A Gnome is Not a Core Competency - Intermediary Consolidation Continues

The Expedia and Travelocity partnership announced last week has many implications for the hotel industry. This blog will explore the many questions about this deal.  Why would two arch rivals and founders of the OTA merchant and packaging models hook up?  DMW has a unique perspective on this due to our diverse client base of hotel owners, brands and managers including branded, independent, economy, limited service, full service and luxury hotels.

The bottom line is that market forces brought this deal to fruition.  OTA margins are under increased pressure, technology capital requirements are increasing, the meta-search channel continues to grow, a proliferation of tech startups is trying to disrupt the channel, money is cheap and equity is fully valued. The consolidation wave has already begun with PCLN buying Booking.com and Kayak and EXPE buying Trivago.

The rationale for Expedia is easy to grasp:

  • Market share and reach growth.  According to Brian Nowak at Susquehanna International Group, LLP (SIG), "Travelocity is the 5th most visited OTA in the U.S., with ~7.2mn unique visitors (See Fig 1). Travelocity and Expedia's user bases do not have much overlap, as 45% of people that go to Travelocity.com don't visit Expedia.com."

  • SIG further estimates that Expedia's total traveler reach will increase by 19% through the deal (See Fig 2). They believe that over the long-term, traffic trends and reaching travelers will matter in market share battles (such as Expedia and Travelocity's battle against Booking.com in the U.S.) and this will be a positive for Expedia's reach.  DMW agrees.
  • While gaining this reach and market share, EXPE is severely weakening a competitor.  How does TVLY compete with no sustainable competitive advantage?  How do you spin "marketing" as core competency when you are shedding the technology side where much of the UX innovation lies.
  • EXPE will gain increased technology scale which can fuel greater tech investment and help EXPE compete with PCLN.
  • EXPE should gain leverage with suppliers by aggregating more demand and offering a single direct connect option.
  • Meta-search road block?  One can envision a future where EXPE coordinates meta and PPC bids between Expedia, Hotels.com and Travelocity and occupy the top 3-4 positions for a overall higher ROI (or lower initial loss depending on how you look at it).  You can see a scenario where user is offered the same rate from Expedia.com, Hotels.com and Travelocity - all powered by the same database of inventory and prices.

The rationale for Travelocity, however, is harder to see despite the spin you read in the press.
  • Cost and capital savings - yes, this deal will reduce TVLY operating expenses and capital requirements.  There are rumors of an impending Sabre IPO so this may have forced this move. As a purely financial maneuver, this deal may work for TVLY shareholders.
  • The "merchant-model" is dead.  Perhaps TVLY wasn't prepared to make the investment to move to a guest pay at check-out model versus pay upfront model.  Certainly, this has higher conversion but lower cash flow for the OTA.  Expedia is currently rolling this out as the "Expedia Traveler Preference" or ETP program.
  • TVLY margins on each hotel booking will be 30-50% less due to revenue share with EXPE. Perhaps TVLY keeps 65% of 19% commission (example) = 12% - not a lot to work with to find ROAS through online advertising.  Perhaps EXPE will help out with more sophisticated, algorithmic bidding strategies between TVLY and EXPE brands.
  • With rate parity under attack, in the near future we expect hoteliers and OTAs to begin leveraging their closed database of users and off special hotel deals below BAR.  The OTAs, however, will need to fund this discount via their commission, which is a problem here since the commission is 30-50% less than it is today.
  • Longer term, I see only risk from a lack of sustainable competitive advantage.  I can't see how you separate technology from marketing for an e-commerce business.  Who will handle the front end UX (TVLY websites, apps, etc.)?  Where will the handoff to EXPE's backend tech occur? Aren't we seeing great innovation in this area right now where the back-end data such as rates, personalization signals, etc are fueling the front end content and engagement?
  • Sorry, but a Gnome is not a core competency.  

What are the implications for hoteliers? Overall, this deal is not great news for suppliers.  
  • Beyond 2014, negotiations may become a bit harder with Expedia. 
  • Our costs to direct connect, however, with OTAs may decrease giving us more funds to connect with Google HPA, TripAdvisor, Kayak, etc.
  • As the battle for market share between PCLN and EXPE heats up, expect ROAS from Paid Search and Meta Search to decrease.  
  • Expect more consolidation.  What's the future for Orbitz?  They could be more valuable in someone else's hand than as a public company ($1B Mkt Cap today).
  • Consider Review Aggregation on your direct website.  Kayak just announced this (as we predicted in Nov) and we may see it from EXPE/TVLY deal in future.
  • Get ready for a world in which hoteliers can break rate parity to our closed guest lists and start working on your new promotion calendar.  
  • Continue to take a holistic view to online distribution and marketing.  Understand that users will visit many travel websites before making a booking.  We need to be on all shelves, measure attribution and innovate on our direct web channel so guests choose to book directly with us. This innovation can only work when marketing and technology work together.
We would love to hear your comments on this blog.   Please share.

By Jack Feuer -- Founder & President, Digital Marketing Works