Eric Schmidt stepped aside at the top of Google last week and was replaced by fresh faced co-founder Larry Page, ready to spearhead the next phase of development.
So, perhaps a kinder, gentler Google? A do less evil Google? Can we, more importantly, expect Google to play nice with the travel industry? I am not a betting man but I would not be regarding it as a safe bet.
Let’s take a look at Google and travel. With $35 billion sitting in the bank, Google is ready to take on all comers.
Lest we forget, travel drives a lot of revenue for the company, and we now understand why travel is seen as a natural fit for Google given that is trying to buy ITA Software for a cool $700 million.
Up until recently I could not figure out – other than pure growth/greed desires – why Google wanted to pick on travel - and why now.
I went back and read through a lot of the articles on the ITA Software acquisition. I looked further at other potential targets that Google could have chosen to spend some of its cash bucket on. So here, finally, is my take on why Google really wants to get its hands on ITA.
The travel industry is very complex and requires a lot of technology to power itself. Owners of raw content either do not want to sell, cannot sell or have failed to realize their value.
Think of ATPCo (the industry fare clearing house) and SITA. The distribution of travel relies on technology that has been powered from one major source, the GDSs, both for intermediary distribution as well as direct airline passenger IT.
Now in some respects there was a strong case for Google to have looked at buying a GDS.
However, purchasing one of the trio would represent a significant challenge to Google, not that they could not afford to do so if they choose.
The GDSs have been owned at various times (and some still are) by equity players, making them not particularly cheap. They are also expensive to run and have a fair number of staff-to-revenue ratio, unlike other Google enterprises. The business sector is also fairly mature.
ITA on the other hand is relatively cheap, has less supplier contracts, but still it touches a large chunk of global air transactions. It is run by fewer people but who are largely technology focused, meaning it is a good fit culturally for them. Plus its self-running.
And clearly, as we have seen, Google is not going to be shy to leverage its other potential assets in, say, mapping. The immediate ability to leverage the asset became apparent.
However the economics of the GDS-based model (not the companies) are compelling and this is what should strike fear into the heart of those in the distribution system.
The GDS makes a fair chunk of money as a sector. Depending on who you talk to that represents about $7-10 billion direct segment fees and a further 10% for indirect (and rapidly growing) revenues the GDS command.
It is also symbiotic with the search part of Google’s business, enabling an end run around the metasearch players. For validation they need to look no further than the fact that ITA is powering Kayak, FareCompare, Orbitz, as well as the many airline websites.
Leaving aside the travel agency and reselling side of the business, let's concentrate on the pure infrastructure cost of distribution for air passenger travel.
Mulling over how much revenue Google might concievably makes out of travel, I estimate that Google makes about 10% of its gross revenue from the whole travel category.
How did I come up with a number? I used the current run rate of Kayak as a model - the metasearch engine is running at about a run rate of approx $170-180 million gross revenue. Let’s eliminate a value of about 10% of that for non-air and we are at about $160 million for air alone.
I assume that around a 6-8x size of revenue multiple for how much Google makes out of travel. Voila, search and conventional advertising of airline products can be assumed to be approximtely $1 billion of revenue today worth to Google in air revenue alone.
Furthermore the rest of travel could probably drive a factor of between 2x of non-air (mostly hospitality and destination advertising), meaning the rest of the travel category could more than triple this number to $3 billion in total travel value.
Thus why the number is probably is worth about 10% of total Google revenue, all approximations designed to size the marketplace logically.
For Google to grow it needs to do a number of things. It must branch out into other areas. Travel non-direct advertising therefore seems to be a good target for a nice juicy hunk of revenue.
If it could find a stream of money where technology plays a big part and which is largely recession proof, the real pot of gold is not the metasearch companies but the revenue of the GDSs.
Am I the only one looking at this? No.
Here, in Cabot Market Letter Model Portfolio last year, with editor Michael Cintolo writing:
"Google was a big winner in the middle of the 2000s as it dominated the rapidly-growing market for paid Internet search. However, in the US, that market is mature; growth in its core business is solid but not spectacular."
So this states clearly that there is a need for Google to branch outside of conventional advertising models that have matured. Think search, video and mobile. It needs to grow the business and the only way to do that is either get more market share of total advertising spend or to get a cut from other forms of revenue such as transaction based revenue."
The article, along with most analysts, however has not pieced together that the GDS market is the real target for Google. Many still see search as the issue.
However you can be sure that Dallas, Madrid and London-Atlanta are all eying the situation nervously.
But it is worth also dismissing now the notion that the focus of Google is on pure search - the ROI is just not compelling enough. With only a total market revenue stream of $320 million in air, slapshing out $700 million for a share in that stream would not be a good ROI for them, even if they dominated the sector.
What amazes me is that the rest of the industry still rallies round the legacy GDS.
Perhaps the real reason for this is that if the GDS model blows up, the cash that it spreads around to the travel intermediaries in the form of incentive payments would dry up and make the intermediaries business models much less attractive, irrespective of whether it's an online or offline business.
The industry is focused on the wrong place - it is not looking at search but on the supply chain access. The customer needs a better solution for search and the agent supporting the customer needs better tools.
Therefore it now becomes pretty obvious that shelling out $700 million for a share of a $8 billion plus market actually makes a lot of sense. The bonus for making the travel niche search business move over to conventional Google search? Well that’s the icing on the cake.
The stock markets will jump and analysts will cry eureka when they figure this out. But if the forces lined up against Google - including the US DoJ - are successful if their attempts to block the deal, then perhaps it will be Google that the market punishes.