Slim margins and complex technology have turned travel metasearch into a contact sport. Identifying the winners and losers in this space takes a keen understanding of the economics and mechanics that power these businesses. Luckily, we’ve produced the definitive resource for understanding and forecasting the trend lines.
This is by far the most comprehensive analysis of the current state of the global metasearch market in existence today. Weighing in at over 50,000 words, this report is as much a reference manual into the intricate mechanics of the metasearch business model, as it is a competitive and financial analysis benchmarking the performance and competitiveness of the biggest brands in metasearch.
We found our interviews with key decision makers to be the most valuable part of the primary research process. Participants were candid with us about their companies, competition, and broad views on the future of the industry. We provide full transcripts of our interviews throughout the report.
Executives Interviewed (transcripts included):
Kayak CEO and Co-founder Steve Hafner
Momondo CEO Hugo Burge
Momondo Managing Director Pia Vemmelund
TripAdvisor VP of Global Sales Brian Schmidt
Skyscanner GM, Americas Shane Corstorphine
Tripping COO and Co-founder Jeffrey Manheimer
Viajala CEO and Co-founder Thomas Allier
Roomlr CEO and Founder Bas Lemmens
Viceroy Hotel Group CEO Bill Walshe
Viceroy Hotel Group VP of Digital and Commercial Partnerships Mary Bennett
Standard Hotels Chief Revenue Officer Jimmy Suh
Former Expedia CEO and Investor Erik Blachford
SiteMinder Co-founder and CEO Mike Ford
Our team spent countless hours sifting over the latest M&A activity, company financials, web and consumer data, and transcripts of interviews with strategists and executives from meta brands, suppliers, and third-party technology platforms.
Biggest lesson: The mechanics of the metasearch business model and how travel brands use it to effectively bring attractive products to market are extremely complex. While many have tried, very few are now doing it in a meaningful way that produces attractive scale and profits. Those that succeed long term will ultimately need the right mix of technology, inventory, user experience, market strategy and budget. This definitive report outlines the competitive landscape along all five of these essential benchmarks.
From this report, you will know the following:
- Unique economics and strategies for the big four brands in meta: Trivago, Kayak, Skyscanner, Google
- Why certain metasearch brands are succeeding while others struggle to cover costs
- Listen to what the most senior thought leaders and executives are saying about the market
- What consolidation and competition means for independent and integrated (OTA owned) meta players
- How metas are making money and which transaction model (CPC, CPA, instant book) are yielding the best results
- What Trivago’s recent IPO means for Expedia and for its competitors
- Foresight into the future of metasearch as a technology
- How metasearch tech plays into a growing alternative accommodations market
- Company valuations and forecasts of future M&A activity in the industry
- The impact of regulation and supplier backlash against metasearch platforms
The travel metasearch landscape is evolving and shifting quickly, in line with the competitive pressures now playing out across the global online travel ecosystem. In this definitive report, we analyze the latest developments and offer our predictions on the future direction of the industry and its key players. We analyze recent events and take deep dives into company filings, and highlight conversations from numerous interviews with c-level executives from the leading travel metasearch brands.
Overall, we see the metasearch players continue to merge with other types of travel product marketplaces including online travel agencies (OTAs). Here we analyze the recent Trivago IPO and dig into the various monetization models including direct book, cost-per-click, and cost-per-acquisition. We discuss TripAdvisor and the company’s strategy to move away from the pure meta model. Expect further consolidation with the largest OTAs holding onto their metasearch platforms and potentially adding significant scale to them.
Launching a metasearch company has relatively low barriers to entry, but success requires scale. Building brand awareness necessitates significant advertising expense on digital and television ad campaigns. Bidding on things like AdWords on Google is also complex and expensive, but necessary to drive traffic to sites. Additionally, it takes the right technology to successfully integrate with customers via Cost Per Acquisition (CPA) or to run bidding platforms on the Cost Per Click (CPC) model.
Hotel bookings are the most lucrative part of metasearch by a wide margin. Most companies make very little money with the airlines, and instead use that traffic to feed other forms of revenue. We dig into the different monetization strategies (CPA, CPC, Instant Booking, Display Advertising) and provide our analysis on the types of hotels and OTAs that are best served by each model.
We also walk through the bidding process on Google’s Hotel Ads platform and discuss the challenges of airline monetization. We explore Global Distribution Systems (GDSs) and whether airline data is proprietary or public. We also dive into metasearch players in the alternative lodging space. Finally, we look outside of the core U.S. and European markets and explore the dynamics in Latin America and Asia.
How these different players leverage mobile computing, artificial intelligence, verbal search, and personalized results will ultimately define the long-term competitive landscape and the future of travel search.
We found our interviews with key decision makers to be the most valuable part of the primary research process. Participants were candid with us about their companies, competition, and broad views on the future of the industry. We provide full transcripts of our interviews throughout the report.
Key Findings and Predictions
At its core, metasearch is a straightforward concept where one website searches other websites for the best deals on air travel, hotels, and other travel related items like car rentals. The sites being searched include online travel agencies, hotel and airline “brand.com” websites, alternative lodging sites, and even other metasearch sites. While this basic model is easy to understand, there are a lot of complicated aspects below the surface surrounding monetization, technology, and strategy. The following section highlights some of our topline findings and predictions for the industry:
Metas and OTAs will Converge…
Metasearch sites and Online Travel Agencies are starting to blur the lines between their business models. The TripAdvisor Instant booking model is essentially as close to an OTA as it could be without being one. Meanwhile, OTAs have acquired large metasearch sites including Trivago and Kayak.
Instant booking has had monetization issues thus far, but the focus on having a streamlined customer experience is one that we believe will become more important for meta brands, particularly for TripAdvisor as it competes directly with the OTAs, but also with Airbnb and other newcomers. Consumers tend not to care if Booking.com or Kayak is the actual platform doing the booking, so long as whoever is responsible delivers excellent user experience.
Whether it is a true direct instant booking model or just a cleaner click-through on mobile, travel brands deploying metasearch will be well served to provide a better experience on mobile as companies attempt to close the monetization gap with desktop.
… and industry consolidation to follow
Metasearch brands require scale to generate meaningful margins and revenue; that takes significant advertising dollars to build brand awareness and to utilize digital channels like Google to drive traffic. Additionally, with the complexities surrounding technology on developing competitive query algorithms, effectively running bidding platforms on the CPC model, tracking click-through on CPA, and building massive scale on the supplier side, smaller players will have difficulty competing with the largest companies. This is amplified by the fact that Trivago and Kayak are housed inside the massive advertising machines that are Expedia and Priceline.
Independent metasearch sites with strong technology or niche leadership could get acquired by the leaders. Skyscanner, Monondo, Tripping.com, and others are among the more attractive when it comes to momentum with consumers and their technology stacks. We have seen this happen with Expedia’s stake in Trivago, Priceline’s purchase of Kayak, and Hipmunk being acquired by Concur. The Hipmunk acquisition was the case of strong technology, but difficulty in building the brand awareness to compete with the Pricelines and Expedias of the world. In the most recent example, Room 77 was sold at a loss. In a letter to shareholders, Room 77 acknowledged how difficult it was to compete with the dominant leaders:
“Expedia and Priceline quickly went from spending a couple hundred million on marketing to spending billions to dominate the Google marketplace.”
The metasearch business model makes it relatively easy to start a meta site, but critical mass needs to be reached on supply and brand awareness along with technology powering search and the consumer experience.
The large OTAs will hold on to their metasearch brands, rather than spinning them off as independent entities
There has been speculation that the Trivago IPO could lead to Expedia selling its shares or spinning off the company. The IPO is not about removing Trivago from Expedia, but rather about monetizing the stake for the founders, adding some capital to invest for Trivago, and using the equity markets to highlight the value of the unit for Expedia. For Kayak, the founders have already monetized their stake by selling to Priceline. Steve Hafner remains as CEO and Paul English has moved onto new endeavors including Lola and GetHuman.
While Trivago and Kayak act independently from Expedia and Priceline from a business perspective, we believe the parent company serves as a common source of technology advancement, knowledge sharing on strategy, and increased bargaining power on the advertising expense side. Additionally, the metas help drive traffic to their OTA sister brands.
For smaller metasearch sites, flights are like milk for the grocer
We borrow this analogy from former CEO of Expedia Erik Blachford. Airline bookings are not very profitable for most metasearch companies, but a strong airline product can drive traffic for other product lines including the more lucrative hotel segment (grocers can take a loss on staple items such as milk and bread to get customers through the door). This is why even the best flight metasearch companies are pushing hotel search.
With enough volumes in traffic certain metas have presumably negotiated higher margins with the airlines. Most smaller metasearch companies concede to lower economics as part of the customer acquisition strategy on the hotel and lodging side. Trivago’s massive advertising budget has let it build scale without flight traffic, but most companies cannot afford to flood television globally with advertisements.
Artificial intelligence and voice-directed booking is early in the game, but will be a tool to improve the user experience
Though still in the early stages, voice directed booking will become an increasingly important part of the booking process as we look five years out. The first step seems likely to be text-based chatting, which is easier to process on the technology side. Further down the road, we believe that voice bookings will become a reality and metasearch should embrace this change.
Artificial Intelligence (AI) is an area where we see a lot of potential on the customer service side as well. We see a world where bots utilize things like Facebook Messenger to answer routine questions and modify reservations. At some point, this could become prevalent enough that AI driven bots could handle certain problems as efficiently as a human, saving online travel companies money and time on handling inquiries and making the consumer experience better.
Personalized metasearch results will matter more as pricing becomes more uniform
Metasearch has been a key price comparison platform. While this still matters, it is becoming as much about distribution via massive scale as pricing parity becomes more the industry standard in places like the U.S.
It has been slow to materialize, but perhaps as we move into the next decade, search results will move away from the default based on reviews, price, etc… and become more personalized. For example, if a person highly values having a kitchen while another needs a bath rather than a shower for small children, search results should be able to be tailored to a person’s individual preferences. Given the massive resources of the biggest online travel companies, we expect they will be leaders here along with niche tech companies. At some point, personalized results could become prevalent and help increase conversions for online travel sites.
The winners on distribution will be the meta sites that have the largest inventory with the ability to return search results that are most relevant to its users, whether the search is done on desktop or mobile or through traditional clicking, text, or voice.
We acknowledge that the willingness of the customer to share information is limited, but we could see a case where machine learning is able to track previous bookings and help improve the search results. We believe metasearch companies should strive to make gains here and educate the consumer on why sharing data is in their best interests.
Mobile computing creates bigger audiences, but cuts into margins
According to Criteo, 30 percent of global travel bookings are now done on mobile devices. eMarketer estimates that just under ¾ of U.S. travelers use mobile in the research process. Mobile creates more internet users into the online travel ecosystem, but the central monetization challenge is that booking conversion is lower on mobile than on desktop. More clicks but lower conversion has, on the whole, made suppliers less willing to pay higher CPC rates.
Additionally, the once lucrative display advertising is not that useful on mobile devices and apps. Lastly, tracking click-through for the CPA model on mobile is more difficult than on desktop. Metasearch apps are becoming better and websites are increasingly being designed with the mobile experience in mind.
Monetization issues on mobile search
Mobile has become an increasingly important channel for the consumer. In Kleiner Perkins Caufield & Byers’ 2016 Internet Trends report by Mary Meeker, she shows time spent on media in the U.S. in 2015 was as follows:
There is still a large gap in monetizing mobile from an advertising standpoint where the percentage of advertising spent on mobile is much less than the time consumers spend using it. This continues to improve with more money moving away from things like print to digital advertising. For metasearch, this impacts costs as well as revenue.
Digital advertisement spend will catch up to time spent, but this benefits Google more than traditional metasearch sites
On the cost side, metasearch needs to build brand awareness to attract users. Successful campaigns (e.g. the Trivago Guy) may flood the television market for awareness than use digital advertising (Google) to build traffic. While pure metasearch numbers are limited here outside of Trivago spending 80-85 percent of its revenue on advertising, the big OTAs continue to grow advertising spending faster than revenue growth. This is a headwind on margins that the companies look to offset with cost efficiencies in other parts of the business that are more operational in nature.
Advertising Revenue Will Become a Less Important Source of Revenue for Metasearch Sites
On the revenue side, some metasearch sites do generate revenue from pure display advertising, but largely as a secondary source of revenue. This is especially the case on mobile where things like banner ads on metasearch are not very useful while paying Google to drive traffic is still crucial.
