Meituan vs. Ctrip vs. Alibaba: Who Will Win in China Services? (Tech Strategy – Podcast 22)

In this class, I talk about the crazy collision of Ctrip, Meituan and Alibaba in services in China, particularly in hotels.

You can listen here or at iTunes, Google Podcasts and Himalaya.

How do Ctrip and Meituan compare in the following aspects?

  1. Bundling of services
  2. The Assets of a Marketplace Platform: Users, Activity and Data
  3. Network Effect
  4. Switching Costs
This is part of Learning Goals: Level 3, with a focus on:
  • #16 Basics of Ctrip, Meituan and Marketplace Platforms for Services

Concepts for this class:

  • Digital Platforms: Marketplaces for Products and Services
  • Bundling and Cross-Selling
  • Network Effects
  • Switching Costs

Companies for this class:

  • Ctrip
  • Meituan
  • Alibaba Fliggy


I write, speak and consult about how to win (and not lose) in digital strategy and transformation.

I am the founder of TechMoat Consulting, a boutique consulting firm that helps retailers, brands, and technology companies exploit digital change to grow faster, innovate better and build digital moats. Get in touch here.

My book series Moats and Marathons is one-of-a-kind framework for building and measuring competitive advantages in digital businesses.

Note: This content (articles, podcasts, website info) is not investment advice. The information and opinions from me and any guests may be incorrect. The numbers and information may be wrong. The views expressed may no longer be relevant or accurate. Investing is risky. Do your own research.

