

Baidu Nuomi, as a more frequently-used group-buying platform of Baidu, is also an important part of Baidu’s O2O ecosystem. However, Baidu Nuomi only accounted for 20% of the market share, while Dianping Meituan together took up 80% of the market share. Thanks to effective offline promotion and online commercials, Dianping and Meituan have firmly dominated the online restaurant-booking, group-buying, movie ticket-booking and hotel-booking market. If the Matthew effect applies here, then Baidu Nuomi will certainly be driven out of the market by Dianping Meituan, which could be an annoying bad news for Baidu.

Challenge Four: An ineffective investment preference

If you have a closer look at the list of companies that Baidu has invested in, then you might find that Baidu seemed to prefer to invest in the number two or number three player in the segment market, and then support these companies and unleash their potentials with the aid of abundant capital and resources of Baidu. However, in the Chinese Internet world, the number one seems to be always leading any segment market as long as they didn’t make silly mistakes. In this case, the number two or number three will always be suppressed by the number one no matter how many efforts they have put in to outperform and how much money Baidu has invested in them. In Qunar’s case, Baidu has actually been suffering from its investment in Qunar when Qunar kept losing money. I don’t think Baidu’s investment preference will finally work out and contribute to building up Baidu’s O2O ecosystem.


For sure, the development of O2O businesses will determine the future development of Baidu. Yet it remains to be seen if Baidu’s shift of focus onto O2O will boost its stock price and win investors’ recognition, especially considering the above strengths and challenges of Baidu.

Personally, I still have confidence in Baidu’s investment and the positive effect of Baidu’s O2O business adventures and I predict that Baidu’s market value will surpass $100 billion by the time Baidu released the Q3 Financial Report in 2016.

[The article is published and edited with authorization from the author @Michael Mao, please note source and hyperlink when reproduce.]

Translated by Levin Feng (Senior Translator at ECHO), working for TMTpost.




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