Mobile Conversion Challenges for the CPC Model
Conversion tends to be lower on mobile where a consumer is more likely doing research than booking; last minute booking is an exception. This leads to metasearch players charging lower cost-per-click (CPC) rates on mobile than on desktop. The difference could be 25 to 50 percent depending on the entity involved. The upside is that mobile by its very nature can be done anywhere so click frequency increases.
We recommend that smaller, independent hotels focus on a cost-per-acquisition (CPA) model in order to minimize risk on low conversions. Challenges with website technology and management of the bidding process using the CPC model can become complex. Third party platforms like SiteMinder can help alleviate some of the challenges. The biggest OTAs like Expedia and Priceline have relatively strong conversion rates and can bring down costs using CPC to an effective rate below the CPA model. We believe large OTAs are best served utilizing a multi-pronged approach with CPA, CPC, and some instant booking.
Tracking Challenges for the CPA or Commission Model
The issue with the CPA model is conversion. When a user clicks away from one site to another (particularly on a mobile device), she is less likely to continue on to actually finalize the booking. The instant booking model used by TripAdvisor and others is one attempt to solve this issue. Cross-device tracking can help with conversions.
Alternative Lodging Metasearch is an Exciting Area, but Monetization is Challenging
Companies like Tripping.com were early to metasearch for the alternative lodging space. Kayak and Trivago meanwhile are dipping their toes in the water and monitoring the situation. The vacation and short-term rental space remains fragmented with numerous smaller players active in market.
The question that remains is whether the consumer that has Airbnb and HomeAway with massive inventory needs to search on a meta platform. The industry remains fragmented, but much of the supply remains on the leading platforms. To change this behavior in a meaningful way requires significant advertising expense focused on brand building. This is not to say that Tripping.com or others cannot be successful on a smaller scale. Airbnb currently keeps its inventory closed to third-party platforms.
While Tripping has built up a successful company with steady revenue growth, the challenge with be scale and cost effectiveness on marketing spend in order to scale. If meta for alternative lodgings becomes prevalent, Trivago and Kayak would likely flood the market with advertising and use their clout to build scale rapidly. Additionally, smaller players cannot compete with the mega brands on the technology side. This market is in its infancy and could prove to be a nice opportunity for all metasearch companies.
We expect metasearch for alternative lodging to be more of an incremental profit source to Kayak and Trivago, but do see monetization improving for the Tripping.coms of the world as more listings become online bookable.
Metasearch Methods of Monetizing Search
CPC Vs. CPA Vs. Direct/Instant Booking Vs. Advertising
Cost-per-Click (CPC) is the most common way metasearch sites monetize traffic. Under this model, a travel supplier or online travel agency would treat the metasearch site as a source of traffic and pay for that traffic as it would for other forms of digital advertising. The supplier would pay the metasearch site each time a user “clicks” the supplier’s link on the metasearch site. The price is determined by things like geography of the hotel, conversion, competitiveness of the market, average daily rates, and others.
The benefit of this model is that these relationships are very simple to set up and the fees are easy to calculate. The hotel or airline or OTA owns the customer and all of the personal data that comes with it.
The CPC model has a wide range of potential prices. A typical transaction could be $0.75 to $2.00, but can be as little as a few cents to an amount in the teens depending on the competitiveness of the listing. Because conversion is lower on mobile, these rates would be lower than on desktop, perhaps as lows as 50-75 cents on the dollar.
CPC, despite is complexities, can be a very attractive option for large hotel chains and online travel agencies to utilize. Independent hotels often use this strategy directly, but also partner with companies like SiteMinder to handle the bidding process. We believe that sites with best in class conversion like Booking.com are able to effectively drive bookings at a sub 10 percent cost. In less competitive geographies, this could be as low as the mid-single digits. Small hotels with poor conversion could see rates higher than what they would have paid to the OTAs without the risk of payment without bookings.
Cost-per-Acquisition or Cost-per-Action (CPA) is increasingly being pushed by the metasearch sites. Under this model, the metasearch site is paid only after travel services are booked on the supplier’s websites.
The benefit of this model to both suppliers and metasearch site is that incentives are aligned to increase quality of the clicks. The metasearch site gets a higher fee and the supplier only pays for actual bookings rather than what amounts to a marketing expense. The headwind to wider adaptation of this model is that suppliers and metasearch owners need to integrate technology to accurately capture what bookings are from click-through off the metasearch site. Like the CPC model, the supplier owns the customer, not the metasearch site.
Direct/Instant Booking is what it sounds like where a customer would book travel on the metasearch site itself rather than clicking off to another site. TripAdvisor’s move to direct booking is the most public example of this playing out, though Kayak and Trivago have done this with less scale. Book on Google is very similar to the TripAdvisor model as well, but less crucial to Google which is the largest beneficiary of digital ad spend from the entire travel ecosystem.
When a user books direct on the metasearch site, they are not truly booking direct as they would at a hotel or online travel agency site. The direct part is that the booking takes place on the metasearch site, but the supplier is still the partner that owns the relationship in terms of data and payments processing.
Instant Booking Economics and Industry Implications
TripAdvisor offers independent hotels two commission choices at 12 or 15 percent; our research indicates that Book on Google ranges from 10 to 15 percent.
With TripAdvisor’s 15 percent commission, the hotel claims half of all “Book on TripAdvisor” traveler views, as well as any resulting bookings those views may generate. With a 12 percent commission, it claims 25 percent of all traveler views and any resulting bookings.
If “Book on TripAdvisor” was displayed 100 times for the hotel, with a 15 percent rate, the hotel’s rates and availability would show 50 searches out of 100. The remaining searches would show the hotel through other distribution partners (OTAs) who are participating on instant booking. Hotel rates must be equal or better than those shown by the distribution partners.
These 12 and 15 percent rates compare to what we believe are 15-25 percent ones at the OTAs for small hotels. This OTA-Meta hybrid model differs from an OTA in that the hotel still owns the customer and gets the booking confirmation and is responsible for customer service, payments, etc. The metasearch site simply makes the booking and the rest of the process is handled by the hotel.
Large Hotel Chains Likely Negotiate Better Rates with Trip
We believe the largest hotel chains negotiate rates with TripAdvisor individually. Given they pay as much as 50 percent less than independents in the OTA model, we estimate that a reasonable commission range here would be 6 to 10 percent for large hotels.
OTAs Participate as Well
Priceline participates on TripAdvisor instant booking. Priceline likely pays anywhere from mid-single digits in non-competitive markets to close to similar to what the large hotels pay elsewhere. Why would Priceline’s Booking.com be willing to pay fees that could largely offset their own booking fees? The answer is that the story is also about customer acquisition. By paying the metasearch company, the hope is that the customer next time goes to Booking.com, that he downloads the app, and becomes a loyal user. It is not that meta is cannibalizing the OTA, it is more that the OTA uses metasearch as just another digital acquisition strategy.
Advertising revenue comes from things like banner ads. While this form of revenue was attractive and a key driver for desktop use, metasearch sites should like to receive as little revenue as possible from this avenue versus other avenues, as mobile becomes a more important source of booking. Mobile has less space for ads and those ads get less money per click. Advertising remains important especially for airline focused metasearch sites where the sites have huge user bases, but the monetization of the actions taken is low; airlines pay very little on any type of booking versus hotels.
How is Metasearch different from an Online Travel Agency?
The online travel agency, Expedia.com or Priceline’s Booking.com for example, owns the customer, handles the actual booking and everything after from a service perspective. The online travel agencies must build massive amounts of inventory to be competitive. The largest players have massive advertising budgets and likely charge suppliers as much as 25 percent for hotel bookings at the high-end and 10-15% at the low-end for the larger chains. These companies have huge technology teams as well to integrate suppliers.
Metasearch sites, especially when operating on a CPC basis, can operate with very little scale. A bare bones metasearch site could basically just partner with Booking.com and Expedia for inventory and be operational. The more difficult part is building an audience and monetizing it. This requires heavy advertising and larger players like Trivago have spent aggressively to gain share.
Interestingly, the large OTAs own two of the large metasearch sites with Priceline owning Kayak and Expedia owning Trivago. By owning these sites, the online travel agencies control a major source of traffic to their key OTA sites (Booking.com for Priceline and Expedia.com and Hotels.com – among others – for Expedia). The metasearch sites act independently, but looking at search results it appears that Kayak breaks a tie by pushing traffic to Booking.com and Trivago by directing to an Expedia owned site.
Airline Vs. Hotel Metasearch
Airline metasearch in the U.S. by itself is not a very attractive business from a monetization perspective compared to hotel metasearch. The airline industry is consolidated and the big carriers have a lot of power. Based on our conversations, we believe the commission rate on a CPA basis is anywhere between zero to a few percent for the large carriers. On a CPC basis, it could be as low as $6 per booking. Internationally, there is more fragmentation so rates are likely a few percentage points higher.
Airline Metasearch Will Continue to Drive Website Traffic, but Not Revenue Growth
Since direct monetization of air travel is extremely difficult, companies like Kayak, Skyscanner, and Momondo are increasingly selling more hotel inventory to its airline booking customers.
For example, Momondo is generating as much as 50 percent of its revenue in new markets from hotels. Skyscanner is also pushing for more hotel bookings. Flight commission revenue decreased as a percent of total revenue to 75 percent in 2015 from 79 percent in 2014.
Trivago has chosen to forego air travel, but has a massive advertising budget to build web traffic without airlines.
Who Owns the Data?
A key difference between the Online Travel Agency model and metasearch is that the former owns the customer while the latter is purely a distribution partner for the suppliers. What this means is that when a traveler books a hotel on Expedia.com or Booking.com, the OTA processes the transaction, handles the customer service, and if it is a prepayment rather than pay at the hotel, takes on the credit risk. The OTAs own the customer relationship and get to market to them and keep the data. A metasearch site simply passes the booking to the hotel or airline.
The benefit to the supplier under the meta model is that they can market directly to that customer right away and increase the chance that the customer becomes loyal enough to book direct on the next stay.
Rate Parity Debate Rages on in Europe
Europe’s various competition authorities are pushing global OTAs to eliminate rate parity agreements with their supplier partners. Overall, greater rate disparity will add to the cost of doing business by obligating OTAs to increasingly offer more competitive commissions, spend more on monitoring competitor rates, and maintaining closer relationships with the hotel suppliers.
At question are written agreements set by OTAs to obligate hotels to maintain room rate parity on their own direct websites and other competitor channels.
These agreements have helped OTAs guarantee their customers consistently lower rates. Certain hotels also benefit from rate parity agreements by preventing their various distribution channels from undercutting their own direct pricing.
Pressure to eliminate rate parity clauses has come at varying intensities, depending on the market. The specifics center on different types of rate parity clauses that are permissible by law. Most Favored Nation agreements – i.e. agreements obligating hotels to offer the lowest available rate to their OTA partner, will most likely be banned outright in all of Europe’s major hotel markets.
Resale Price Maintenance – i.e. agreements prohibiting hotels from undercutting their OTA partners have been upheld in France, Italy and Sweden. German competition authorities have taken the hardest stance against these types of agreements.
Rate parity agreements have maintained a certain level of uniformity and transparency in hotel prices across the various distribution channels. This uniformity has helped big brand OTAs with direct hotel contracts to capture market share by limiting flexibility in the pricing hotels can offer competitor channels, including their own websites.
The deterioration of rate parity will – in varying degrees depending on market – remove some of these safeguards. Here are some of the ways various online channels could be affected:
- OTAs will offer discounted retail rates directly to consumers.
- Hotels will offer more private rates to OTAs and metasearch websites
- Wholesalers will re-market merchant rates on a B2B basis to third-party retailers.
- Metasearch websites will be able to sell discounted rooms to consumers across a wide range of booking sources.
- Hoteliers will experience more frequent challenges to best rate guarantees.
To a certain extent, these activities are already common practice in the industry. But in a price-sensitive market like European hotels, any changes dictating the official rules of engagement between suppliers and intermediaries will likely have significant impacts on the overall competitive landscape.
Revenue and channel management will become more complex as hotel managers get tasked with setting different rates across channels and markets. OTAs will keep closer watch on increasingly disparate market rates and their preferred hotel supplier partnerships, all while navigating a geographically fragmented regulatory landscape. If price uniformity across channels widens, even marginally, consumers could feel compelled to spend more time shopping across different channels. This will usher new opportunities for brands to capture market share through unique promotions through bundling, private rates, and others.