——transcription below

Welcome, welcome everybody. My name is Jeff Towson and this is Tech Strategy. And the question for today’s class, C-Trip versus Meituan versus Alibaba. Who’s gonna win the death match of Chinese services, especially hotels? And it’s pretty fascinating to watch. There’s a lot going on. You have a lot of the most interesting and really powerful Chinese digital giants. in this space and they’re all sort of colliding in this one area of services of which people talk about transportation, hospitality, hotels and some others. So that’s going to be the question for today and I think it brings up a whole lot of interesting theory and some interesting companies so this should be great. But first, if you haven’t signed up, please do so. That would be fantastic. You can go over to my somewhat dumpy web page which is currently getting an upgrade so hopefully that will be better very shortly and there’s a 30-day free trial and for that we basically all of this content we’re going through companies ideas concepts it’s all with the idea of sort of making you smarter over time i mean this is ultimately a class this is about you know getting wiser and getting more expertise and something that’s fairly complicated And the way you do that is by step by step exercise, repetition, ideas. And that’s kind of how this is all laid out and all the content, the podcast, which is free, but then probably 60, 70% of the content is now for members only. All sort of focuses more and more on these steps, these concepts, these companies. So if you’re interested, do that. It’s great. And we’re doing a lot of fun stuff. Okay. Let’s get on to the class for today. So the approach for today’s class, I’m gonna talk a bit about Ctrip, a very important company, international company competing in Europe and a lot of places around the world, not just China. Meituan, which is just really fun. Meituan’s a fun company. The management is kind of crazy, but aggressive, but cool to watch, and the company’s moving quickly. That’s just a fun company, and it’s important. And then we’ll talk about some theory. behind these companies and in Alibaba I’m not going to go into too much just to sort of mention what they’re doing in hotels and services because we’ve talked about them before and I want to talk more about Maytwan and Ctrip today. And then we’ll talk about the theory and really the theory that matters for this one is marketplace platforms, which we have gone and do a bit and this is marketplace platforms for services not products like buying a cell phone. and not for content, which might be a platform audience builder platform like a Yoku or YouTube or something like that. Now we’re talking about a marketplace platform for services, and these are actually different and there’s some important differences that we’re going to talk about. That’ll be kind of the big idea for today is marketplace platforms for services. The other sort of smaller ideas will be repetition of stuff we’ve already talked about. So it’ll be going more into depth on network effects, obviously important. Switching costs, always important, and then bundling. And those four ideas, three of them have been in classes before, and the big one is marketplace platforms. And the learning goal for all of this is learning goal number 16, for those of you who are subscribers. I’m giving you learning goals in buckets of 10. And we’re on number 16 now, so we’re getting a lot of theory there. So this is gonna be number 16 for those of you following that pathway. Okay. Let’s get into C-Trip. Now I just had an interesting conversation with James Hull and Elliot Zagman, Elliot who lives here in Bangkok. And we talked on their, they have a podcast called China Tech Investor, which looks at a lot of the same companies, but through investor frameworks, as opposed to, you know, more of an educational executive education framework, which is how I think, and we talked a lot about the subject of the collision and services that There’s just a lot of strange things happen in the services space by the companies involved, by what they’re doing, by the changing business models, by the changing industry barriers. It’s a really interesting little sort of niche that’s happening right now. We talked about that yesterday, it was a lot of fun. That podcast will be coming up shortly. So I thought this would be a good way to jump into marketplaces for services. Now, Ctrip is one of the old China giants. I mean, it was founded back in 1999. They went public in 2002 in the US, as a lot of these companies did back then. And this is kind of, I would call it internet 1.0, where it was really taking something that existed in the physical world, the traditional world, which is travel agents, and digitizing it. And a lot of benefits to that, you don’t need offices, you don’t need staff, you can be much bigger. And it’s a platform play at the end of the day. It’s a platform business model that serves two different user groups. One user group being customers, consumers, the other user group, the main one being hotels. Lots and lots of hotels, not just say in China. Well, that’s where they started, but really regionally and internationally because Chinese tourists, you know, they go everywhere now. They’re probably 50% of all the tourists in Asia are Chinese, United States, New York City. Latin America more and more. So it’s hotels everywhere, connecting with Chinese consumers. That would be the two sides of the main interaction on the platform. However, they also have some other user groups there. They have airlines, right? You can get your hotel and you can get your plane ticket. Now there’s not actually that many airlines. So when you’re talking about hotels, you’re talking about millions of hotels, like 1.0. I’ll give you the exact number in a minute. 