Travelocity's gnome long ago reached cult status - do a simple search online, and thousands of gnome-tastic images appear. But can the power of the brand be strong enough to eliminate all technological competitive advantage in the OTA space?
The world will know soon enough: Travelocity has inked a "strategic marketing agreement" with Expedia, an agreement that packs up North American internal operations in favor of a complete brand focus backed up by Expedia's technology.
Travelocity's owner, Sabre Holdings, already has a robust GDS that is one of the systems used by Expedia to supply inventory to its own results.
And as competition in the online travel agency heats up, it becomes increasingly expensive to compete on technologies needed to provide the breadth and depth of inventory required by today's savvy travel shopper.
Travelocity thought long and hard about how it could best compete against rivals with equally deep, if not deeper, pockets, competitors willing to fuel competitive advantage with technological innovation. Rather than compete head-to-head, the thinking became: what if Travelocity was merely a marketing brand, and eliminated all, or most, operating costs from the balance sheet? Travelocity would then be a marketing engine, working exclusively on getting people onto the site and retailing travel.
The technology would be taken care of by someone else.
And this someone else is officially Expedia. Big news in the travel space, especially as speculation mounted immediately about an even longer term partnership between the two companies. The partnership has already been forged, and so the likelihood, should this go well, for a more long-term linkup is very real.
The other piece to the story here is speculation about an imminent IPO from Sabre Holdings. This linkup most certainly improves the balance sheet over at Sabre, as the operational costs of running Travelocity will be drastically reduced.
And with the recent CEO shakeup, the company seems to be getting both its leadership and its financials in peak form.
The other set of concerns are around the actual health and vitality of the big OTA players, especially given the popularity and pressure put on by metasearch sites that aggregate results from many search engines into one result stream.
Expedia CEO Dara Khosrowshahi points to their continued investment in technology, as well as the scope of inventory, as their entrenched advantage:
“Over the years, Travelocity has become one of the most recognized travel brands in the US and Canada. Going forward, this agreement will enable Travelocity to focus on further building its brand while at the same time providing consumers with an enhanced suite of travel products and services.
“This announcement stands as a true testament to the advanced capabilities that our significant technology investments over the past several years enabled us to build. We believe volume generated through the agreement will add further scale to Expedia’s global supply and customer service capabilities."
The terms of the deal remain undisclosed given Sabre's standing as a privately held company, although there might be some insight into the deal on the Expedia end from a future filing, as they are a public company.
Tnooz spoke with Sabre Holdings CEO Tom Klein and Travelocity President and CEO Carl Sparks about the newly minted partnership, set to take effect in 2014.
While the conversation was brief, here are some highlights to offer a bit more depth to the deal discussion.
Why a deal?
In talking about the deal, Sparks pointed to the ability to focus on core competencies as the primary driver.
The space we are in is highly competitive. We have our own traditional OTAs, we have metasearch, we have our suppliers - it's highly competitive.
When you add to that that we have similar access to marketing channels, inventory and similar products - it gets even more competitive.
In that crowded space, how do you differentiate and grow your brand? How do you cost effectively provide a great product?
One of the things that we've done well is a really good job on the marketing side. When you look at how we do on tours, unaided awareness, preference, Travelocity and the gnome punches well above our weight. We're doing really well versus the competitive set.
This allows us to focus resources on what we've traditionally been able to do well. We get the best of the both worlds - we continue to secure tech and supply that is at the level it needs to be without much expense.
[With this deal] we get a world-class platform that is continually enhanced to the needs of the market, and a complete supply solution, and we get that without an upfront cost or ongoing expense.
Terms of the deal
While prodding for any inkling of terms, Sparks did allow, "We can't discuss terms, but we can say this is a long-term agreement by any standard."
After a brief team huddle, there was no comment on this front. Carl Sparks said, "Part of the legal side of our contracts is how risk and liability are shared," meaning that there is no comment on this most intriguing issue. The ability of the partners to mitigate risk as they test the waters - and to have a rip cord if something goes wrong - is vital to a trusting partnership.
Carl Sparks was previously the General Manager, CMO and SVP at various Expedia brands, and the obvious question is how his previous employer played into the decision. Not at all, said both Tom and Carl.
Carl: There was no bearing on that. At the end of the day, when we decided to look at our strategic options to make us more competitive and allow us to grow our business, a solution like this was one of the clear, obvious things to consider.