Changes to rate parity could have different impacts on OTAs depending on their business model. Some OTAs operate on an agency model. They make their money by charging hotels commission, typically a percentage of the total value of the sale. Other OTAs operate under a merchant model. These OTAs make money by purchasing inventory from the hotel at a wholesale rate, and then marking up the retail rate. With the merchant model, OTAs have more flexibility to publish variable retail rates, since they can adjust margins. With the agency model, OTAs have less room to adjust the retail rate since they are set by the hotel. In a more dynamic pricing environment where OTAs can no longer obligate their hotel partners to publish their lowest rates, agency model OTAs could be challenged adjust rates accordingly.
Metasearch brands will gain momentum, particularly in hotel space
Various factors will play into the favor of European metasearch brands and their various parent companies. The deterioration of rate parity will push hotels to look for alternative marketing channels, as relationships with their traditional distribution partners grow more complex.
Rate Parity Prevailed in the U.S.
Back in February 2014, U.S. District Judge Jane Boyle in Dallas dismissed a class-action suit against hotel and online travel providers claiming they were engaging in price fixing by having rate parity agreements. The companies named in the suit included Starwood, InterContinental, Marriott, Expedia, Orbitz (not yet owned by Expedia), and Priceline. The lawsuit claimed that by hotels and online travel sites agreeing not to compete on price, the customer paid artificially higher prices. The companies stated that it was not price collusion, but simply a business decision where the hotels wanted to control online prices and the online distributors wanted to competitors not to undercut them.
Department of Transportation RFI: Is Airline Data Public Information?
The Department of Transportation issued a request for information (RFI) after the industry group for travel sites, which includes online booking sites, expressed concern on distribution and display of airline flight schedule, fare, and availability.
At the heart of the debate is whether airlines can claim that their supply inventory is proprietary information. The airlines maintain that they need to control display and distribution of flight information, while online travel sites (OTAs and metas) argue that restricting information is anticompetitive and hurts the consumer. According to the DOT:
“Some airlines have issued cease and desist letters to some OTAs demanding that these companies stop distributing airline flight information to some metasearch entities that operate flight search tools or have included language in their contracts with OTAs prohibiting them from sharing airline flight information with any metasearch entity that has not been approved by the airline. Additionally, some airlines have issued letters to metasearch entities operating flight search tools demanding that these companies stop displaying the airline’s flight information or limiting how the entities display the airline’s flight information on their flight search tools.”
The airlines argue that they only did this to sites that provide inaccurate information or poor customer service. It seems likely that the big metasearch or OTA sites would not receive these, but would fight for the industry to avoid having the airlines set a negative precedent.
Certain airlines have also restricted GDSs and other data aggregators from distributing information to any entity not approved by the airline itself. Others have prohibited online travel sites from displaying codeshare information that could make the trip cheaper than doing a roundtrip on the same carrier. Other cases are where the airlines do not allow metasearch sites to link to OTAs for airline booking (the link for airline booking must be to that airline’s own website).
How Does This Resolve Itself?
The large online travel sites do not get paid much from the airlines for a flight booking, but do rely on air travel to drive consumers to the website initially. We fully expect flight times and pricing to be complete and accurate on a site like Kayak or Skyscanner. That being said, airlines have the right not to participate (Southwest Airlines for example) in third party distribution (at least currently).
It seems unlikely that the government will mandate participation in certain distribution channels, but instead would focus on the rules governing participation. We believe any regulation would likely favor the customer, which suggests that airline ticketing information would be considered public.
While we are certainly not legal experts in the space, the most rational result would be that online travel providers are given rules they must follow that limit inaccurate information while the airlines that participate in third party distribution must be transparent on ticketing information (pricing, times, etc…).
The large U.S. airlines likely pay very little to the online distributors for traffic on a per transaction basis; to be fair, legacy airlines have a cyclical, capital intensive business with a poor history of profitability, so having much lower commissions than lodging makes sense. At the same time, metasearch is a key channel at the start of trip planning as most consumers do not search flights by brand, but rather by price, date, time, stops, and duration. The metasearch sites rely on airlines for website traffic and the airlines use the metasearch sites to fill their planes. Ultimately, we do not expect much change here, at least for the reputable, larger online travel companies.
What Are GDSs?
Global Distribution Systems (GDSs) include companies like Sabre, Galileo, Amadeus, Pegasus and Worldspan. Orysis, a travel technology company that does Whitelabel GDS integration, sums up what GDSs are:
GDS is a computerized web service that provides pricing, real time availability, centralized data display with reservation functionality to the global travel industry in a very unified process.
Simplistically, the a GDS acts as a proverbial pipe passing along hotel or airline information from the suppliers to the online or offline distributors.
Why does this matter to airline metasearch?
Legacy airlines have been connected to GDSs, but the transaction costs have limited the extent of smaller airline participation outside of the U.S. While metasearch sites can pay to plug into GDS inventory, building their own relationships seems like a more sustainable business model with higher barriers to entry and more unique offerings. This is why companies like Momondo and Skyscanner emphasize their lack of dependence on GDSs.
What about hotel metasearch?
For hotels, metasearch sites can partner with large OTAs and build huge amount of hotel inventory without needing to use a GDS to receive information; a site like Booking.com has their own connections to the hotels. We believe that airlines are much larger participants in the GDS space.
Google’s Impact on the Industry
Google’s travel tentacles are complex and large. On one hand, Google is the most dominant advertising platform, accounting for the vast majority of digital advertising spend for Online Travel Agencies and metasearch sites. On the other hand, Google is also operating a metasearch model of its own. As Skift has emphasized in the past, we do not see Google becoming a full-fledged OTA, but clearly its metasearch push is impacting the industry.
From a user perspective, the Hotel Ads works is straightforward. We searched for hotels in Boston on November 18. Google returns traditional AdWords from Expedia, Ritz Carlton, and Trivago at the top followed the different Hotel Ads below.
Next, we click the Boston Harbor Hotel and see a metasearch model of search results. The lead result is Booking.com, which clicking takes us over to that website to complete the booking.
From a supplier’s point of view, listing ads is a complex process
The first step for hotel is to create and submit feeds themselves or to work with an approved third party integration partner. After this, Google crawls the hotel’s booking pages and compares this to the prices being submitted to Google to make sure accuracy reaches Google’s thresholds. To start advertising, a hotel then submits a budget and bids they would like to use across properties. This can be done at the property level or by grouping. To set these bids, hotels can manage ads directly through Google’s Hotels Ads Center and manually adjust targeting and bids, integrate with an API approach, or use a third-party partner.
The data needed for hotels includes the hotel listing, price and availability, and point of sale
This includes a comprehensive list of hotel properties with things like address, rating, contact info, latitude and longitude; the data will be hosted on a FTP or HTTP server.
Price and Availability
Google recommends this be updated at least several times per day.
Point of Sale
This shows how the traveler sees the next step. For example, if the search is in English from New York, the booking site should be an English version.
CPC Bidding Process
The hotel (or OTA) sets a base bid and multiplier. We walk through an example of what this means below.
The supplier can bid a percentage of room rate to align the investment with a booking. An example would be a one percent bid on a $200 per night room. The bid gets multiplied by the room night query.
1% Bid x $200 room x 2 nights = $4 bid
The other CPC bid option is a fixed CPC per night. Google recommends the percentage approach so more expensive rooms cost more per bid.
This lets the supplier customize bids up or down based on device type, user country, length of stay, google site, check-in day, and advance booking window. The bid multipliers are additive.
If the supplier wants to bid 10% more for a Friday, but 5% less for mobile click, the bid is as follows:
1% Base Bid $200 room x 2 nights = $4 bid x 1.10 x 0.95 = $4.18 Total Bid
Target Return on Ad Spend (ROAS)
The supplier starts with a target ROAS. For example, this could be a $5 back for every $1 spent. This automates the hotel bidding process. Target ROAS predicts future conversions and the total values of those conversions based on historical data. From there, max CPC bids are entered. The user must have conversion tracking enabled and pass data to Google.
Authorized integration partners include RoomCloud, RMS, TourOnline, Hotel Commerce Solution, Profitroom, Verical Booking, Web Hotelier, eRevMax, HiRum, WIHP, Sirvoy, HotelNetSolutions, eGlobe, DirectWithHotels, AxisRooms, Phobs, DJUBO, peakwork, SiteMinder, Oracle, eZee, TravelClick, Seekda, Idiso, Ads Hotel, FastBookng, Cubilis, Koddi, Wix, Bookassist, Visit Group, Trust International, ROIBACK, p3 Hotels, Sabre, SHR, Net Affinity, Staah, JackRabbit, myhotelshop, Mirai, BookingOne, Availpro, DerbySoft, eRes, Hoteliers.com, GOTO Plus, Forcia, HeBS, and Simplex Digital Hotel Marketing.
The CPA Model with Google Hotel Ads Commission Program
Under this model, the supplier simply generates a commission in the 10 to 15 percent range. Higher commission rates would lead to higher prominence in the search results.
Google Flights operates under a flight metasearch model. Below is what it looks like searching for a flight to London from New York.
Unlike most metasearch sites, Google connects with airlines exclusively, omitting OTAs.
There is much less information on the advertising process from an airline perspective. We believe it is likely CPC and privately negotiated CPA rates, both of which would be much lower than the hotel model.
Book on Google
This is still in its early days with only a handful of airlines and hotels participating. Google processes the booking, but the hotel or airline remains the merchant of record. Unlike an OTA, Google gives the partner the customer data and the partner handles customer service. The model would benefit less known boutique hotels where a consumer may not be comfortable providing credit card data to them, but trusts the Google brand. Additionally, mobile conversions are more difficult the more a site needs to be clicked off of. This helps with conversion. The issue for wider acceptance is that the branding is still skewed as Google and the supplier would often rather use Hotel Ads to bring the customer in and then attempt to effectively train them to book without Google the next time they stay. Commission rates here are likely comparable to the Hotel Ads rates with a 10 to 15 percent range.
Broader Impact on Other Metasearch Companies
Google is a key source of traffic, especially in the traditional digital advertising AdWords space
Any metasearch site that looks to compete in the space will need to invest fairly heavily in digital advertising as they look to capture clicks from search results that compete with other metasearch sites, OTAs, and hotel and airline sites. We expect further acceleration of advertising growth in the industry with Google being the key beneficiary. Facebook is gaining traction, but is in its infancy where the vast majority of digital ad spend goes to Google.
In a recent article, Skift discussed how Google’s ad revenue could easily be over $12B with $6.2B from Priceline, Expedia, TripAdvisor, and Airbnb. The estimate of that math is shown once again below.
- The Priceline Group and Expedia Inc., including their wide array of brands, spent around $4.9 billion for total online advertising in 2015 and are on pace in 2016 to bring that total to around $6.8 billion. If roughly 90 percent of the total goes to Google, then Google would attract some $6.1 billion in revenue from just these two companies.
- TripAdvisor would conceivably spend around $500 million on Google in 2016; TripAdvisor’s total online spend in 2015 was $507 million. Airbnb’s spend on Google, based on public rumors and educated guesses, might total some $300 million in 2016.
- That means Google would take in $6.2 billion in 2016 from just these four advertisers — Priceline, Expedia, TripAdvisor and Airbnb.
- Roughly around half of Google’s travel advertising is considered to come from suppliers, namely airlines, hotels, car rental companies, cruise line and destination marketers.
Google’s Hotel Ads and Flights Compete Directly with Metasearch Peers
This is where the relationship gets complicated. Metas need Google to drive traffic on AdWords, but can also lose traffic to Google’s own platform.
Skift’s Outlook for Google:
For Google, our recommendation would be to continue down the path they are on, but not move into a pure OTA model where the risk of alienating the massive advertising revenue from OTAs is high. Additionally, metasearch makes sense where it is more about technology and scale, but moving to an OTA model requires more people and customer service. Google could do this, but those investment dollars are better spent on things like Google’s cloud platform or simply investing back into the core search business.
For the rest of the metasearch industry, Google will remain a crucial traffic source and investing in AdWords will be necessary.
OTAs should spend on traditional AdWords and also Hotel and Air ad formats. Larger OTAs with high conversion should skew towards CPC bidding where the effective costs could easily be under 10 percent. Smaller players should either hire a third-party vendor to manage the process or move to a CPA model.
Hotels, like the OTAs, will be served well by participating in AdWords and Hotel Ads. Again, smaller, independent chains should focus on CPA models or hire a third party. Large chains could likely find more success under the CPC model if they have the resources to optimize bids. If not, a third party would help as well.
For Airlines, AdWords likely help drive clicks, but metasearch or direct brand awareness seems to be a more effective traffic driver. Most people would use a metasearch engine or an airlines own website before they would search “flights to London” and then click through the ads at the top of the page.
Who Are the Key Players in the Metasearch Industry?
