Jeffery Boyd, CEO of Priceline, recently made comments casting doubt on the effectiveness of relative newbies Room77 and HotelTonight.
He commented on their ability to justify the substantial investment required to scale their hotel businesses in the face of competition from the big players and decreasing product differentiation.
Someone with the pedigree, track-record and credibility of Boyd generally sees his opinion on almost everything carry a fair amount of weight.
On this occasion, his thesis is based on the dollars it takes to scale, and whether investors have the appetite to take that risk. After all, Priceline has billions of marketing spend whereas these "well-funded" startups are playing with around $30 million in total money raised each.
Is this a real barrier or just a typical bigco CEO underestimating the underdog?
Backgrounder
There is some evidence behind what he says. After all, Kayak did not reach scale until it spent nearly $100 million on marketing during its growth phase, and raised a total of approximately $230 million of venture capital.
As one of the first metasearch engines, Kayak still required such a large amount of capital to reach profitable scale. Nowadays the world is murkier, with more options available, a mobile landscape complicating efforts, and more entrenched competition from the likes of Expedia and Priceline.
On top of that, research shows that the ever-increasing focus on mobile is actually an advantage to entrenched players vs. newcomers.
Marketing on mobile is more nascent than on the web, as such, new tool discovery is harder and people rely more on the brands they know and love (or hate).
Expedia and Priceline, for example, get significant app downloads based on their brand reputation alone, whereas a start-up might struggle even with a far superior competitive product.
All that being true, I’m not sure it adds up.
Reality
First off, there’s no reason why Room 77 and HotelTonight or any other similarly statured player can’t continue to raise large sums of money provided the business model supports it.
They have a strong base of existing investors and with meaningful commissions on hotels, continued fundraising seems plausible. Secondly, there’s no doubt that these start-up products are superior to what Priceline or Expedia is putting out there.
When you can focus on one thing, you can do it better. And when that one thing is still in a market of $100 billion, well then, no problem.
It is true that these products will suffer as they grow and try to appeal to a wider audience (e.g. HotelTonight’s city list is so long, it’s hardly better than a typical search box).
But even with these challenges, it’s still easier to branch out from doing one thing amazingly well than trying to dumb down a comprehensive product to make it not-suck as much.
Bigger picture
The macro view remains: hotels want you buy from them directly, and people are increasingly doing just that.
For those that want to do research, more niche tools, such as Room77’s meta product, or HotelTonight’s tonight-only mobile product, will meet consumer needs better than the big OTAs.
The macro trends support the types of differentiation that are the focus for Room77 and HotelTonight, as compared to the relative commodity approach of the big OTAs, or even Kayak.
That’s not to say one should short Priceline stock (far from it), but there is a path for venture-backed start-ups to succeed even in the face of such competition.
Should Boyd’s predictions about the ability to attract funding in the hotel search area be wrong, he’ll need to pay increasingly close attention to these companies.
They could just grow to be significant players in the ecosystem. If so, he should buy them before they IPO. He might find that would result in a more reasonable price.
NB:Growth graph image via Shutterstock.