The days are getting darker for the mass-market online travel agencies (OTAs). The fundamentals of their business are weakening amid intense pressure up and down the value chain, especially in the mature US market.
How many times have people asked you: “Why should I book from Expedia or Orbitz?” In my world, that refrain is growing louder as more people are beginning their travel searches on metasearch engines and I have to admit there’s not much to say in response.
The transcript for Expedia's most recent quarterly earnings call read like a terminal diagnosis, with its own offspring as poisoner. TripAdvisor, once a loyal subsidiary, was no longer deferentially sending Expedia it's lion share of traffic. The media giant was commanding the audience and Expedia was not the highest bidder.
The loss of traffic during TripAdvisor's switch from pop up ads to hotel metasearch caused Expedia's stock to plummet 27% in one-day; it's now down about 20% on the year. The company is being attacked on all fronts, with its recently acquired metasearch engine Trivago the lone shining light.
The rise of metasearch
This pressure is not unpredictable. On one side we have the supplier brand.com sites, who have begun an aggressive campaign to build direct relationships with the consumer. The benefits to them are game-changing for both cost and revenue: A cheaper distribution channel and an increased opportunity to merchandise and upsell to consumers.
On top of that, direct relationships allow supplier brands more intimacy and brand engagement with the consumer, a boon to loyalty programs as they invest heavily in loyalty marketing.
Suppliers will try to exploit their stronger bargaining hand to haggle over commissions with OTAs and drive down distribution costs. Supplier consolidation has made air a zero-profit center for OTAs as it is, a trend we’re likely to see extended to hotels and wherever else possible.
On the other side, we have the major metasearch and media channels with Kayak (owned by Priceline) and TripAdvisor being the dominant players. The metasearch message has finally gone mainstream, and everyone from Kayak to Room77 to Trivago are reaping the benefits.
Metasearch offers a better search experience and make it easier to consistently find the lowest prices available online. Many of them now offer equivalently seamless booking for hotels. The line is blurred between metasearch and OTA for many consumers and it's the OTAs who stand to lose.
Three things OTAS can do to stay relevant
Despite all this, I would argue it’s not the end of OTAs. There is still plenty of room in the market for them, but here's what they need to do better:
1) Be a platform, not just a brand: Expedia with Expedia Affiliate Network (EAN) is probably the best example of this. Now all of the major OTAs have an affiliate network, which lets them distribute hotels through the major metasearch players as well as any other site that wants to sell travel in a plug-n-play way. It instantly expands their distribution footprint and scale, while forcing them to give up some margin.
Pros: Focuses on fulfillment value-add and scales easily
Cons: More of a commodity service; does little to reinforce a brand.
2) Improve the search experience: OTAs are getting killed by metasearch and media players in part because the search experience is just plain worse. TripAdvisor brings useful reviews to the search experience; Kayak has spent years perfecting its search technology and user interface. Start-ups like Hipmunk have built brands off of user experience and are iterating at a much faster pace.
These rivals offer better research and more consistent lower prices so it’s no wonder you’re better off starting there than going to an OTA directly. But there’s no reason the OTAs can’t compete. They have talent and resources and far more years of search experience.
Pros: Profit from the core, many been doing search for more than a decade.
Cons: Head to head competition with faster, more dynamic companies; UX superiority is unproven as a sustainable positive driver of return on investment (ROI) for the long-term.
3) Add value. Remember when Orbitz marketed its “TLC” service for better disruption support for their customers? Whatever happened to that? Maybe they couldn’t justify the ROI or perhaps they weren’t delivering on it effectively. But the point remains, for an OTA to be relevant they must do something better, faster, or cheaper than a supplier can direct.
Because they’re never going to be cheaper and probably never faster, they must do something better. To stay alive, they must differentiate one way or another and brand is not enough.
Pros: Holy grail of relevance. Cons: Margin pressure makes this challenging; Commodity rewards programs likely aren’t enough.
OTAs as marketing organizations are not sustainable for the long-haul. The brand message falls flat when consumers realize there’s no real advantage to using their products when metasearch offers a superior product and better prices, and transacting through supplier sites is intuitive and seamless.
The current plan of diversification through investment and acquisition up and down the value chain is a good medium-term solution, but for Expedia Inc. to thrive, it should find a path for expedia.com to have long-term relevance. I’m optimistic there’s a path to a durable business model here, but it won’t happen on auto-pilot.
NB: Image courtesy of Blue Sky Travel.