Notes: Kayak revenue and EBITDA are Skift estimates.
Below are the average monthly users from August to October according to Similarweb. We note that the data does not include every country site. For example, Trivago has over 100M users across all of its international sites while our data was limited to the top ten markets. While brands with more URLs would be understated in the data below (i.e. Trivago), we do believe it is useful to show how traffic in top markets.
Expedia owns 63.5 percent of German hotel metasearch company Trivago. The company launched in 2005 and Expedia acquired its stake in 2013. Trivago operates in 55 markets under 33 languages for 120 million unique monthly visitors. Its vast inventory includes over 1 million hotels, 250 booking sites, and 100 hotel chains.
Trivago is investing heavily in marketing to fund rapid growth
The unit operates independently from Expedia and is growing revenue well above the rest of the total company rate with a 78 percent compound annual growth rate from 2011-2015 to just under 500 million euro. Trivago has been growing revenue at a 20 percent rate with a 25 percent contribution margin in its mature markets while revenue growth has been 130 percent in newer ones. The marketing strategy sacrifices profits in the short-term to gain market share for the long-term; Trivago is spending 80-85 percent of revenue on marketing.
While management could not comment on our report given the looming IPO, several of our channel checks at smaller competitors confirmed how much traction Trivago’s marketing strategy has had in new markets. In fact, one industry insider told us that Trivago is the only metasearch company taking meaningful new market share.
Cost Per Click with Online Booking Sites Remains the Main Business Model
Trivago has established direct links with hotels, search results definitely skew dramatically to online travel sites. We ran a number of searches across different markets including Germany, the U.K. and the U.S. The overwhelming majority of the prominent “view deal” results were online channels versus the hotels’ own websites.
The business model is primarily Cost-Per-Click (CPC). While the bulk of results are to booking sites, Trivago works with its hotel suppliers with Direct Connect, helping clients optimize their marketing campaigns using analytics. Trivago has been in the early stages of testing a direct booking model as well.
Update from Trivago’s IPO Preliminary Prospectus Filing
On November 15, 2016, Trivago, which Expedia owns 63.5 percent of, filed for an IPO. While the aggregate share value proposed was $400 million, this is essentially a placeholder in a preliminary prospectus and the amount may (and very likely will) change.
The valuation of Trivago is impossible to ascertain at this point, because we do not know what percentage of shares the founders are selling.
Immediately following this offering, the holders of ADSs representing our Class A shares will collectively hold % of the economic interests and those Class A shares represent % of the voting power in us, and holders of our Class B shares will hold the remaining % of the economic interests and % of the voting power in us. Following the post-IPO merger, assuming it occurs as contemplated, the Selling Shareholders will hold % of the Class B shares and % of the voting power in us, and Expedia, Inc. and its affiliates will hold % of the Class B shares and % of the voting power in us.
One Clause Gives us a Clue on the Maximum Shares to be Sold
The clause below implies that the founders will start off with nominating rights and that they will still hold over 15 percent of the company.
If the Founders, collectively, hold less than 15% of our outstanding Class A shares and Class B shares (calculated as if all securities convertible, exercisable or exchangeable for Class A shares or Class B shares had been converted, exercised or exchanged), they lose certain contractual rights to nominate members of our management board.
In our recent Expedia Trends Report, we estimated that a likely total implied value from the IPO would be approximately $3B; the total implied value in the chart below is calculated by dividing the $400M potential IPO value by the percentage of shares sold. The $400M headline number is not likely the entire stake and more likely implies a $2 to 3 billion range for the total value of Trivago.
Dual Share Structure
Class A shares or the ones in the IPO will have one vote while Expedia’s Class B shares will have super voting rights at ten votes per share. This essentially ensures Expedia will maintain control even if it sells shares or gradually spins them off down the road.
Advertising Spend Continues to Drive Revenue
The company has been aggressively spending on marketing to grow revenue. Trivago’s impressive growth outside of Europe has made Developed Europe smaller than other markets.
Note: Americas includes Argentina, Brazil, Canada, Chile, Colombia, Ecuador, Mexico, Peru, the United States and Uruguay.
Developed Europe includes Austria, Belgium, Denmark, Finland, France, Germany, Ireland, Italy, the Netherlands, Norway, Portugal, Spain, Sweden, Switzerland and the United Kingdom.
Return on Advertising Spend (ROAS) shows that this ad spend is growing revenue faster than the investment cost. The ratio is referral revenue divided by advertising expenses. The chart below shows that in its developed markets, $100 invested in advertising yields $131 in revenue. The newer markets are progressively less profitable with the Americas at $114 and the Rest of World effectively losing $12. Trivago is building brand awareness in these markets and willing to have negative margin in return for profitability in the future.
Qualified Referrals (clicks) are unique visitors per day that generate at least one referral. If a single visitor clicks on multiple hotel offers, this counts as multiple referrals, but as only one qualified referral. Trivago charges for every referral, but believes that the qualified referral metric is a helpful proxy for the number of unique visitors with booking intent that is of interest to advertisers. With over 50 percent growth in qualified users, the value of clicks to advertisers should continue to grow.
RPR Is increasing While Click-Out is Decreasing
RPQR = RPR x click-out rate
RPR = revenue per referral
click-out rate = referrals / qualified referrals
The headline sounds complicated, but the underlying meaning is straightforward. RPR or revenue per referral is just revenue per click. This metric has gone up due to advertisers paying more per click. As we previously mentioned, the value of the platform rises with qualified referrals.
Click-Out rate is the ratio of referrals to qualified referrals. The lower the number is, the less a user is clicking around. Superficially, less clicking around would look bad for Trivago, but in reality, it means that the customer is getting better value on its CPC bids and will want to invest ad dollars on Trivago at a greater rate going forward.
Intercompany Revenue Remains Meaningful, but Third Party Revenue is Larger and Growing Faster
For the nine months ended September 30, 2016, Expedia generated 35 percent of Trivago’s revenue (down from 39 percent in 2015). However, third party revenue is growing and is not only 65 percent of the total, but is growing faster than Expedia’s contribution with 58 percent growth versus 34 percent this year.
Priceline Group is Also a Large Revenue Source
Priceline accounted for 27% and 43% of total revenue for the year ended December 31, 2015 and the nine months ended September 30, 2016.
Combined, Priceline and Expedia accounted for 78 percent of Trivago’s revenue in 2016 thus far. Clearly, Booking.com is spending heavily to advertise on a valuable hotel metasearch platform, but that does make Trivago highly reliant on two companies.
Alternative Rentals Could be More Prominent on Trivago
Buried in the filing, was the following statement:
We are focused on the hotel sector. Our marketplace and algorithms are optimized to display and match users with specific hotel characteristics. As our technology is advancing and traveler preferences are shifting, we increasingly complement our traditional hotel offerings with other forms of accommodation, such as vacation rentals and private apartments that are relevant to our users.
Tripping.com has led in alternative lodging metasearch, but Trivago would be a formidable competitor. That being said, having Trivago and potentially Kayak enter the space legitimizes the model and should help that sub-industry.
Mobile Revenue Now Larger than Desktop
In June 2016, revenue from mobile exceeded desktop for the first time. Visitors on mobile are usually earlier in the planning process and have lower conversion rates for advertisers than desktop, where users tend to finalize bookings. Trivago notes that over time this trend may shift, but it remains to be true today.
One clause in the filing suggests that CPC bidding may change on the surface, but the economic results would not:
We have historically had, and currently have, a single bidding price structure for referrals from both desktop and mobile. We may choose to adopt a differentiated pricing model between mobile and desktop applications, which would likely lead to an increase in desktop revenue share, as the pricing for desktop applications would increase due to higher conversion rates, while the pricing for apps on mobile and tablets would likely decrease. We do not expect this to have a material impact on revenues, as long as there are sufficient active participants on both desktop and mobile to ensure our marketplace functions effectively, as we believe that the current bids advertisers place on our CPC-based bidding system reflect the overall efficacy of the combined desktop and mobile prices they receive.
Brand Awareness is High Across Markets
The television campaign has made the Trivago brand well known globally.
Source: Trivago Preliminary Prospectus
Skift Outlook for Trivago
We expect a continued aggressive marketing push leading to rapid revenue growth and limited profits in the near-term. Eventually, the company will pull back spend and mature and see profits ramp up. With a focus on hotels and a massive marketing budget versus its peers, we see Trivago as winner in the metasearch space. Expedia will keep its Trivago stake on the IPO and we believe, in the future.
Kayak operates 40 international sites in 20 languages, processing 1.5 billion queries offering air, hotel, cars, packages, and now, trains and vacation rentals (small offering as they test the market with 350k properties). The company uses CPC, CPA, advertising, and to a lesser extent, instant booking. The company has been the leader in the U.S. market and is starting to grow internationally. Priceline has taken a different approach with Kayak than Expedia has with Trivago as it is not investing as heavily in advertising to fund revenue growth. The company likely still generates more revenue than Trivago and smaller peers, but is likely massively more profitable than most traditional metasearch competitors who are break even at best. Those peers are growing revenue nicely and will likely become profitable, but we believe Kayak is already the industry standard for monetization.
Priceline acquired Kayak in 2013 for $2.1 billion. Kayak was focused on the U.S. market with 79 percent of revenue coming domestically. Airlines were a major source of traffic accounting for 85 percent of travel queries. Given that airline bookings are less profitable than hotels, air travel accounted for 22 percent of revenue versus 78 percent for hotels and other. We believe that the percentage from international markets has increased with a push to compete more in Europe, Latin America, and Asia, but growth would likely come at a slower, but for now, more profitable, pace than Trivago. Kayak is the dominant pure metasearch player in the U.S., but is likely smaller than Trivago abroad.
Our Attempt to Back into Kayak’s Revenue and EBITDA
Since being acquired by Priceline, the amount of details for Kayak’s financials has been limited. We know that it is included in advertising revenue, which was $613 million last year. OpenTable is also included here, which was recently written down. Prior to the acquisition, revenue was $200 million. As a rough estimate, we assume that with OpenTable’s issues, Priceline accounts for 75 percent of revenue here. The numbers are net of intercompany revenue. To get a picture of Kayak as if it were an independent entity, we next attempt to estimate how much revenue is from Priceline Group and add that to reach a gross total. Prior to being acquired, Kayak’s 2012 10K reveals that 26 percent of revenue came from Expedia and 10 percent from Priceline. We use 25 percent as an estimate for how much revenue is generated from Priceline as CEO Steve Hafner told Skift that the percentage of intercompany revenue would be similar to Trivago’s in Europe, but much lower in the U.S. With Expedia formerly being the largest contributor, we believe it is reasonable to assume that Priceline spends comparable a 25 percent to what Expedia did when Kayak was independent.
Current Priceline filings state that as a percentage of gross profit, Kayak online ad spend was less than the rest of the company. If we assume that 30 percent of revenue rate on ad spend and 27 percent of costs otherwise (similar to the parent), we would arrive at a 43 percent EBITDA margin. Next we deduct likely additional brand awareness campaigns. Trivago’s combined ad spend is over 80 percent of revenue whereas all indications are that Kayak spends much less.
If we assume both Trivago and Kayak spend 30% of revenue on digital, but Kayak spends half as much on other advertising, that gets us to total advertising and marketing being 50% of sales, which takes us to a 23% EBITDA margin.
As a sanity check, we can look back at Kayak’s 10K and prospectus before the Priceline acquisition. In 2012 and 2011 EBITDA margin was just under 23 percent. With Priceline’s conservative management, it seems likely it was able to maintain similar margins while growing revenue in the 15 percent plus per year range; the implied year/year growth trend from our estimates. Trivago’s margin is 25 percent in mature markets, which serves as another comparison point.
The chart below is very much just an estimate, but we believe helps put potential revenue and EBITDA in context versus peers like Trivago that have grown rapidly the past few years.
Kayak is Operationally Independent, but Benefits from Priceline’s Massive Scale
On day to day operations and unit level strategic decisions, our conversations indicate that Kayak is very much an independent operation from Booking.com and other units. However, Priceline’s massive scale is an important factor helping Kayak continue to be a leader in metasearch. Booking.com and Kayak can share content, best practices on marketing and consumer acquisition, and technology. The groups benefit from Priceline being willing to fund technology experimenting that helps drive innovation in things like artificial intelligence.
On its latest earnings call, Priceline CEO Jeffery Boyd commented that:
“I think some of the more interesting things that KAYAK has been working on are around artificial intelligence, natural language processing with Alexa, Facebook Messenger trying to be able to respond to a customer’s spoken query, which is at its early stages now. It’s not generating a ton of business, but I do believe it’s at the front end of some pretty important changes in the Internet in general and the way people interact with technology. And KAYAK is doing a very good job of being out in the front of that.”