1.5 million to 2 million hotels. Okay, you’re talking about airlines, you’re talking about 20, 30. So platform business models don’t really work terribly well when you’re connecting people with six different airlines. And you can just go to those airlines on your own. These aren’t independent small hotels on every back street in the Philippines. This is United Airlines, China Eastern Airlines. So these platform business models work well, work… better when you have a huge number of users on each side, that they tend to be smaller SMEs, individual content creators, individual solo entrepreneurs, not just connecting consumers with six big companies, because those companies are pretty good at reaching consumers on their own. So you’ve got at least three sides to this business model, and then you actually have rental cars, get a train ticket. In theory, they have these experiences now where you can go to a city and find a tour guide. So that would be another user group. And now these companies are starting to offer not just hotels, but Airbnb type individuals renting their homes. OK, so there’s actually kind of a lot going on there. But with the real power in this is between consumers and hotels, not the big hyats and the Marriott’s, but the… the smaller and medium sized hotels. That’s where the real volume is happening. The other stuff is helpful, but it’s not the big engine. So that’s why if you go on Seat Trip or if you go on Expedia or or any of these, they will immediately try and get you to book a hotel. Like if you go in there and look for flight, it’ll immediately say, do you want a hotel with that? And you know, it’ll always try and bundle and push you to hotels, cause that’s their business. All right. Now we look at sort of the basics of Ctrip. Ctrip was founded way back when it was kind of a traditional tourism business that had become digital. And they go public and Ctrip has more or less stayed within that model ever since. They are pretty much, you know, if you look at what they talk about, the phrase they have in their 10Ks are we are a one stop travel service. Right. They target businesses and leisure travelers. Basically people not buying as a group. They’re not to say selling to companies buying tickets. They’re selling to what they would call FITs, frequent independent travelers. That’s what they want. Individuals and ideally who buy frequently because one of the issues with services in this space is the frequency of interaction is quite low. So if we’re talking about services, you can start to put these in a couple buckets. You can talk hospitality and travel. That’s C-Trip. We could talk transportation. That could be Uber, that could be DD, that could be bicycles, that could be train tickets. Transportation is a type of service. Hospitality is a type of service. Now if you’re selling the plane ticket and the rental car with the hotel, okay, maybe C-Trip has got a foot in transportation. We could also talk about services like restaurant reservations. Restaurants are a local service business. food delivery which we’ll talk about with Meituan. We could talk about buying movie tickets. We could talk about beauty treatments, health spas. There’s a lot within services and one of the dimensions you can break this down on is are you selling to lots and lots of small companies like restaurants or are you selling to a handful of big companies like airlines? Is it fragmented or is it How frequent is the interaction? People buy food every day. People don’t buy airline tickets that often. It’s a pretty infrequent activity. That’s kind of an issue. People maybe rent bicycles every day if they’re using them to work or train tickets. Maybe rental cars, not so much. So frequency of interaction matters if you’re building a platform business model. And then there’s some other dimensions here to think about. And I’ll go more into this when we get into platforms of services. But the other one is to think about commodity versus differentiation. You know, if you take, if you’re getting a ride to work, all you care about is the price and how long do you have to wait? That’s pretty much it. If you’re getting a hotel in Indonesia for your vacation, well, you might care about a lot of things. You might care about where it’s located. You might care if it is close to where you want to be. You might care if it’s good for a family versus good for a solo person. Is it on a bar street? Is it in a nice villa overlooking the beach? There’s a lot going on there. So the services hotel-wise are very differentiated. Getting a ride to work on Didi, pretty much a commodity. So those are some dimensions to think about. Some other information. One of the things we talk about when we talk about selling products through a marketplace like Alibaba, we talk a lot about inventory. Because you gotta buy all those goods, you gotta put them in a warehouse, and then you gotta sell them, and you need delivery people. Well, who holds the inventory? Does the company have to hold the inventory? That makes you a retailer more or less. Or is it someone else’s problem? Does it show up on your balance sheet? Well, there’s no physical inventory for services. Often it’s just a reservation. I’m C-Trip, you booked through me, you give me your money today, I put the money in my pocket, it shows up on my balance sheet under the cash bucket, and it shows up under deferred services on the liability because I owe you a service in the future. And then I wait and then maybe a month from now you actually go to the hotel, you check in, and then I send them their money. But there was no physical good sitting in a warehouse. So that kind of changes the balance sheet and the working capital in particular. And so you think about inventory risk and things like that, not as big of a deal. When you look at Ctrip, the numbers I have, these are more or less correct. 1.5 to 2 million hotels in China on their platform. And big surprise, they have 200 plus monthly active users. These numbers you got to take with a grain of salt, but it’s big. It’s in the couple hundred million range. So tons of hotels, tons of users. expanding from there into things like services, rental cars, trains, things like that. And when you look at their operations, quite large now, you’re talking 45,000 employees. When you look at what they do, they’re basically in two buckets. They’re either writing software, right? You have a lot of people coding and building the platform. And then you have a ton of people in call centers, because a lot of these digital businesses, in each one of these digital There is generally a supporting activity that is not terribly software like. You know, Meituan has a ton of people on scooters delivering food. Alibaba has a ton of people that check for fraud and things like that. And you have warehouses and you have logistics. Well, what a company that does travel, you know, if you’re in the travel business, what you have to have is call centers. Because if someone can’t get on their flight at 2 a.m. in some airport around the world. they’re going to call you back and say my flight’s canceled or I need to change or I just showed up at this hotel in Jakarta and they say they have no reservation for me even though I booked it with you so you’ve got to have a sea of people online all the time ready to take those calls and that’s just the nature of the business now they’re actually trying to