In November 2011, TripAdvisor was spun off from Expedia Inc., yet the young company continues to suckle at the teat of its mother.
But hard financial realities will push TRIP into becoming truly independent.
In 2012, Expedia-related revenue accounted for 26.7% of TripAdvisor revenues, down from 33% in 2011—based what TripAdvisor discloses in its quarterly filings.
In absolute numbers, the company also registered a decline, with related-party revenue from Expedia totaling $203.8 million in 2012, a drop of 3%, compared with 2011.
What impact does the Expedia strategic partnership have on TripAdvisor?
"Net neutral now," says Dan Su, a senior equity analyst with Morningstar, who last month wrote a report on the company for paying members of the site.
Su tells Tnooz:
TripAdvisor will remain an important market channel for Expedia, although Expedia as a percentage of revenue will probably continue to decline.
I don't expect any material change in the relationship though.
As Trevis, the Big Data stock analysis firm, puts it:
Expedia plans to reduce the percentage of gross profit (on bookings generated from TripAdvisor-sourced visitors) that it pays to the company in the future, which is likely to reduce Expedia s marketing spend on TripAdvisor.
If TripAdvisor is not able to compensate for the loss of revenue from Expedia with higher advertising revenue from other customers, margins could fall to 50% by the end of our forecast period.
Mutually beneficial relationship, slipping awayTo understand the strategic partnership between the companies, it helps to step back and look at what TripAdvisor does.
TripAdvisor functions as a platform that sends shopping traffic to Expedia and other online travel agencies (OTAs) and travel suppliers, and earns money almost entirely from cost-per-click advertising, according to its S-4 filing in 2011. This advertising powers the company's 29% average margins.
A huge chunk of this traffic and advertising involves Expedia. TripAdvisor more or less operates a huge segment of Expedia's ads while earning fees from qualified leads it refers to its former owner.
This semi-formal partnership reduces TripAdvisor's sales and marketing costs, because TripAdvisor doesn't have to go out to other OTAs and hunt for business. There's a technological advantage, too, as the systems were built to talk to each other seamlessly.
But those advantages are diminishing with time, because Expedia isn't generating adequate growth. For TripAdvisor to maintain its profit margin momentum, in needs to look elsewhere.
No wonder TripAdvisor is eager to test a hotel metasearch service. It wants growth from other partners.
TripAdvisor will probably turn to hotels directly. A Bank of America study of 350 global hotel listings found that only 35% of US and 20% of international hotels buy click-based advertising. The banks' analysts expect hotels to push harder to drive bookings direct to their own sites.