Interview with CEO and Co-founder Steve Hafner
Skift: Since being acquired by Priceline, how have things changed for Kayak? Is it still an autonomous model? How much interplay is there between the parent, as a holding company, and Kayak?
Steve: Yeah going into the deal, they promised us autonomy and operating independence and they’ve delivered on that. There’s really been no change in structure in terms of how we run the business other than reporting to a board of directors. I now just report to Jeff Boyd, our interim CEO. They don’t interfere with our future planning the way we display the website, who we do business with etc. so it’s been great for us.
Skift: Great. Yesterday Trivago had their filing. All of their revenue is basically CPC. For Kayak, how much is CPC, CPA versus display ads?
Steve: Yeah, we use all those models and it’s a balance depending on the vertical. Its primarily CPC based but we’re different in terms of how we operate as a supplier or a business partner. If they want to go with the CPA model, we’re fine with that too provided we get tracking in place.
Skift: On Instant Booking, you guys were talking about dabbling in that and you’ve seen Trip has struggled a bit. What’re your thoughts on that?
Steve: Yeah it’s funny we were actually the pioneer in the category of Instant Booking and we did it to improve the consumer experience. It wasn’t with a view towards monetizing differently or with a view towards changing the strategic balance of power in the industry. We rolled it out, what four years ago, five years ago? It’s something that we’ve offered. It hasn’t had a material impact on the user experience or our economics in the way that it did for TripAdvisor but TripAdvisor is trying to force it in a way that we didn’t. We basically put it out there for consumers to use if they wanted to, we didn’t bias this way towards that path and as a result our experience has been very different than TripAdvisor.
Skift: What’s your take on the Trivago IPO here and how does that impact your business?
Steve: It’s finally great to see their numbers right?
Steve: You know, I was reading through it at one point last night actually and it’s amazing how aggressive those guys have been in terms of adding accounts. They’re over twice our size now in terms of employees and also how incredibly aggressively they’ve been on the marketing spend. The real question is, looking through it is, what’s going to happen when they actually go public and have to deliver EBITDA to their shareholders?
And the only way I think they can do that is to back off their marketing spend. I think the billion-dollar question we’re eager to see is as these guys reduce marketing spend, how much of their traffic sticks versus how much goes back to TripAdvisor or Kayak or others?
Skift: You also spend a decent amount on marketing and advertising and since you’ve been a part of Priceline there hasn’t been too much in the way of financial disclosures. Is there a rough sense of how much you spend? I mean they’re spending eighty, ninety percent of their revenue on marketing.
Steve: It’s nothing that we disclose, but I would just say that marketing is our biggest line item on the P&L and we continue to invest aggressively in getting the Kayak name out there and getting consumers aware of our services but not to the level that those guys do.
Skift: Trivago got its start in Europe and now is strengthening or building its presence in the United States. Kayak, took it the other way around. Can you give us an update on how things are going in Europe?
Steve: Sure, we started in the US. Priceline bought us when we were in fourteen countries and now we are in over forty. We are expanding both with the products as well as with the marketing push, so this is the first year we’ll spend more money outside of the US than we’ll spend in the U.S. in terms of brand and marketing.
Steve: If I had to fast forward a couple of years, you’d look for us to spend additional money in APAC. The U.S. is steady base for us now and we are using all the profits from the U.S. to fund our marketing expansion elsewhere.
Skift: Traditionally, you guys were known more on the airline side and our sense is that, airline is really great for getting traffic to the website but is really hard to monetize. Is that the case for you guys where it helps drives traffic but the hotels is where the revenue is coming from or is airline by itself actually a fairly meaningful contributor?
Steve: We like all the business. We make a nice margin on our airline business actually because we don’t incur the customer service at an extra cost that an OTA does. We’ll take that business all day long and for the U.S. airlines, we provide a great source of traffic in terms of high quality as well as high volume. So some of the smaller players may not be getting the same economics as we’re getting because of our size and may have a very different cost structure but we love the airline business.
Skift: Yeah it’s really interesting to hear you to hear you say that because we’ve been talking to some of the smaller players the Momondos of the world and the Skyscanners. They like the airline business but it seems they’re pushing more towards hotels because the rates they’re getting on there are likely low, but I guess as a bigger, dominant player you guys probably are on a little bit more favorable terms than they are.
Steve: Yeah it’s funny, there’s only two companies in the Meta space making money and that’s TripAdvisor and Kayak, but thankfully we can hide behind Priceline how good a business we have. Yeah, there’s no question there’s more money in hotels than there are in flights because in flights there’s industry consolidation and you actually have to have a good relationship with the airline to get paid. You have to be a meaningful distribution channel for them which fortunately we are. Yeah, it’s tough if you’re a Skyscanner or some of the other folks where you may not be getting the same economics and you still have huge cost structures.
Skift: How do you view your smaller competitors?
Steve: Yeah I’ve got a view on all of those guys, but in general, bigger is better right, because it is a scale game both in terms of engineering and marketing spend. I suspect consolidation will happen. Also, you have a brand name that helps you play across verticals, right, not just flights but hotels.
Then, you need to have real dominance so you can have profitability and some of the smaller guys, if you’re Momondo and you’re dominate in the Scandics you don’t make enough money there to actually have an impact on marketing spend in Germany and certainly the U.S. or U.K. I think the big will get bigger because there’s inherit economies that scale both in engineering and marketing.
Skift: Another angle in the alternative lodging space. Trivago’s filing had a little statement that they’re getting into that. How do you see that as a part of metasearch going forward?
Steve: Yeah, I mean look it’s something that we’ve taken a crack at too. Right now, my observation would be people are either on Airbnb or they’re not and the Meta experience from Tripping.com and others, hope to get another one isn’t that meaningful for a consumer. But, if it gains traction, it’s something you are going to find on Kayak.
Skift: Right so you guys are just watching, okay.
Steve: Yeah so look if that category ever becomes a category that requires the Meta experience, it’ll be on Kayak. It’ll be on TripAdvisor. It’s not a big enough category to sustain a new Meta player.
Skift: So, basically, if Tripping starts to really succeed that’s where you are going to see the Trivagos and the Kayaks come in more aggressively. Then, the question is, is the market big enough where they can still do well or they just lose their share to you guys?
Steve: Yeah, I wouldn’t be an investor in any of those fights honestly.
Skift: In terms of artificial intelligence, voice search, personalized search results, how do you see that in the future impacting how people book? What are you guys doing there?
Steve: It’s all early days of that stuff. We have a dedicated team against it because we want to try to figure it out and just because we love trying new stuff. Right now, the functionality is pretty limited to spoken voice, broad search commands. I think where that stuff can get real traction is going be on the customer service side in the short term so allowing people to cancel their transactions for example by speaking to an Echo device or speaking to Siri or re-booking.
I don’t think it’s going to be useful for actually transacting for three to four more years and when it does, it will be on the Chatbox site first before the natural language processor. If you look at China for example, lots of people buy stuff through WeChat, not so many people buy stuff using Siri. That’s going to be the way it goes in the U.S. too.
Skift: Then, in terms of the search results, we’ve heard a lot about personalized results where maybe one person has a family and they want to make sure they have a kitchen. How much do you think results will be able to default more to specific people’s tastes in the future?
Steve: Look we’ve been talking about personalized search results since we started the company so I think it’s just really difficult to do.
People don’t want to especially answer questions about what they’re looking for. They want to see a results list. Then, you try in a margin to tilt the display to get what you think they’re going to want to buy higher for top results. AI helps with that because we can look at the data in the background and try to make more intelligent assumptions about what someone wants. It’s still low hit rate in terms of probability of hey, if I show you these three flights those are the three you’re going to want.
Skift: One thing we noticed in the Trivago filing that we were wondering if it’s comparable for you guys, they disclosed the revenue from Expedia and Priceline and net was like 70 something percent. For you guys, is it a similar type thing or you are more diversified between the hotels, the airlines, and OTAs?
Steve: Yeah we’re a lot more diversified than they are because we have the other verticals, right?
We have the flights and the rental cars, and soon the cruise vertical. We don’t have the customer concentration they do. If you looked within the hotel vertical, we still don’t have the customer concentration that they do just because we operate in markets like the U.S. where chains are bigger players than if you look at Europe it has a lot more independents. If you just said okay, the Kayak hotel business in Europe, we’d probably look like they do in terms of the percent coming from Priceline group plus Expedia.
Skift: In terms of Google, any updates there? I know it’s always the big question but what do you think of their app and do you think that they are going to continue doing well in the hotel space? Are you concerned about that at all?
Steve: We’re very attentive to what Google’s working on but my observation is they don’t have their best people on it. Their best people are on self-driving cars and stuff like that, that’s cool.
Their hotel price ads, their Trips App, all this stuff is well behind what Kayak and others in the industry lead with. For example, they just launched fare alerts on their flights, but hey guess what, everyone else’s business has those for ten years. It’s something we’re attentive of. We pay attention to what Google does. We haven’t seen any real innovation there. They’re always, thankfully waiting for you.
Skift: When you’re working with a really small hotel chain, is the technology is that an issue to be integrated? Do they need to use third party? How does that work?
Steve: Yeah, I mean overall technology in the travel industry isn’t up to snuff, right, and that’s specifically true at the hotel versus the airlines. It’s something that’s in the process of being upgraded but right now on the hotel side, you basically have cache after cache built upon a cache to get prices and it works because most hotels don’t have complicated rate structures and are unsold for the time. Normally, if you send them a reservation they can take it but if the hotels ever get more sophisticated about pricing availability management, the same way the airlines are, that’s going to require some big-time investments and not many of the chains have the wherewithal or the capability to make those.
Skift: One thing, we’ve heard some companies talk about how they don’t rely on GDS’s for connections. Do you guys use that much for either the airlines and the hotels?
Steve: We do all of the above. We suck in data from GDSs, directly from the airlines, from OTAs, from third party caches. Our goal is to be comprehensive so we take it from everywhere and then accuracy is really important to us so if we get the same flight from two different sources it has a higher degree of accuracy than if we just get it from one.
A lot of people avoid the approach that we take just to save on cost, but we operate at that scale that cost isn’t that material to us.
Skift: Steve, on the regulatory front in the U.S. there’s some rumblings around competitiveness in airlines and metasearch. What’s your take on that?
Steve: No, we don’t really have a dog in that fight honestly. We upgrade partners in the airlines. We observe a lot of competitive activity between the airlines in the U.S. so I don’t know.
We’ve been to Washington and they have asked us lots of questions and our goal is to be comprehensive and be objective and unbiased and that seems to be working fine for us.
That’s my way of giving you a lot of words without answering your question.
Skift: For Latin America, what’s the attraction there just beyond lack of competitors? Do you see a favorable outlook for that market?
Steve: Well, I would just make the observation that the same things that make Kayak valuable in the U.S. and in Europe also are true in Latin America which is, when consumers ask for a travel related question, they want to see all their options. The Kayak platform of taking flights and hotels and content from multiple suppliers or OTAs and presenting it in one format works there just as well as it works here. There’s definitely consumer demand there. You got a lot of little cost carriers who aren’t plugged into GDSs in Latin America. You’ve got a lot of independent hotels who are looking for a distribution platform. The business model works and for us and this goes back to the engineering field, launching in those markets isn’t a big thing. We don’t have to invest a lot of head count or engineering to actually get a great product live and given the strength of the Kayak brand name, we don’t have to invest a tremendous amount of marketing either.
Skift: Going back on the U.S. hotel market, it’s not directly metasearch really, but the OTAs, Priceline, Expedia, and then the Hiltons and the Marriotts are pushing direct booking campaigns. The chains both said they are taking shares, while the OTAs have not seen much impact. From a Metasearch perspective, is it a case where the hotels are using Meta and CPC to drive Instant Bookings or is it they look at you guys how they look at the OTAs?
Steve: Yeah, I mean it’s an industry with a lot of competition, right? We work with all the big chains in the U.S. on a direct basis and we have a bidding algorithm that they can use to steer traffic for their hotels directly to them. We see them stay very actively in that but in general, I would say OTAs are pretty good distribution channels for the big chains as much as they like to grouse about it. Metas are an area where it’s pretty easy for them to be more competitive by increasing their bids while playing around with the price offerings. In general, you got to remember a third of the hotel’s reservations are coming from their meetings or walk-ins or phones so even the fight that you see on the Metachannel, aren’t that significant to the overall hotel business.
