O2O is China’s next billion-dollar battleground

Over the past year, we’ve seen the ridesharing market in China explode, culminating this summer in the industry’s biggest players raising absolutely massive rounds: Didi Kuaidi raised US$3 billion and Uber China has raised well over US$1 billion with plans for more on the way. It’s one big cash-burning party.

China’s O2O sector looks startlingly similar. Just like the ridesharing market, the O2O sector was dominated by three companies, each backed by one of the BAT (Baidu, Alibaba, Tencent) companies. And just like the ridesharing market, the Alibaba- and Tencent-backed companies (Meituan and Dianping) merged. Now, they’re looking to raise similarly massive funds – reportedly as much as US$3 billion – to take on Baidu’s Nuomi, just as Didi Kuaidi raised US$3 billion to take on Baidu-backed Uber.

There are some key differences between these markets, though. For one, the market leader is clearly Didi Kuaidi in ridesharing, but the waters are murkier in O2O and Baidu’s Nuomi appears to be ascendant.

Not really a BAT battle

More importantly, though, the ridesharing market is more of a proxy war – Baidu, Alibaba, and Tencent all have skin in the game but all have only minority shares of the companies that are battling it out. It’s really just a competition between Uber and Didi, with the BAT companies all standing to gain or lose a little depending on who ultimately proves victorious. In the O2O market, however, Baidu owns Nuomi outright. Alibaba and Tencent only have minority stakes in Meituan and Dianping (respectively), and neither is likely to kick in the same sort of resources Baidu can bring to bear with Nuomi because they don’t stand to benefit as much from their success.

Baidu CEO Robin Li sees O2O as an essential part of the company’s future revenue. Alibaba and Tencent seem to be more focused on other areas of business, meaning that in O2O, it’s not really Baidu versus Alibaba and Tencent, it’s Baidu versus this new Meituan-Dianping combination.

How that battle will play out is anyone’s guess, but with Meituan and Dianping looking to raise US$3 billion, it’s not likely to be cheap for anyone. User subsidies and incentives could play a big role in determining who wins O2O, and those aren’t cheap. But with a market that’s expected to be worth more than US$1 trillion by 2017, it’s no surprise both Baidu and Meituan/Dianping are willing to spend big in pursuit of more market share.

What comes next

The next question is where Meituan and Dianping plan to get their billions from. Tencent reportedly has plans to invest in the upcoming round, but it’s not officially involved, and it’s not clear whether Alibaba wants to up its stake, too. If both companies upped their stakes significantly, the O2O market could turn into a real Baidu versus Alibaba and Tencent battleground. But that seems unlikely, especially with Alibaba having just announced plans to spend billions on acquiring Youku-Tudou.

See: 5 big reasons Alibaba is spending over $4 billion to acquire a video site