replace a lot of that with chatbots and things but it’s sort of inherent to the travel business that you have a lot of call centers and that’s just the game They do package tours. I don’t think that’s terribly interesting. And of course they do bundling, which was one of the key ideas we talked about for the economics of digital. That bundling, you know, you go to the drug store, there’s the shampoo and then there’s conditioner and then right next to it, there’s shampoo and conditioner wrapped together for one price. Why is that valuable? Well, it’s a pretty powerful economic move to do. Cable companies have… doing this forever. That’s why you get 300 channels at a certain price and even though you don’t want most of them, it’s actually a really good deal for you and it’s a really good deal for the cable company. Well bundling gets a lot easier when you start talking about digital services because it’s no big deal. So they can bundle hotels and airline tickets. They can bundle hotels with tour packages and they can also cross-sell. Hey we see you’re getting an airline ticket, would you like a hotel with that? which is a, you know, those are your kind of your big levers. We look at the finances for Ctrip and they are quite pretty. They are certain businesses have very attractive finances. Certain businesses don’t. It’s just the nature of the game you choose to play. If you are doing the vending machine business, your, your economics don’t look that good. If you’re in, let’s say the mobile type business, renting bicycles, which is pretty much like the vending machine business. the economics are not terribly good. Certain businesses have really nice economics. E-commerce tends to be very nice. And marketplace services, e-commerce for services, which is what C-Trip, tend to have very nice economics. So we look at their revenue, 2013 to 2017. Basically, you see a rapid growth in revenue. That doesn’t have a lot, I mean, that’s partially because they… took out most of their traditional competitors, Chunar, Yilong, it basically collapsed down to one player, more or less in the traditional tourism hospitality space online. And that was C-Trip. So one, they were the only game in town at a certain point. Two, Chinese consumers are growing in wealth, they’re traveling like crazy, they didn’t used to do that, now they do. And so 2013, their revenue in Renminbi was about 5.4 billion. That’s about $700 million. Fast forward to 2017, it’s $26 billion. So you’re up by a factor of five in four years. That’s pretty awesome. Okay, we look at their gross profit. Take out the various costs of sales, payment is one of those, not including sales and marketing expense, which we’ll talk about, but their gross profits are about 80%. because it’s a digital business that’s a platform that’s connecting you with hotels and you know, there’s no inventory, there’s no warehouses, there’s no shipping. They just, you know, they take your order, they connect you with the hotel in Jakarta. That’s all they do. And it happens automatically through software. So great gross profits. Then you get into their operating expenses. They have product development expense. That’s just developing their services. That’s fine. GNA 10% product development expenses 30% the one that matters is sales and marketing expense Which is about 30% and i’m going to talk about that but you take all doubt all those out you get to an operating profit of about 90 percent depending what year you’re talking about they will say operating expense, you know more or less 10 operating profit as of 2017 Now you can wiggle with those numbers and there’s some other, you can take some out to find the true economic profit, which is what investors do. But look, it’s a very attractive business financially. It grows very easily. It doesn’t require a lot of capital to grow and it’s inherently profitable. That’s all pretty great. Now the one people talk about is their sales and marketing expense. Because if you’re a platform business model, it’s all about getting users, it’s all about getting traffic, it’s all about getting interactions and frequency. If you have a dating site, two user groups, probably men and women, and nobody’s coming, let’s say the women aren’t coming, then the men don’t show up. The men don’t show up, the women don’t show up. The whole network effect works in both directions. So you are always dependent on a lot of traffic coming to your site when you do these platform business models. One of the big issues people talk about with Expedia right now… is that Google and other meta search companies are starting to get in between the platform and consumers. Where if you go on Google and search for hotel, Jakarta, what doesn’t pop up is Expedia. Expedia doesn’t pop up as number one. What pops up is Google Hotels and they start to direct you. Now lower on the page you’ll see Expedia. But these search engines are getting between these platforms and their customers. And so what the platforms have to do is they have to market on Google. or Baidu and keep the traffic coming through and those costs are going up. So they’re getting, they’re at risk of sort of being disintermediated. And when you see their sales and marketing expense start to spike, which is what’s happening at companies like Expedia and Google, that’s what that’s about. And it’s a big risk. And so they’re starting to do their own search and they’re trying to get out in front of that. That isn’t a huge problem for Ctrip yet, but it’s something to keep an eye on. But other than that, their financials look great. You look at their balance sheet. Not a lot of tangible assets. There’s no factories here. There’s no stores. It’s just software. It’s all about their intangible assets. And because people usually pay you upfront, you get a negative working capital, which means people give you money today and then you have to give the service to them a month from now. Any business where you get paid first, economics work beautifully. If you’re doing a jewelry store, I did one of these ones, it’s the exact opposite. To open a jewelry store, you have to open a store. Usually it has to be somewhere nice because people don’t go to jewelry stores on the outsides of town. It’s gotta be downtown, Tiffany Cartier. So you gotta hire an expensive location. You gotta build it out with really nice modeling and furniture because people like nice spaces. And then you have to spend a… an incredible amount of money on inventory because you have to buy all the jewels and put them in the safe and under the counter and that is a huge amount of inventory cost that you got to stick