Skift: What about five years out, if we’re thinking about the future of metasearch and the model relative to the OTAs and what’s happening with everything else, where do you see it all going? Is it always going to be this somewhat messy blend of OTA Meta?
Steve: So I’ll make maybe two comments there. The first is that the meta and OTA model will merge. What the metas are offering or adding facilitated booking and then the OTAs are showing you more and more advertising links to be for their own in-house brands. I think those models can merge. Ultimately, what a consumer wants is one place to see all their travel options and then they want some way to book. Sites will arrive at certain needs. Kayak being one of them. The second is it’s going to be a consolidation fight. There’s no need to have 40 different OTAs. There’s no need to have 20 different Metas. A handle on each will suffice. Our goal as the management team is to ensure that Kayak is one of those and I am highly confident it will be.
Skift: Consolidation is something that we have been talking about and believe in too. Five years out, do you see the case where the large metas are still part of the OTAs and that’s business or the case where yourselves the Trivagos or whoever become completely independent entities?
Steve: I don’t think the metas will be independent entities. I think it makes complete sense for them being a part of an overall holding company that has that from the OTA space and the meta space. There is a lot of synergy like having them both sitting along-side of each other. I think that is why you are not seeing Expedia selling stake in Trivago.
Skift: What are the type of synergies for a meta being part of the OTA?
Steve: Yeah, I mean we are a store, right? But potentially we don’t commercialize as a store because we don’t ship the product but a consumer looks at us no different than they look at Expedia. The one synergy behind these brands under one umbrella is we can share best practices on how to run our stores. We can share content with each other. We can share best practices on marketing and consumer acquisition. We can elaborate eachother’s technology on the back-end. There is a lot more sharing going on than perhaps research analysts like yourselves would actually note. On an operational basis, we work very closely with our sister companies at Priceline and I suspect Trivago works very closely with their sister company Expedia.
Skift: The independence is more on things like the listing themselves and how the business decisions are made but there is a nice synergy on the intellectual capital, at the management level, at the technology level, and sharing in there.
Steve: Yeah, I mean look when Booking.com signs up a new property, it is instantly available on Booking.com, and it’s instantly available on Kayak. We both spend money on Google to buy those new keywords. We know how it monetizes when someone says booking, the people at Kayak know about it. When someone says Kayak people at Booking know about it. There’s lots of operational synergies that makes sense to keep these two, the OTAs and metas under one roof.
Skift: Trivago is doing a lot of offline marketing. Do you see an overall shift away from Google or is it still more or less business as usual?
Steve: Look, the marketing dollar is going to continue to rise with the business activity and Google is going to be a primary beneficiary of that as more and more consumers use Google right. I don’t think anyone is going to look to pull back on their spending on Google anytime soon but the sophistication of spending on Google is going up, which means that the bigger guys are smarter about it. They can bid more intelligently. They can run ad creative that generates higher click through rates and when they get to the landing page you can actually extract higher ROIs as well. I think the Google framework will actually help drive consolidation in the industry just because it is such a massive source of business for everybody and only two or three players can do it at scale.
Skift Outlook for Kayak:
Kayak is likely by far the most profitable of the pure metasearch players in the space. We expect it to continue to do well in the U.S and maintain revenue growth without sacrificing much in profitability. Internationally, Europe will be a more challenging space to capture share, but we see the company using Latin America and Asia as nice growth drivers. Kayak could be a consolidator in the metasearch landscape.
With 390 million average unique monthly users, as of the third quarter of 2016, TripAdvisor clearly has a large user base. Even after seeing its stock price decline 44% from its 52-week high, TripAdvisor still sports a $7B market cap and is one of the largest publicly traded online travel companies.
The original model was monetizing traffic on desktop via advertising. As the world changed, the business model evolved with TripAdvisor pushing a metasearch model and then instant booking.
Skift’s Trends Report on TripAdvisor discusses the company at great length, but there are a few key components that are worth revisiting.
TripAdvisor Needs Instant Booking to Work
The company will need to win over the consumer as well as the supplier. The Priceline partnership was a big win on the supply front, but a temporary fix as TripAdvisor moves to strengthen its direct relationships with hotel partners. Most of the big hotel chains have signed on, but it will take time to build momentum with the independent brands, particularly in Europe where the hotel market remains much more fragmented than in the U.S.
Instant booking was a monetization play to help Trip capitalize on a growing share of its mobile traffic. Approximately 50 percent of visitors to the TripAdvisor site now come from mobile channels. This is a huge user experience success story, but also a challenge for an ad-revenue business built around desktop traffic.
The shrinking return on ad revenue in the mobile environment is widespread. Quick consumer adoption has left content platforms in travel (and other industries) scrambling to find workarounds to traditional display formats. The move into metasearch, and now IB was TripAdvisor’s solution to this issue.
2016 Third Quarter Results Update
Normally, a quarterly update would not have much place in a Trends report focusing on long-term issues, but every quarter gives us an update on progress being made on the business model transition. With declining hotel revenue and the stock dropping almost 15 percent on earnings, the verdict is that a lot more progress needs to happen to assuage fears.
Hotels accounted for 76 percent of revenue and saw a 6 percent year/year decline. In its prepared remarks, management noted, “We are still early days at demonstrating that we are plugging the monetization leak and capturing its expected financial benefits, though we continue to see nice leading indicators of success. We are moving fast, we are learning and improving, and we believe that we are on the best path to maximize long-term growth and shareholder value creation.”
Late August was the first full year since instant booking was rolled out in the U.S. A sign of progress was year/year positive Click-based and transaction revenue growth in the U.S. However, international is “experiencing significant headwinds.”
Mobile is Growing, but the Monetization Gap Persists
Phone hotel shoppers grew 25 percent representing more than 1/3 total shoppers, but revenue from this grew 20 percent. This difference is consistent with management’s estimate of a 30 percent gap that they look to shrink. Within mobile, 50 percent was app versus site.
The issue here is that volume needs to grow more if monetization levels are less than volume growth. In a steady state, 20 percent growth would be great, but there appears to be a steady decline in global desktop revenue given the total revenue decline at TripAdvisor from hotels.
Guidance Implies Management is All-In on the Instant Booking Push, but the Financial Headwind Will Persist in 2017
TripAdvisor management stated:
“In 2016, we have made a lot of progress aligning our products and platform for long-term growth. However, this progress has clearly had a negative impact on our 2016 revenue growth amidst what remains a competitive travel landscape. Now that we have our transaction products in place, and we have been able to learn and improve, our 2017 focus will shift to re-accelerating revenue growth in our Hotel business, and we believe paid marketing channels will play an important role. Therefore, we believe our 2017 adjusted EBITDA margin will likely be lower than the margin we achieve in 2016. We are still in the early days of re-educating users about our end-to-end user experience, building repeat behavior and plugging the monetization leak in our business. We believe this journey will pay off financially, but will take time. Consistent with our past commentary, we play the long game and remain focused on building for the long-term.”
There are two subtle points in the guidance that are worth discussing. The comment on paid marketing channels playing an important role suggests that digital ad spend will accelerate. The company paused television ad spend in 2016, but could go back there in 2017 to build brand awareness. The decline in EBITDA margin means that the amount of ad spend will be greater than the associated benefit in revenue growth. Expedia and Priceline have had similar issues on that line item, but revenue is growing so strongly there, that it is not really an issue for those companies. For TripAdvisor, YTD hotel revenue growth was negative 6 percent and the total company decline was 2 percent. It is harder to give them the benefit of the doubt on whether the increased ad spend will drive strong revenue growth, but it appears to be a necessary strategy now that they have gone down the instant booking road.
The chart below shows how EBITDA margin has continued to decline as revenue growth slowed and became negative in 2016. Management clearly is willing to invest now for future returns, but the near-term impact has been fairly severe and why the company’s stock has had such drastic declines. A quantitative measure of success will be a return to strong 15-20 percent revenue growth and EBITDA margin expansion (or at least stabilization in the mid-20s). For context, Priceline had a 38 percent EBITDA margin last year while Expedia’s core OTA business was at 27 percent.
Note: YTD 2016 is through Q3. Growth numbers are year/year.
Traditional Metasearch Will Remain a Key Part of the Business Model
CEO Stephen Kaufer stated on the latest earnings call that:
“I’ve always maintained that meta is an integral part of our value proposition. Travelers want to come to our site, they get the phenomenal content, the information, the trust, the community, and then travelers really want to know that they’re getting the best price. And meta delivers on that best price, and if the client has a brand loyalty to an OTA or to a supplier direct and they wish to book on that site, we were fine with that because meta enables that.”
“If the user wants to book on TripAdvisor through Instant Book, because we have great pricing, great content, then that would be a straightforward mechanism, and arguably easier on the phone because it’s less of a click away. But then when we look at being successful in the eyes of our travelers, it’s did we help to find the property they wanted and did we help them book it at the best price, book it on TripAdvisor or book it on our partner sites through meta. So meta remains critical. I don’t frankly ever foresee it going away period, full stop.”
Adding a Partner like Expedia Could Help Instant Booking Conversion
Booking.com was a key partner for TripAdvisor. Adding Expedia would help as TripAdvisor benefits from the largest possible inventory with the best prices. If Expedia offers lower prices, TripAdvisor would lose on conversion.
Instant Booking is Taking Longer than Expected to be Successful
CEO Stephen Kaufer commented:
“It’s absolutely taken longer than we thought, but it is a multi, multi, billion-dollar opportunity as we’ve explained before, as we can close the gap between us and what a typical online travel agency generates in terms of revenue from these travelers. It’s a huge win for us, but then that’s clearly been harder, or it is taking longer than we thought has been the changing of the consumer perception.”
Skift Interview with TripAdvisor VP of Global Sales, Brian Schmidt
Skift: Management has mentioned a 30 percent monetization gap between mobile and desktop. How do you close this gap over time?
Brian: We continue to improve instant booking on two fronts to close the monetization gap: 1.) optimizing the product, getting even more sophisticated about when and how to show instant booking, and 2.) continuing to expand supply which helps us increase availability, show the best prices and surface a wealth of quality content. These are important factors in our efforts to increase conversions and close the gap, and we’re making progress.
As our CFO Ernst Teunissen noted on our last earnings call: “We are still in the very early days at demonstrating the financial benefit of plugging the monetization leak. However, we continue to see very nice leading indicators of success. We believe this journey will pay off financially, but it will take time. We are moving fast; we are learning; we are improving; and we believe that we are on the best path to maximize long-term growth.”
Skift: As you roll out instant booking outside of the U.S., how much of an impediment is a lack of technology from smaller, independent hotels? Do third party technology solutions help solve the issue or does TripAdvisor get directly involved on things like API integration?
Brian: We continue to support a broad range of connectivity options for our partners of all sizes, including offering direct connections, as well as through third-party solutions such as IBE and service providers.
Smaller, independent hotels tend to have a more difficult time adopting new online distribution channels, compared to their larger chain counterparts, due in part because the third-party marketplace is fragmented with many regional players. That’s why it’s so important for TripAdvisor to be actively involved in making the process as easy as possible for these smaller hotels and by connecting into as many of the third parties as possible—over a hundred now.
Skift: On the latest earnings call, Stephen stated that traditional metasearch and instant booking models are both here to stay. What type of hotels are best served by each model?
Brian: Instant booking and meta both play integral roles in our efforts to help travelers plan and book a great trip, while also meeting the needs of our diverse array of partners. As Steve noted, both of these platforms are here to stay.
We believe meta and instant booking solve different needs for our customers: our metasearch offering ensures that we’re finding the full spectrum of options to allow our shoppers to make informed booking decisions, while instant booking gives them the convenience of completing the transaction within the TripAdvisor experience.
On the partner side, both platforms continue to offer value, and we expect to see hotel partners of all sizes – large, medium, and small – continuing to participate in our marketplace.
Skift: The 12 and 15 percent rates that you publish on instant booking, would the largest hotel chains be in that model or is it negotiated? What about a booking.com?
Brian: We don’t comment on any specific partner agreements, but our rates are in the 12 to 15 percent range as noted.
Skift: Guidance implies that advertising expense will outpace revenue growth. How far along are we in building awareness? At what point, can we expect EBITDA margins to stabilize? Do you expect Trip to return to television advertising?
Brian: We are always building awareness through a variety of marketing vehicles. We do not have any immediate plans for television advertising.
Skift: How will AI and personalized search results change the industry? What is Trip doing here?
