Qunar Baidu Deal Closes. How This Could Ripple Through Chinese Startups.

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Chinese search giant Baidu’s investment in Qunar officially closed  this week, and the two teams are working on integrating Qunar’s search results into Baidu’s travel vertical now. I caught up with Qunar’s CEO Chenchao Zhuang for his first Western interview about the deal to talk about what the deal means for the company and China’s Web scene broadly.

This $306 million deal is not only a big one in dollar amount, but it could represent a seminal turning point in the Chinese Web. Until now, Chinese Web companies have had a strong bias towards going it alone. Much like earlier eras in Silicon Valley, success is considered to be an IPO not an acquisition. But there’s a lot of pressure on that to change, and most industry watchers feel it’s just a matter of time– and of course, price.

For one thing, the Chinese Web is so crowded, and the haves and have nots are incredibly lopsided. Distribution is becoming an expensive challenge and tie ups with companies like Baidu or Tencent can represent massive synergies and upsides for good, profitable Web companies having a hard time breaking out into the mass market.

And the heady prices of some of the Chinese giants will put pressure on the companies to show new areas for growth, something that gets harder and harder for these companies by the simple law of large numbers. Meanwhile those big Chinese Web giants just have staggering amounts of cash. Investor pressure is going to mount to do something with it, and as the markets stay volatile for Chinese Internet IPOs, those deals are going to start to look more attractive….at some point.

Qunar is taking a step half-way in that direction by taking the investment from Baidu, and Zhuang expects more companies could start following its playbook.

Qunar is by all accounts doing well: It’s been profitable since last year, its growth is at least doubling every year, and it is still on the IPO track. It’s raised just $27 million over six years and only spent $6 million of that, focusing on profits and revenues from the beginning like many Chinese Web companies.

But online travel is still a niche market in China. A deeper look at the market shows why calling Ctrip the “Expedia of China” or Qunar “the Kayak of China” is an inherently flawed analogy. It also shows why Qunar needs the power of Baidu’s distribution more than it really needs Baidu’s cash.

Only 8% of people book travel online, versus 35%-50% in the US, depending on what category of travel we’re talking about. And unlike the early days of online travel agencies in the US where an oligarchy of sites divvied up the market, Ctrip consumes the bulk of China’s online travel pie. What’s more: Ctrip isn’t really a great analog to Expedia or Travelocity because 70% of its business goes through call centers; only 30% of its business is truly booked online.

Qunar started out in 2005 to be the “Kayak of China,” but has substantially changed its model, because the online inventory just isn’t there yet in China the way it is in the US. “The airlines just started their online initiatives recently and the percentage is still low,” he says. “Most hotels do not have a central reservation system yet. There is no legacy system the way there was in the US.”

Not only did Qunar have to painstakingly build its own complex database of deals, routes and prices, but one of Qunar’s main businesses is giving hotels and airlines a software-as-a-service booking engine so that they’ll actually have the kind of results to aggregate and search that Kayak was able to take for granted. “It’s painful, but it gives us a more and more unique barrier to other entrants,” Zhuang says.

The flipside to the pain is a massive greenfield opportunity to build better travel engines and consumer experiences from the ground up in China. When modern Internet companies are the ones giving hotels and airlines the reservation engines, they’re likely easier to connect with online systems. “Sometimes being behind is a good thing. We have no legacy systems and we can do everything from scratch,” Zhuang says.

But calling Qunar an OpenTable for travel isn’t quite right either because it doesn’t charge for the software. It doesn’t make money off of transactions fees either.  Eighty percent of its revenues come from pay-per-click ads, and another 15% comes from display ads. This may be the biggest distinction from other online travel players: Essentially Qunar is a media company, not an ecommerce or software company at all. Like TripAdvisor, it has aggregated thousands of consumer reviews to help consumers make decisions. The company makes money off of advertising against that content and its search results.

Given that, the deal with Baidu makes a bit more sense to Western eyes. There’s no media company on earth that can’t benefit from a torrent of eyeballs from a major portal. (Even a laggard. Just ask TechCrunch, post AOL deal.) No doubt startups in the same profitable-but-needs-more-distribution phase will be watching this partnership closely to see if those always promised synergies are actually there.