under the counters and then you got to do all of that before you make one dollar. Then you hope people show up and buy. So the working capital is brutal in a jewelry store. This is the inverse of that. People give you money on day one and then you have to give them the service at somewhere in the future. Insurance is even better. Like insurance is from a working capital business. You can’t beat insurance. Like you sit at a desk, you offer a policy, I will cover your auto insurance for this rate. And people come up and they give you money and all you give them is a promise on a piece of paper. Any business where people give you money and then you just give them a piece of paper with a signature, that’s good working capital. It’s also a breeding ground for bad behavior and thieves. If you’re a thief and you want to be a bad person, that’s what they do. Like they go into businesses where people give you money and you give them a promise. It’s hard to be a thief if you’re opening jewelry stores. Okay, but basically big networking capital. Now we talked about Jingdong, how they are a marketplace platform for physical goods, but they’re also a retailer, which means… they’re buying the goods themselves and then reselling them. So they’re actually 50-50, a retailer and 50%, 50% a digital platform, a marketplace. You see the same thing with services and it basically comes down to whether the company’s acting as an agent or a merchant. So if you look at their revenue split, that’s what you’ll see, you’ll see, we make most of our money, Ctrip, as an agent. That’s a marketplace platform. They are not delivering the service themselves. They are just connecting you as an agent with the hotel or the airline. If they are a merchant, that means they have actually booked the room themselves, and then they’re selling it to you from themselves, and they are the merchant of record. But it’s basically the same difference between a retailer and a marketplace. It’s no different. Last comment. Basically, Ctrip is overwhelmingly acting as an agent. They do act as a merchant somewhat, but they’re mostly an agent. So that’s a market or a marketplace platform. There are revenues about half, half hotels and planes, and they’re making their revenue from commissions as opposed to marketing. Now that’s actually different than Alibaba, which is a platform for products. You know, they make most of their revenue from market marketing expenses. Basically that’s merchants paying to advertise on their platform. Please come to my store on T-Mall. Please rank me higher, things like that. That’s not Alibaba taking 10% of every sale. They’re making more money on the marketing. Well, this platform, it’s different. It’s more about you make your money on the commissions, not the marketing expense, although they do do both. Now let’s talk about Meituan. Like if Ctrip is sort of the classic internet 1.0 version of tourism hospitality services, that was created and thought up 2000, 2003, 2005. Meituan is kind of like version 2.0. They’re doing services, so both of these companies are direct competitors, and they’re just coming at this completely different in terms of their thinking and their approach. Now, Meituan has this whole crazy history. I’m not gonna go through it. It’s founded by Wan Xing, who is really this interesting China CEO, he’s a serial entrepreneur. He was kind of famous for taking something that came out of the West, like Groupon or Facebook. And I think even to Twitter, creating a China version of that very quickly and then innovating off of that. So, you know, step one, do a copy step to innovate, adapt to China. And he’d done that several times and had some success and some failure. And, you know, this was sort of his third attempt was when he saw Groupon. He founded Meituan, although it wasn’t called that at the same time as a copy of Groupon, you know, group buying. Back then there was what they call the war of the thousand groupons where all these companies in China were jumping into this space, tons of them. It was brutal. Most everyone died at the end of the fight when everyone was dead on the arena floor. Maetuan was still standing, did very, very well, merged up, opened new services. His thing is the way I see him is he’s just like kind of a, he’s just kind of scrappy. He just, he just. jumps from business to business very aggressively, very quickly, very nimble, light on his feet. So he will go from group buying into bike sharing because Meituan owns Mobike now. He will get into hotels, he will get into flights, he will get into restaurant, he will get into food delivery. He just moves. He tried to get into ride sharing recently. He’s just quick on his feet, which is not a bad strategy for China. I mean, I’ve heard China CEOs basically say like, look, there’s no time for strategy in this market. Like you just have to move fast all the time and if you do that you’re you stay alive for another six months. That’s the strategy. I’m paraphrasing but that’s more or less what someone told me. Okay so he jumps into a lot of things and out of that there is this strategy for Meituan that has emerged which is somewhat strategy and is somewhat just rewriting the history and giving it a name. Sometimes people just do stuff and you put it all together and you kind of rationalize it after the fact. Oh, this was the strategy. It’s like, nah, you just weren’t doing stuff. But the sort of explanation of Meituan is it’s the Amazon of services. It’s e-commerce for services. It’s the same way Alibaba might offer tons and tons of products, appliances, clothing, apparel, fashion. Well, Meituan is the Amazon or Alibaba for services. They offer… bicycle rides, ride sharing maybe, hotel services, you can get your movie ticket, you can get restaurant ratings, you can make a restaurant reservation, you can get food delivered, you know, beauty treatments, all of that, all the services you might need, that’s what they offer. Now, kind of true. In reality, most of what they’ve been doing is food delivery. You know, that was, you know, of their 28 million orders or so they take every day. That number is about a year old, so it’s probably different. But last time I checked, it was about 28 million orders per day. The vast majority of those are in food, you know, 20 million plus. So they were overwhelmingly, you go there, you look at restaurants, you find where you want to eat. Then you either make the reservation or you have it delivered. And why would they do that? Now the way they describe it. So let’s say we have a marketplace digital platform. Okay. Who are our user groups? Obviously