Brian: We began our investment in personalization in 2014 with our Just For You product. That effort enabled us to break ground in personalization and start building a deep set of experience in natural language processing, machine learning, and algorithmic recommendations. In that time, we’ve learned a lot and we’re continuing to evolve our personalization efforts based on the results of our testing. In addition, the technology we’ve built as part of our personalization efforts is being leveraged in key areas of the product like search, merchandising, discovery, trip planning, and in-destination recommendations.
One of our key learnings is that personalization for travel is different than other markets. A user’s persona is driven, in large part, by the type of trip they are taking and with whom they are traveling. A single user’s preferences may change drastically between a business trip, a romantic trip with their partner, and a trip with kids/family. For this reason, we’ve been working to understand how to adapt personalization based on the context of a user’s trip. This insight has been key to our efforts to create effective trip planning functionality.
A second learning is that users want to have more control over personalization in a travel context versus in another context. If an on-demand video platform recommends the wrong movie, then the viewer has lost, at worst, a couple hours of time. However, if a travel site recommends the wrong place to stay or the wrong tour/activity, then the stakes are much higher in terms of time and money lost. Because of these high stakes, users want to be able to control how personalization is being used to influence results. For that reason, we’ve started investing in explicit preference analysis where we combine preferences that the user has provided with other data we have which includes past behavior, behavior of like-minded users.
Skift: Vacation rentals are in the search criteria. Is this true metasearch or only directing to Trip/FlipKey owned properties? Do you believe alternative lodgings will become a bigger growth area for you? How hard is this to monetize?
Brian: Our vacation rentals product is not a metasearch model. For background, TripAdvisor owns one of the world’s largest vacation rentals businesses, which comprises TripAdvisor Vacation Rentals and our subsidiary brands FlipKey, Holiday Lettings, Niumba, Vacation Home Rentals and HouseTrip.
Skift: On the flight side of the business, is just a case of completeness and helping add to hotel bookings or does Trip monetize this is a meaningful way? Our sense is that rates are so low on meta for air travel that this is more just a traffic driver rather revenue one.
Brian: TripAdvisor has hundreds of millions of customers who come to us on a monthly basis, looking for complete and transparent travel information. Our goal is to provide information about the most important products and services consumers need to plan and book the perfect trip. Air travel is one of the most essential parts of trip planning. Providing the most complete and transparent information on airline reviews, pricing and schedules in air travel, helps consumers make the most informed travel decisions. Comprehensive air information benefits the entire travel ecosystem at large within a global economy.
Skift: Kayak’s writedown of Opentable appears more about overpaying on the acquisition versus the validity of the model. Can you talk about The Fork and how restaurants are integrated into search and vacation planning?
Brian: In many markets around the world, TripAdvisor is the go-to site for finding and reserving a table at a restaurant. We make it easy for travelers to search for nearby spots, compare options and pick the best dining experience for their meal, whether they’re near home or on a trip abroad. And we also offer filters and categories, ranging from “fine dining” and “cheap eats” to “coffee and tea” to help them find the right experience for their needs.
Our acquisition of lafourchette (TheFork) in 2014 helped us propel our restaurants business forward and more recently we’ve invested in EatWith, a social dining service that helps pair travelers with a host – often a local chef who prepares a meal out of their own home.
Skift: As we look out five, ten years into the future what does the Future of Metasearch look like to you? Who are the dominant players? What business model becomes most successful? Does mobile become a headwind versus tailwind?
Brian: We believe metasearch will continue to evolve. If you look at TripAdvisor’s own metasearch product in the last year – we’ve evolved how it works for our users (e.g. now better surfacing the best pricing more prominently in our results) and for our partners (such as introducing new advertising tools, such as audience remarketing). There continues to be a lot of opportunities to improve the experience for consumers and partners alike.
Skift: Any updates on when Expedia could be on Instant Booking?
Brian: We are in ongoing discussions with a number of hotel brands and online travel agencies. The details of these discussions are proprietary.
Skift Outlook for TripAdvisor
The TripAdvisor brand will be challenged on the marketing front as it moves deeper into travel bookings. Its core competitive advantage is the branded traveler review. This has positioned it as key source for information and opinions on places and things to do. A significant chunk of its internet traffic likely comes from its pre-booking or in-destination user base – i.e. travelers in the research phase or those that have already booked accommodations.
The company will need to reeducate and incentivize travelers to use TripAdvisor earlier in the trip planning process when booking their accommodations.
In its earnings calls, the company confirmed that metasearch will remain an alternative to Instant Booking. Offering both booking options will help reduce risk on the revenue generation, but could dilute efforts to rebrand TripAdvisor as a booking platform. Large players with high conversion can likely acquire guests on Trip’s CPC model at an effective rate below the instant booking ones. This may lead to less participation in instant booking, which in turn, could lead to less customer interest.
We believe the reviews and brand awareness are incredibly valuable, but the transition to a booking platform will take years to play out.
Skyscanner was founded in 2003 with a focus on airlines. The model has evolved over time to now includes hotels and cars, but airline metasearch remains the overwhelming majority of the business.
The website had over 50 million unique monthly visitors in 2015, which was up nicely from 30 million in 2014. Over the same period, total app downloads were up to 40 million from 30 million. The company has localized sites in 31 languages in 70 countries, employing over 800 employees in 10 countries. Search results feature the direct airline connection along with online travel providers equally prominently.
Hotel results seem to skew to the online distributors.
Vast direct connections make the company less reliant on Global Distribution Systems (GDS)
GDSs are the proverbial pipes travel suppliers use to distribute correct rates and information. An online travel provider would need to utilize one of these networks (at a fee) to offer its customers booking options or have its own direct connection to the suppliers. Skyscanner has spent ten years building out its 1,200 direct connections to airlines and other online travel partners, making it less reliant on GDS platforms. In fact, Shane Corstorphine, Skyscanner’s General Manager of its Americas business and former company CFO, tells Skift that less than 5 percent of queries go through GDSs; we include our lengthy discussion with Shane at the end of the Skyscanner subsection below.
A second benefit of its direct connections, is that Skyscanner can use those and its technology to power API and White Label platforms. These partnerships grew from 200 in 2014 to 500 in 2015.
Mobile Presents Challenges and Opportunities
As the number of users utilizing Skyscanner on mobile continues to grow, the conversion becomes more difficult. By conversion, we mean when a user clicks out from Skyscanner to its travel partners site and does so in a way where Skyscanner and the partner can capture this appropriately. If a user searches on mobile, but then goes to book under a new tab or switches to a computer, Skyscanner would have the user, but not the click-through. The company continues to invest in technology to monetize mobile efficiently.
Digging into the Financials
While Skyscanner is a private company, its annual financial report is publicly available at Companies House in the United Kingdom providing a wealth of information that we would not normally have about a private company in the United States.
The company increased revenue 24 percent to 110 million pounds in 2015 (close to $138 million based on current exchange rates, which have been negatively impacted by Brexit). Excluding the impact of currency depreciation (half of revenue is denominated in Euros), growth would have been even more.
Revenue comes from a combination of:
- Commissions earned from facilitating booking of flight, hotel or car
- Commissions for facilitating click through of visitors to flight, hotel and car
- Display advertising based on impressions
- Subscription agreements for analytics
The chart below shows the breakdown by product. Other services likely are driven by advertising and analytics subscriptions for both airlines and hotels.
Source: Skyscanner 2015 Annual Financial Statement
Geographically, Europe, including the U.K. and Ireland, is the main driver, but Skyscanner is aggressively moving into the Americas and Asia.
Source: Skyscanner 2015 Annual Financial Statement
Volume is Large and Growing, Monetization Remains a Challenge
Total ticket value from flights (essentially gross bookings) jumped 49 percent to $11.3 billion to came in at $11.3B. While Skyscanner does not operate on a pure commission basis, the amount of revenue per total ticket value does give us a sense of how difficult it is to monetize in airline metasearch. The negative for Skycanner is that the implied commission rate for its business would be under 1%. The positive is that at such low rates, airline metasearch is a volume game where the largest players have a nice barrier to entry. These low rates also explain why Skyscanner is moving more into hotels.
Source: Skyscanner 2015 Annual Financial Statement
Costs Reflect Appropriate Investment in Growth
Operating (EBIT) margin decreased 400 basis points in 2015, but this is not negative operating leverage. Instead, this is management deliberately investing in product and engineering staff along with technology to fund future growth.
Below is overview of Skyscanner’s funding as provided by crunchbase.com.
A $1.6 billion valuation would translate to roughly 12x revenue. This seems high, but the value lies in future monetization of its users and the value of the relationships and technology (especially to a potential bidder).
Interview with Shane Corstorphine, Skyscanner’s General Manager, Americas
Skift: Can you walk us through how Skyscanner has evolved over time?
Shane: We were founded in 2003, and you’ll realize a lot of what we do, which kind of positions us as almost a platform for travelers, comes back to what was probably a terrible business idea to connect just low-cost carriers. You have to direct connect. That has been really interesting. As a meta player we’re probably the only people who have done it completely back to front where you go local carriers first, scheduled airlines second, OTA third.
Therefore, less than five percent of our pricing comes via GDSs or is GDS reliant. The alternative, and probably far more sensible, short-term model is to plug into the GDS, sign deals, weave the result together and you’ve got a pretty good comparison site. You can monetize it immediately and all the rest of it.
That’s kind of how our business started. That actually works particularly well in a highly fragmented airline market and with the boom of low-cost airlines, it has also worked exceptionally well.
I then joined just under five years ago we were just under a hundred people. Today we are around about eight hundred people. I joined as CFO. Then in April took the role as General Manager of Americas and moved to Miami with my family in July.
Skift: What percentage of traffic comes from the GDSs?
Shane: Less than five percent of our searches are querying GDSs for prices.
Skift: For a typical competitor, what would you estimate percentage would be?
Shane: It would depend on their model. For smaller companies, you could build a meta model that literally just plugs into GDS and gets all your scheduled airlines, but I think the important thing to understand in travel and where meta really helps is there is no single source for one hundred percent of information – even if you do take the GDS route and you’re predominately GDS.
It is a painful way to build a business one partner at a time, but actually if you want to be a global player, it is probably the right solution because you build an operation designed for onboarding partners all with varying APIs. Actually, the move to NDC we’re really embracing, because it will certainly help simplify things here.
The outline we’ve shown for Skyscanner is there is 1,200 direct connects into the platform. Then what’s really exciting is, with the introduction of things such as bots and other varying and very different distribution channels from standard to a display or advertising channels, is we can give almost plug and play access to those 1,200 partners into these distribution channels.
Skift: You’ve moved to the Americas, that must be an important growth push.
Shane: Revenue and traffic are largely aligned. The Americas is getting to around about 15 percent globally for us. I say the Americas rather than just North America, because as you know we’re based in Miami. We are split roughly fifty-fifty for North America and South America. We are equally excited about both opportunities.
Skift: In North America, there is the congressional request for information on the airlines with the issue being how they share or not share information with online distributors. What are your thoughts on this issue?
Shane: I think, and we’ve been fairly open, first and foremost, we are entirely supportive of anything that is in the consumers favor. We believe in transparency of flight pricing and consistency across markets. Therefore, it’s something that we will continue to defend.
Skift: Can you discuss direct booking?
Shane: At this stage, we only have a handful of partners on direct booking. It’s not entirely straight forward to do, but with the introduction of NDC, it’s something we have raised within the last year. There are still only nine major partners on NDC for instance, so a lot of bespoke integrations, but we’re in dialogue with a huge number of partners. On the site, I think we have about five partners with direct bookings.
The economics they benefit from as a result are much stronger. This is probably fundamental to the evolution of meta search as it moves from price comparison to product comparison is we’re seeing things like around about 25 percent increase or more in selling ancillaries.
We’re seeing about nine percent are taking, for instance, paid seating. We are seeing a much higher conversion, I think 50 to 60 percent, on mobile. That for us and for the partner is a great place to be. As a tech company our P&L is far closer to that of a Facebook or a LinkedIn where over fifty percent of our costs are engineering and product base as opposed to be marketing based, because we have a traditional travel way.
We are first and foremost a data company that does travel and our P&L looks like that. That means that at any point in time we have a thousand AB tests running. That allows us to really help partners through direct booking execute their strategies, whatever they may be, to be increasing fare families, to be increasing ancillary up-sell, because the speed at which we can iterate the test. Those conversion rates are much higher with direct booking.
Skift: Moving on beyond flights to hotels. What’s the game plan there?
Shane: We are a test and learn culture so it makes sense to learn first from a flights point of view and put those learnings into hotels. We’re I suppose continuously evaluating is this the right thing for us, do the right booking for hotels. Then secondly when is the right time to do that? We’re not at a stage yet where we can conclusively say, absolutely now is the right time for us to be doing this.
