NB: This is a guest viewpoint by Jack Feuer, founder and president at Digital Marketing Works.
The Expedia and Travelocitypartnership announced last month has many implications for the hotel industry.
The simple question is this: why would two arch rivals and founders of the OTA merchant and packaging models hook up? The bottom line is that market forces brought this deal to fruition.
OTA margins are under increased pressure, technology capital requirements are increasing, the metasearch 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 started a long time ago (with Priceline buying Booking.com) and then ramped up a gear last year with the Kayak deal and then Expedia buying a majority stake in Trivago.
The rationale for Expedia's deals is easy to grasp:
- Market share and reach growth. As quoted in another Tnooz article, Brian Nowak at Susquehanna International Group states that "Travelocity is the 5th most visited OTA in the US, with ~7.2 million unique visitors. 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. It believes 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 US) and this will be a positive for Expedia's reach. I agree.
- While gaining this reach and market share, Expedia is severely weakening a competitor. How does Travelocity 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?
- Expedia will gain increased technology scale, which can fuel greater tech investment and help it compete with Priceline.
- Expedia should gain leverage with suppliers by aggregating more demand and offering a single direct-connect option.
- Metasearch road block? One can envision a future where Expedia coordinates meta and PPC bids between Expedia, Hotels.com and Travelocity. If this comes to pass, the Expedia family would occupy the top three-to-four positions for an overall higher ROI (or lower initial loss depending on how you look at it). You can see a scenario with the same rate from Expedia.com, Hotels.com and Travelocity - all powered by the same database of inventory and prices.
The rationale for Travelocity with its Expedia partnership, however, is harder to see, despite the spin you read in the press.
- Cost and capital savings - yes, this deal will reduce Travelocity operating expenses and capital requirements. There are rumors of an impending Sabre IPO so this may have forced this move. As a purely financial manoeuvre, this deal may work for shareholders.
- The "merchant-model" is dead. Perhaps Travelocity 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.
- Travelocity margins on each hotel booking will be 30-50% less due to revenue share with Expedia. Perhaps Travelocity keeps 65% of 19% commission (example) = 12% - not a lot to work with to find ROAS (Return On Advertising Spend) through online advertising. Perhaps Expedia will help out with more sophisticated, algorithmic bidding strategies between the two brands.
- With rate parity under attack, in the near future we expect hoteliers and OTAs to begin leveraging their closed database of users and offer 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 will be 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 (Travelocity websites, apps, etc.)? Where will the hand-off to Expedia'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 fuelling the front end content and engagement?
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.
- As a result of intermediary consolidation, suppliers’ direct-connect costs to OTAs may decrease, giving us more funds to connect with Google, TripAdvisor, Kayak, etc.
- As the battle for market share between Priceline and Expedia heats up, expect ROAS from paid search and metasearch to decrease.
- Expect more consolidation. What's the future for Orbitz (and its European offshoot, Ebookers)? They could be more valuable in someone else's hand than as a public company ($1 billion market cap today).
- Consider Review Aggregation on your direct website. Kayak just announced this (as we predicted in Nov) and we may see it from Expedia-Travelocity 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.
In short... Hoteliers must continue to take a holistic view to online distribution and marketing.
Understand that users will visit many travel websites before making a booking. Suppliers need to be on all shelves, measure attribution, and innovate on their direct web channels so guests choose to book directly with them.
This innovation can only work when marketing and technology work together.
Easy, right?
NB: This is a guest viewpoint by Jack Feuer, founder and president at Digital Marketing Works. Follow on Twitter.
NB2:Bad news and hotel reception images via Shutterstock