one user group is consumers. What are they offering those users? This is from their 10K. Mass market services that are essential and high frequency. Those are their three words. Mass market, essential and high frequency. This is the stuff you absolutely need and you need it often. And it’s for the mass market, it’s for everyone. Now, how does that compare with hotels? How often do you need a hotel room? Okay, it is kind of, is it essential? Most people in hospitality regard this as discretionary. You travel with discretionary income. Getting food every day is essential. So that doesn’t really look like hotels. Now within their suite of services, they have four apps, Meituan, Dianping, Meituan Waimai, and Mobike. They got a bunch of brand names, but those are kind of the big ones. Generally speaking, you can think of them as somewhere to get food, restaurants. Okay. Now within that bucket, Okay, on one side of the platform we have users, consumers, and on the other side of the platform we have lots and lots of restaurants. Okay, that looks like a two-sided platform to me. You know, it’s very fragmented, right? It’s not like there’s six companies that sell food. There are millions and millions of restaurants in China. It’s a very fragmented business, not unlike hotels. It’s a very differentiated business. It’s not like I just want to… hamburger, any hamburger will do, just get me the right price. Like getting a ride to work. No, no, I want Thai food, I want Japanese, I want sushi, I feel like this tonight. I don’t like that restaurant, I like this restaurant, I want the one that’s close to me and faster, you know. Now it is somewhat local but it is very differentiated, very fragmented. You don’t generally order food from Beijing if you live in Shanghai, which I’m sure is obviously not allowed. That’s kind of Second to that you see things like lifestyle services. So that’s hotels. I need a hotel. I’m going somewhere. I got to get a hotel. That’s the beauty treatment. And then Mobike. Okay, the first thing that should jump out at you is there is a big difference between bucket number one and bucket number two. Bucket number one, food. That looks like mass market essential high frequency services. I’m sorry, bucket number one. Bucket number two, That looks more like discretionary, infrequent, low volume services like, I’m taking a vacation, I need a hotel in three months from now. So that’s kind of an interesting mix. Why would they do that? Why would the suite of services, how would that compare with a C-trip, which is much more focused on one thing, hospitality and travel? That’s kind of an interesting question. And what you’ll see in the Maytuan discussion group is they talk, not discussion, they’re writing in their 10Ks. Now they talk about getting high frequency services that are maybe unprofitable or very, very low margin, but you do them anyway, because it allows you to drive traffic to the lower frequency, but high margin services. Ctrip is a low frequency, high margin, very attractive economic service. That’s what they sell. Meituan is a mix of very high volume, very frequent, low volume, and even in some cases, unprofitable services, but they are tied to the low frequency, high profitable ones. Now that’s a really interesting strategy. And there’s a lot of power to that. If you do healthcare stuff, I do a lot of healthcare. Hospitals, this is what hospitals do. Hospitals are a bundle of services. If Meituan is bundling services on an app, Hospitals bundle services in a building. You know, you have the pediatrics on the first floor, you have dental, if you’re in Thailand, on the fifth floor or whatever, you don’t have them in the US, they’re separate. You have surgery, you have OB-GYN, you have all of this. They’re all bundled services in one location, or a package, a suite of services, not necessarily bundled price-wise, but a suite of services. And you do a lot of stuff like pediatric visits just to get patients. Well, one, you have to do it, because people get sick. But you don’t make any money on pediatric visits because kids aren’t sick. They come in, they’re fine, everyone looks good. Hi, mom, you’re doing a great job. And that’s pretty much what you do. And kid goes home, everyone feels good. It’s kind of a nice thing to do. But there’s no tests, there’s no surgeries. Economics are very, very poor. But out of that high volume of services, thousands of patients coming in and being seen, out of that, let’s say, falls the occasional hip replacement. Or we need to do some tests. and you make your money on your tests, your labs, surgeries, valve replacements, things like that. But you can’t get those low frequency, big dollar services without offering the high frequency, high volume, more or less unprofitable services. You need one to get two. So that pairing of service types is really kind of a powerful move. And that’s kind of what’s Meituan is doing. You have a very large group of consumers, 300 plus million of them. And true, Ctrip had a couple hundred million too, but the Maytwan people are there almost every day or every week. The Ctrip people aren’t there that often. They don’t rent, you know, get hotels that often. The Maytwan customers are there all the time. And on the other side of the two-sided platform, marketplace platform, you have lots and lots of, you know, merchants, about 4.5 million merchants. as opposed to Ctrip, which is 1.5 to 2 million. So bigger user groups, more money moving back, more activity, and this gets back to something, if you remember those diamond charts I was sending out. If you’re building a platform business model, your intangible assets, if you’re building a factory business, warehouse business, your assets are your factories and your warehouses. If you’re building a platform business, your core assets are intangible, and the three big ones are your users, their level of activity and the data. Now it’s clear that Meituan is building a lot of users with very tons of activity, including reviews, which I didn’t mention. People do a lot of reviews, that’s Jianping, and then a lot of data generated. Ctrip doesn’t have that. They have a lot of users, but they have very little activity and not that much data. So one is sort of a more powerful platform play. And you can see them doing this. And then when you look at… what’s really going on in the platform as I mentioned it’s overwhelmingly food delivery which means they’ve had to hire five hundred thousand delivery writers. Now they’re not really employed, I mean they’re contracts so you can consider them a user group but I would consider the same way