When we looked at partners and companies that could provide us that, we looked at the solution that Expedia provides for itself and that it provides for other 3rd parties, and we realized that would work well for us in North America. That's what our consumers need and we went from there.
Tom: As we look at strategies across the company, we're always looking at our options, and we all agreed that this was the best one for this time. It allows us to play to our strengths at Travelocity, to build the brand and provide a unique value proposition to our many loyal customers.
It also frees up some capital to invest in marketing or innovation in some of our other businesses - whether Airline Solutions or Hospitality Solutions or our core distribution business. We build technology and push it across all industries, and we like to spend money on those kinds of things.
There will be no money changing hands.
Tom: There's no trade or money changing hands. Travelocity will focus on what it does well and Expedia will focus on technology, supply and media. We think they have a terrific platform to do things, and we'll both benefit as the business goes. We've announced this as a "performance-based marketing agreement."
Carl: What we've converted the business model into is one where we get regular payments from Expedia for the marketing we do to bring revenue to them, but without any backend costs. As many companies measure Return on Capital Employed, this transforms the financial side of the model.
There will be some product advantages to partnering with Expedia.
Carl: There are going to be some improvements. One is the depth of hotel supply. Because [Expedia has] a bigger scale business, they have a bigger footprint in terms of relationships. So in smaller markets where we may not have as much contact every day, we will get a deeper supply of inventory.
Second, there will be more choice. With the Expedia solution, we will be offering a pay now or pay at the hotel feature, which is a choice that drives customer satisfaction and conversion.
Finally, in some places, we will get enhanced functionality, such as multi-phase trips which will be provided by Expedia.
What about the customers?
Travelocity will both continue to own the customer relationship and be responsible for providing branded customer service.
Travelocity's Carl Sparks:
Travelocity is 100% owner of the customer service experience. From marketing to calls to emails, it will be a Travelocity experience. Today, a fair amount of Travelocity is using a 3rd party provider to do our servicing, so its still to be determined on how that will be dealt with in the future. It will still be at the high standards we set.
What about the employees?
There clearly is going to be a reduction in staff at Travelocity, specifically in the operations arena.
If Expedia is now providing all the technology, there is going to be a vast reduction in needs at that point. Of course, every business must organize in such a way to provide stability that leads to future growth, which is why this deal exists: to provide a healthier foundation to both maintain and eventually grow the business.
Carl: If you look at the kinds of things that we do today and 2014, it's quite clear there will be some significant reductions in our staffing levels in North America.
Tom: Strong companies create opportunities for our team. From 2010 to now, our annual growth in jobs in the US was about 7%. We've added over 1,000 jobs in the US at a rate much higher than the US and local averages here in Dallas. Sometimes companies have to take a step back before they take a step forward on growth. We think this will result in a growing Travelocity over the longer term.
Will hoteliers be even more pressed by the power of the EXPE?
In short: yes. Well, at least it appears to be the case. At the outset, surely there will be some transitional contracts. But with Expedia providing 100% of the inventory for Travelocity, it would be very strange - not to mention logistically difficult - for Travelocity to maintain any control or influence over contractual specifics.
Carl: Expedia will be responsible for securing all of the supply, so in terms of how those conversations will go, we're talking to our suppliers, they're likely talking to theirs - and those discussions are private.
Hoteliers will likely find this disconcerting, as it consolidates more power into Expedia's hands. Without a doubt, this was probably one of the main reasons why Expedia entered the deal with Travelocity: they now not only eliminate a competitor but also have more leverage in contractual negotiations. This is vital as OTAs become increasingly pressured by metasearch to deliver the most relevant, extensive choices.
Overall, this is a significant development in the online travel agency landscape. As one company bites the operational dust, there is one less competitor in the space.
The deal also allows Expedia the option to purchase undisclosed assets from Travelocity at a later date - and also opens up a potential sales of "Travelocity the brand." That final point would be a tough sell to a buyer, unless that buyer was seeking branded travel inventory to seed throughout a large digital media and actually preferred to have technology outsourced.
One clear front-runner of that sort would be Yahoo. They've been searching for a product to bolster the travel side of things in North America - especially on the bookings front - and while Sabre has trimmed the sails without selling the boat, this would solve the Travelocity equation cleanly for Sabre.
The technology partnership with Expedia also allows for North America to be sectioned off and sold, liberating European operations to be sold at a healthier price to a European-focused operation.
Regardless of how it shakes out, this partnership points to the underlying challenges of the OTA market and may be a harbinger of more creative 'non-mergers' to come.