Two major benefits of frequent mergers between the top two in the Internet industry

Judging from the four O2O mergers that occurred this year, I don’t think the mergers will have a negative impact on the development of the industry.

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Recently, Jiayuan.com, an online dating platform, announced that it has reached a merger agreement and plan with LoveWorld Inc. and its wholly-owned subsidiary FutureWorld Inc., which is an indirect wholly-owned subsidiary of Baihe.com. This is also the fifth merger case in China's Internet industry in 2015.

Since 2015, the merger of China's largest and second largest Internet companies has been intensifying. Didi Kuaidi, 58.com, Meituan Dianping, and Ctrip Qunar have merged one after another and caused a sensation. The last influential merger dates back to the marriage of Youku and Tudou in 2012.

It is worth noting that the merger of Jiayuan.com and Baihe.com is of the same nature as the marriage between Youku Tudou, which is an alliance between pure Internet companies. It is completely different from the four O2O mergers such as Didi Kuaidi. The latter is the integration of the Internet and traditional industries. The competition brought about by price wars and subsidy wars is extremely exhausting. They choose to merge under the secret matchmaking of capital to reduce internal friction and achieve long-term development.

In fact, the merger of the largest and second largest Internet companies is also an inevitable result of market development. When an industry develops to a certain stage, such as 58.com and Meituan-Dianping, which have experienced long-term competition and developed to the present, the concentration effect of the entire market is obvious. At this time, it is a natural move for several companies to integrate to reduce internal friction and enhance competitiveness. After the merger, Meituan-Dianping's huge ground-based sales team laid off employees and merged into one in some cities, and reduced marketing expenses.

Although there are many benefits to the merger of the top two companies, problems also arise. The first is the superposition of the market shares of both parties. Is there a suspicion of monopoly, which will lead to an intensified Matthew effect and stifle industry innovation? In fact, before the merger, Didi and Kuaidi were both involved in the taxi-hailing market, with taxi-hailing as the main business and private cars as the auxiliary business. After the merger, the taxi-hailing market share reached 99%, and the private car market faced a close fight with Uber, which was strongly supported by Baidu.

Due to the existence of network effects, Internet companies are striving for monopoly, which is understandable, provided that they achieve monopoly through products, innovation, and marketing in a free market environment. On the contrary, setting up artificial entry barriers through administrative means is a monopoly. Obviously, the merger of Didi and Kuaidi is the result of perfect competition.

The merger of Ctrip and Qunar did not create a monopoly. According to Analysys, in the second quarter of 2015, Ctrip and Qunar’s combined share of online air ticket transactions reached 76.93%, and their combined share of online accommodation transactions reached 62.11%. The merger of the two parties has greatly increased Ctrip’s market share, and Ctrip, which also owns eLong and Qunar, has a clear advantage.

However, the merger of Ctrip and Qunar only affects the online travel industry. Currently, the Internetization level of China's tourism industry is still very low, and online travel accounts for only 10% of the entire tourism market, far lower than the 40% level in Europe and the United States. Therefore, although the new Ctrip has put tremendous pressure on tourism integrated platforms and vertical manufacturers, it does not constitute a monopoly.

From another perspective, the purpose of corporate monopoly is nothing more than to obtain huge profits by relying on market dominance. Although the capital market has cooled down collectively and the subsidy war has cooled down, due to the lack of a clear profit model, O2O companies are still mainly loss-making. This shows that market leadership is not a panacea and has not even helped O2O players get rid of the dilemma of losses. In addition, O2O is destined to be a protracted battle. It will take 5 years or even longer to truly become profitable. Both large and small players must be prepared for a long run. Where does the monopoly come from?

Of course, in measuring the pros and cons of a merger, I think the most important criterion is whether it promotes industry development, rather than simply looking at the superposition of market shares. You know, the hidden promotion of the capital market represents the will and judgment of investors, but in the long run, whether it can create new value for users and gain market recognition is the kingly way, which can fundamentally determine the success or failure of a capital operation. Although no obvious effect can be seen in the short term, the innovation of user value is indeed playing a role.

Judging from the four O2O mergers that took place this year, I do not think that the mergers will have a negative impact on the development of the industry. On the contrary, there are some favorable signs and positive effects that will promote the rapid and healthy development of the industry. I summarize them into two major benefits:

1. Return to reasonable profit margin

In the short term, price wars and reduced subsidies will lead to fewer low-priced products and benefits for users, which is what they don’t want to see. But please note that, like traditional services, O2O is ultimately a business, and merchants will not give up the pursuit of profits just because they have the wings of the Internet, which is itself a shameful act.

Whether it is products or services, they all conform to the principle of "you get what you pay for". O2O players cannot and will not always engage in price wars. It is inevitable to move towards profitability, and they may obtain profits from other aspects. In other words, in the long run, corporate profits are actually a protection of user interests.

Any industry needs to make money and maintain a reasonable profit margin. When the overall income or profit is unreasonable or unstable, the damage to the development of the industry is a long-term impact. If the industry is affected, it will inevitably affect the services enjoyed by users. Only when prices fall back to normal levels, the upstream and downstream of the industry chain can make profits, and each link maintains a reasonable profit level, can user services be better put on the normal track.

In fact, in the business philosophy of traditional merchants, profit is a matter of course. Once the profit declines, they will become nervous and are most afraid of losses. The result of the merger is to weaken market competition, and merchants will obtain normal returns, which is conducive to promoting the stability of the cooperative relationship between the platform and merchants and maintaining a normal service level.

2. Accelerate the integration of online and offline

Whether it is taxi-hailing, housekeeping, catering, or tourism, the current level of Internetization is still very low, and the interests within each industrial chain are complex. The merger of the top two will help the platform to increase its voice in the industrial chain and reduce costs, and accelerate the integration of online and offline.

Taking the online travel market as an example, the user scale and transaction scale of the new Ctrip after the merger have increased significantly, increasing the bargaining chips for negotiations with upstream suppliers and weakening the latter's role in the tourism industry chain. At the same time, the supply chain of traditional travel agencies is long and complex, and has been criticized by users. With the establishment of the online advantages of the new Ctrip, the competition focus of online travel companies in the future will shift to offline. Players such as the new Ctrip, Tuniu, and Tongcheng will strengthen the layout of upstream suppliers, and the role of travel agencies in the tourism industry chain will be further weakened in the future.

It is important to know that small and medium-sized travel agencies have a limited user base and are located between first-tier suppliers and retailers. Facing the new Ctrip with platform advantages, their status is bound to decline and they face greater survival pressure. Of course, the competition pressure in the online travel market is still huge. Against this background, upstream and downstream integration and mergers in the tourism industry will occur frequently, and companies with a large number of resources will dominate the tourism industry, such as the new Ctrip.

The status of online travel companies represented by the new Ctrip has been further consolidated, which will help accelerate the integration of online and offline, enhance users' overall travel experience, and take the online travel market to a higher level. In the future, O2O will become the mainstream of the tourism market.

It is worth noting that the current tourism market is relatively fragmented and has a low degree of integration. Users need a standardized, one-stop service. The top priority for online travel companies is to integrate advantageous tourism resources from various regions and improve their overall service level. In the future, platform-level companies such as Tuniu and Tongcheng will also undergo a continuous merger process to incorporate better resources into their own systems. In mid-November, there were rumors that Tuniu and Tongcheng would merge. Isn’t this proof of ***?