we consider the call center people for Ctrip. You had to hire all these people to answer phones under various types of contracting. This you had to hire all these people to deliver the food. And because of that the food delivery business is very active with huge volume but it’s not very profitable. And so when Meituan went public there was all this discussion of all this company it’s you know it’s it’s not profitable it’s not making money. And that’s true because most of their activity was in food delivery and you make a little it was losing money then but maybe you get to break even or a little profitability but not much. But it was very obvious what they were going to do they were going to go public. Then they were gonna, and they also bought Mobike shortly before going public, and people said, oh, that’s a bad deal, because that company doesn’t make much money either. This company has no source of cashflow, which was true. But it was very clear that they were gonna start to drive these high-frequency, high-volume activities into more infrequent but profitable activities like hotels and ride sharing. And that’s where they were gonna make their money, which is exactly what they did after going public. And suddenly everyone’s like, oh, they’re starting to make money. What I thought was the interesting question back then was, okay, they’re gonna have to take on somebody to do this. Are they gonna go after hotels, which I’ve just kind of explained was profitable? That means taking on Ctrip. Or are they gonna go after ride sharing, which has less clear profitability, but probably profitable. That would mean taking on DD. So which company were they gonna go after? and they did a little experiment in ride sharing, but it looks to me like they turned their guns on C-Trip and they were going after hotels as the source of profitability. You actually can make pretty good money on restaurant reservations as well, which is very similar to hotel reservations. So if you’re doing food delivery, you can actually make money on just getting people reservations to go into the hotel or into hotels or restaurants. So both of them are pretty similar. You can make money on both of those. That’s exactly what they went for. They started… their economics started looking a lot better. And when you look at the numbers, it’s pretty much what you see. These are from when they IPO’d. But if you look at their revenue, it was about 20 billion of Rem and Bee coming from food delivery, but that delivery money was at a gross profit of about 8%. So that’s gross profit, not even operating profit. That was just gross profit, very, very low. Remember, C-Trip was 80%. But then you look at their in-store, their hotel stuff. That’s about 10 billion of revenue. So, you know, half of their food delivery, but 80 plus percent, 90% of their gross profit was coming from that business. So they’re pairing two different types of services. And that’s where their money came from. And like C-Trip, they were mostly making their money on commissions for transactions, not on marketing. All right, let me bounce it to you now. So if you’ve been sort of… leaning back and maybe dozing off wake up because this is going to become a little more active. The question for today, who’s going to win? Ctrip, Meituan, they’re both in services, different business models, different approaches. Who do you think is going to win? And I’ll give you sort of two ideas to think about. I want you to take a vote. Which one do you think is going to win and why? Don’t just say, oh, Meituan, why? Well, just because. Give me a reason. Now, If you, I always, you know, my standard thing is always, always look at this from the consumer point of view, because you live and die with your customers. At the end of the day, that’s where all your money comes from. Well, unless you’re a platform. And then look at it from a competitor point of view. From the consumer point of view in this case, how do you feel about a, like sort of a suite of services, transportation, bicycles, hotels, trains, movie tickets? beauty treatments, getting food, food delivery. How do you feel about a company that offers all of that as a consumer versus one that is specialized just for tourism and travel? I’m going to Jakarta, I can go to a C-Trip and look at, I can get my hotel, I can get my rental car, I can get my plane flight, I can read reviews of hotels. I know that’s one thing. Do you care? Is the consumer point of view different? Or is it kind of a wash or is one stronger than the other? User experience does matter. I mean, people like to do certain things more than others, so they do them. And is it better for a consumer? So that would be the consumer view. So I want you to think about which has a better consumer pitch in the hotel and tourism space. And then the second one, I want you to look at it from the competitor point of view. These are marketplace platforms. One is competing as a specialized platform for tourism and hospitality, that’s C-Trip. The other one is competing along the lines of we’re gonna have more users, we’re gonna have more frequent interactions and activity, and we’re gonna have more data. That’s Meituan. They have a huge amount of activity relative to C-Trip. They have a huge amount of data relative to C-Trip. Their customer user numbers ballpark more or less the same. Is one of those gonna kill off the other or slowly grind the other down as time goes on or not? And that’s usually how, sometimes even if the customer likes one better than the other, if the competitors grinds that one away year after year, it doesn’t matter what the consumer wants sometimes. So think about those two things, consumer view, competitor view, and make the call. Based on that, I think within three to five years, the market leader is going to be who? C-Trip, Maydwan. Pause the podcast and make the call. Walk down the street a little bit, stand up if you’re at your desk, walk around, think about it. If your boss called you down to the office, or if you are the boss, and said, hey, we’re looking at this company, maybe we’re making an investment, maybe we’re thinking about getting into hotels, who do you think’s gonna win? What’s your answer? I think company X is gonna win because from the consumer view, X and Y or whatever your reason, from the competitor view because of this. Give me a reason, okay? Pause the tape, do that. Okay, and we’re back. Now we’re gonna go into a bit of theory and then I’m gonna ask you again, what do you think? Although that was kind of a bit of theory, but we’re gonna do a little bit more. And we’re back. All right, I’ve been talking at you for quite a while, so I’m gonna make this sort of short. Here’s how I look at it. So, I’m gonna go ahead and do a little bit of theory. Consumers don’t care. Consumers just want what they want. They don’t care. Like they don’t care what business model you’re using behind the scenes. They just want a good user experience. They want to find what they find and that’s it. So I think from the consumer side this is all gonna end up looking more or less the same. I can get a hotel here. I can get a hotel here. I can get a hotel here. Fine, I think it’s a matter of behind the scenes who is a bit more powerful. Switching cause. Looks to me like a wash. I think Maytwan is building in switching costs with restaurants. I think they’re probably gonna do the same with hotels and drivers and all of that. That’s fine. I don’t think that they’re stronger than C-Trip. I don’t think that they’re weaker. I think it’s a wash. Bundling. I think all these companies are gonna do a lot of bundling across types of services there. I think Alibaba is gonna be particularly impressive on the bundling side because they’re gonna be able to offer things that no one else can offer just because of who they are. So Alibaba might have some real firepower on the bundling side. Hey, join our membership program, which they’re offering. With our membership program, you pay a yearly fee and you get a discount on bicycles, e-commerce, I don’t know, streaming services, music, services. They can offer it across all these different products and services across the whole suite. That’s pretty impressive. C-Trip versus Maytuan, I think they’re both gonna do bundling. I think it’s gonna be a wash. The difference to me for Ctrip versus Maytuan is the platform and the network effect. I think Ctrip has a much more powerful network effect. Maytuan is still overwhelmingly a food delivery and restaurant service. And that’s great in terms of user frequency and it’s great in terms of activity, which is a platform thing. I think it’s a weaker network effect. I think the fact that Ctrip has an international… Offering of you can get a hotel anywhere in the world with C-trip anywhere you want to go you want to go to Brazil? C-trip we got you covered. We got hotels all over Sao Paulo. We got him in Rio We got him everywhere that is very hard to replicate and the network effect from that is much more powerful than anything We see in restaurants, and I think it’s definitely more powerful than what we see in transportation Which is not that big a deal now perhaps Maitan will replicate that over time, but they are years and years away from doing that. That to me is the big gun that Ctrip has, is that hotel business and its international network effect very, very powerful. If we talk about platforms, this is a marketplace platform, that’s where I think Meituan is stronger than Ctrip. Because if you’re building a platform, it’s about users, the level of activity and data. That’s how you build a platform. The fact that they focused on mass market essential high frequency services regardless of where they are has gotten them a huge amount of activity which is giving them a huge amount of data. C-Trip is pretty weak on that regard. So it’s network effects versus platform strength in my book in terms of how these two are going to play out over time. And we’ll see. And long term. This is a pure guess. I think Maytwan is going to do quite well on the three to five years out. I think Maytwan is going to get stronger and stronger. So we’ll see if it ends up being maybe a 70 30 business, but yeah, that, that seems to be the dynamic as far as I can tell right now. And then Alibaba is coming in as a wild card. And then you’ve got, you’ve got 10 cent with their mini programs. They could jump into hotels too. So a lot of companies are converging on this space. There’s a lot going on, but that’s kind of how I break it down right now. and we’ll see. So that’s pretty much my take and we’ll talk more and more about this as it goes on, but it’s kind of a fascinating subject. But you know just to review, think about Ctrip, understand the basics of Ctrip, understand the basics of Meituan, that’s very important, that’s the learning goal for today, and that’s learning goal 16 for those of you who are in the class, and then understand marketplaces for services versus products. Also very important, on the class learning goals list. Okay, that’s pretty much it for today. It’s been crazy. I’m in Thailand, I literally can’t leave. And Thailand went into full shutdown mode as of today. All the shopping malls are closed. Well, most all of them are closed. The retailers are closed. Not all of them, but a lot of them. That was not the case a month ago. We thought this had sort of passed us by. that it hit China. Things got a little quiet here, but not much, but then it went on to the rest of the world. Didn’t really happen in Southeast Asia. Well, it’s happening right now. Things are getting closed down, and maybe all this heat doesn’t really protect against this thing. Which, you know, there was a Middle East respiratory virus, MERS, a couple years ago. Well, if it can happen in the Middle East, which is pretty odd, then I guess maybe it can happen here. So that’s what’s happening. Everyone’s visa’s getting wrecked, and the foreigners of Thailand are all freaking out right now. I tend to trust the Thai government. They treat foreigners quite well, so we’ll see what happens. In other news, we just got the first sponsor for this class this week. So I’m kind of excited about that. I’ll announce that next week, but let’s call it a top five digital tech company out of China is gonna sponsor several episodes of this class, so that’s great. And I’ll announce that I think next week. So things are moving forward. Doing well, website’s getting better, we’re getting sponsors, we’re getting more and more content, class is getting laid out better and better in terms of I think the structure, that should improve more and more. So anyways, onwards and upwards. But for those of you who are subscribers, thank you so much. I mean, I really do appreciate it, it means a lot to me. Every time someone signs up, I get a little ding in my email and it’s great. And I look up who it is, hey, that’s fantastic, appreciate it. So of all of you that have signed up in the last week, thank you so much. And… We’ll keep going, we’ll keep going, we’ll keep going. Anyways, that’s it for me. I hope everyone is doing well, staying safe, but this is Jeff from Thailand and I will talk to you next week.

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