Skift: It’s say still very much in the experimental phase, or not experimental but priority still sits in the flights category.
Shane: I think that’s right, yes.
We’re still leading with flights. We like the fact that flights are further up the funnel if you like, in terms of the booking funnel people tend to book their flights significantly further in advance than a hotel. The ability to add most value to the partners aside from distribution at the moment comes in flights. That opportunity is only getting better with the introduction of NDC.
Skift: Can you talk a little bit about the NDC initiative now and how you think that’s going to impact the meta search model overall? How do you think that’s going to take shape over time? Is it a year out? Is it five years out?
Shane: I think it’ll start moving pretty quickly to the extent that anything moves particularly fast in the airline world, but the opportunities now are significant. It’s allowing partners to really distribute not just tickets or not just seats, but ancillary bookings.
Some airlines will focus on the very low price ticket and then significant up-sell ancillary. Others are actually taking a stance that they stand for the seats being all inclusive with meals and whatever else. What you then have is the problem with meta as it was, is it does nothing to show that their strategies are very different. A price is a price and really that’s it.
Our job is to provide as much value as we can at the point where the user meets the partner, but really do it in as friction-less a way as we can as well.
Skift: In terms of the front end and how these products align with the consumer and the shopping for these price comparisons based on not only just flights but also on these other factors that ultimately NDC will allow you guys to bring to the consumer, is that going to be a significant challenge for the meta search model?
Shane: I think the art will be in making it simple. Actually, much the way that if you look at our app and how we persistently work to make it as simple as possible and yet the amount of information in there for a power user should they want to power use is vast. Invariably that is one of our strengths as a tech company is finding ways to allow users to expose them. If you were to look even at this stage where really we’re just beginning to really ramp focus and investment on direct booking, we’ve got a 55 percent increase on mobile conversion rate. We’ve got our take rate for things like ticket insurance actually up a 150 percent. Fair price upgrades are up 160 percent.
We’re already seeing that it is increasingly complicated for consumers to purchase travel full stop. The options as they’ve un-bundled have become vast and actually that’s where technology can really add value to consumers. Then we have to deal with the multifaceted ways in which consumers are engaging and trying to get that information. It’s advancing very quickly from coming to our site and then redirecting to our partners site.
Skift: What are you seeing on the adoption side of the mobile device versus traditional desktop?
Shane: About three years ago, the shift to mobile caught most businesses by surprise. We were in that same camp of being somewhat surprised and the shift was rapid. Understanding that, and being consumer obsessed, meant if that’s how consumers wanted to engage there was no way we were going to go stick our heads in the sand or try and force them back to desktop if that’s not what they want to do. We actually re-orientated the whole company to be mobile first. What that means is our developers will develop on mobile first and then they’ll expand out into the stage for desktop. Whatever it is they’re trying to develop, the new version of their homepage, whatever it might be, first they will get designed on mobile. Then it will scale out. A
That strategy has definitely worked for us. Our retention rates on app are really super high. We believe that comes back to strength of product because travel inherently is not that frequent. Therefore, if people are coming back with frequency it’s because you are creating more than just a transactional experience for them. We continue to work at that but we think we’ve been very successful up to date.
Skift: How is your traction in Asia?
Shane: Asia is a still hugely exciting area for us. We did a joint venture with Japan last year. I think we could say it was a resounding success and continues to be an excellent relationship we have with Yahoo Japan.
The rest of Asia is largely based out of Singapore. Then we have Beijing and Shenzhen for China, both of which are going incredibly well. As GM of the Americas I set my sights on their growth rates, and we’re starting to get there, but we have some phenomenal markets in Asia. o.
Skift: Are there any particular challenges that you see going into China specifically that you think might impact your longer-term strategy over there?
Shane: Less so longer-term. It’s a hard market to figure out. It’s more extreme than others. In most markets, you can iterate and tweak your product to make it right in that market, but China we have found really it is a complete rebuild. That’s what we’ve done and that’s why we have the product and engineering team there. Our engagement rates and conversion rates have grown massively s ince doing that. We have a local team now. Therefore, I think we’ll only get faster longer term as opposed to have any major long term headaches.
Skift: How are your relationship with the airlines?
Shane: I cannot talk about specific partners, but what I say, and certainly I think one of the best observations I’ve found coming over, is how analytical the airlines are and the caliber of people we’re dealing with. They are super sharp, very analytical and actually, because we are a data company and we have things like travel insights where they can see volumes of who’s flying where, and we come with our uncovered route of the week and all sorts of bits and pieces we’ve actually found the ability to align really very easy.
We’re both obsessed with ticket value and selling tickets is the number one priority, not revenue. It is rarely a conversation about revenue and commercials, it’s much more strategic than that. The other thing is the obsession with data. We’re building some really, really great relationships with the airlines by being more than anything, just entirely open with them.
They’ve been fairly outspoken about trying to drive direct bookings. The great thing is we are entirely aligned there because with direct booking on Skyscanner they own the customer. We are supporting them to up-sell their products, their ancillaries, it is very much branded in their style. They manage customer service. All we are trying to do is reduce friction in connecting the user and the partner.
Skift: How does artificial intelligence and voice directed booking potentially impact things in the future?
Shane: I think as we move from price to product comparison and the platform becomes more and more congested from 1,200 partners to however many partners that might end up on their, as you move to flights to hotels to everything else, AI is incredibly important. We may become less effective at answering the right question for the consumer. Actually, that’s now why we have a dedicated bot squad here. Partly because of an obsession with bots, but bots really are just an indicator for what is to come. Whereas people used to ask quite simple questions they can now ask increasingly complex questions.
The interesting thing is their bot experiences are getting shorter and shorter actually as they get very used to dealing with bots. We’re seeing time and engagement with bots shortening the longer we have our bot out there. This we saw on Facebook and now we’re seeing on Skype as well as people become familiar, but also as we get better at answering that query.
Skift Outlook for Skyscanner
Skyscanner is profitable but margins are relatively low compared other meta sites including Skift’s estimate for Kayak and even Trivago’s mature market margins. Revenue and website traffic are growing nicely and their direct relationships and technology prowess would make the company an attractive acquisition target; there continues to be speculation about an IPO and/or a potential merger. We do not want to speculate on who would want to buy them, but potential suitors could be anything from the large online travel agencies in the U.S. or abroad, an airline itself looking to buy the technology, or a technology company.
The most likely case is that Skyscanner continues to expand into new markets and successfully takes traffic market share. The question is, how does this monetize better over time? A key part of the story will likely be flight bookings pushing down to hotels, which are more lucrative. We are skeptical on the airline business being able to improve monetization much from these levels, but are optimistic that volumes continue to grow and hotels become a more important driver of revenue growth.
Cheapflights Media acquired Momondo in 2011 and became known as Momondo Group. It has sites in 35 markets in 20 languages, employing 350 people with offices in London, Copenhagen, Boston, and Sydney. The company operates with a dual brand strategy with Momondo (founded in 2006) focusing on inspiring travel primarily in non-English markets utilizing both flights, hotels, and car rentals. Like other metasearch sites, the flight and hotel results tend to skew towards online travel sites rather than to the brand.com sites directly given the better technology and often times, pricing, the OTAs provide. Additionally, there are unique features seeking to influence travel further up the proverbial booking funnel.
Tripfinder lets the user choose between things like cities, beaches, nature, skiing, shopping, and nightlife and put in a budget to start a search. It then lets the user filter by time and categories including most popular, cheapest, warmest, social, fancy, cultural, family, local, and romantic. The user can then build a package and book flights, hotels, and car rentals.
Inspiration has articles like the expert travelers’ guide for first-time hikers, Europe’s best Christmas markets, ultimate guide to Whistler-Blackcomb ski resort, where the reader can book flight and hotel directly within the story. Again, Momondo is looking to be a part of the travel planning earlier in the process. Momondo’s DNA journey campaign, where people test their DNA and plan trips based on where they are “from,” has been watched 175 million times.
Founded in 2003, Cheapflights focuses on English speaking markets with the U.S. being its largest one. Similar to the Momondo site, the results skew towards online travel companies. Cheapflights has reinvented itself over the last few years from being a deals and supplier focussed model, to a rapidly growing global metasearch brand; in the U.S., the business model has not changed and has been successful. The business model change resulted in accelerating growth with English speakers from Asia, the Middle East, and the Pacific.
The main source of funding came in October 2014 with Boston, Massachusetts based Great Hill Partners investing $130 million at an estimated $210 million valuation. For context, Skyscanner has been estimated to be valued at $1.6 billion. If we applied a media-type private transaction multiple at 5-6x revenue, Momondo’s valuation could easily reach over $500 million.
There is not much data on other funding, but below is what is provided by Crunchbase:
Digging into the Financials
Similar to Skyscanner, Momondo is a private company, but we were able to obtain a copy of the company’s 2015 annual financial statement via Companies House in the U.K.
Revenue increased roughly 17 percent in 2015 to 62.2 million pounds or $78.8 million in USD at current exchange rates. Momondo uses a combination of CPC, CPA, and advertising revenue according to its filings, though our conversations with management suggest that vast majority is CPA. Website in 2015 visits were up nicely with a 32.7 percent increase, but operating profit was negative. The negative operating income was due to increased marketing expenses and personnel, investments in upgrading the cheapflights.com website, and an increase development personnel.
The company provided some financial guidance in May, guiding to over 30 percent revenue growth for 2016 with mobile accounting for 60 percent of demand. Momondo and Cheapflights saw a record 95 million visits in the first quarter of the year. 40 percent of all traffic now comes directly to their site as brand awareness has improved after successful marketing and TV advertising campaigns. This traffic source is a 100 percent increase year/year.
More recently, Momondo provided an update on its growth through the third quarter with 64 percent year/year international revenue growth for the quarter; international (outside the U.K.) accounts for 92 percent of the total. The U.S. was 26 percent of the total (driven by Cheapflights) and the Nordics were 36 percent. New markets such as Spain, France, Italy, Austria, and Switzerland grew 400 percent.
Momondo updated its 2016 guidance to over 40 percent revenue growth since its initial statement in May. This implies over 87 million pounds this year or roughly $109 million with an approximately 60/40 split in revenue between Momondo and Cheapflights.
Source: Momondo 2015 Financial Report
Interview with Momondo CEO Hugo Burge and Managing Director Pia Vemmelund
Skift: At a high level, could you walk us through the brands of Momondo and Cheapflights and how the transition to metasearch for the Cheapflights platform has progressed?
Hugo: Cheap Flights is really focused on the English-speaking flights metasearch market, the global market, and is focused on making the experience simpler. Extrapolate smart search made simple. Our belief is that travel on metasearch has a long way to go to become an enjoyable, simple, seamless experience and we believe that it can be made more frictionless.
Cheap Flights is a very focused brand. It is a great name. People know intuitively what it is before they click on it and I think combining the great name with great technology and a great user experience, we are seeing a great deal of success globally in very exciting markets, with growth in Asia Pacific and Africa. But as a reminder, the U.S. is our largest market and it is also worth highlighting that the U.S. also remains on our previous business model which is working very well there. We don’t intend to change that.
A brief recap of the transition of the Cheapflights market outside of the U.S. We had a very commercially successful model that allowed us to grow our cash flow into 10 markets around the world and purchase Momondo. It was phenomenally successful. We are very grateful to the Cheapflights business over the last 16 years.
We had a problem with the old business model in some markets in that it was overly dependent on Google, seemed to be churning users, and had a negative net promoter score despite being very friendly to advertisers and being very commercially successful.
Our hypothesis was that if we were to move across the Cheapflights business to a metasearch model, which was consumer friendly and made less money per user, we would get a very substantial improvement in our net promoter score and an improvement in our repeat and direct traffic. It would offset the short-term revenue losses of the switch of business model.
I think that we are extremely gratified by the results that we’ve had on Cheapflights in that transition, and Cheapflights is now growing extremely strong as a global metasearch brand and we are very pleased with the results that we’re getting.
The U.S. is also outperforming our expectations using the multi-clip model, and we think actually that is very well suited to the U.S. markets.
Overall, Cheap Flights has bounced out of this transition and is in a very healthy state. In fact, we’re seeing revenue growth of around 50 percent year over year, over the last few months, which is extremely healthy indeed. We are very pleased with that transition and the Cheapflights brand.
Skift: What is the rough breakdown between business generated under the CPC model versus the CPA or commission model?
Hugo: We do not disclose this, but the majority of our partnerships are CPA, because we believe this is in the consumer’s best interests. CPC tends to bias results towards revenue and not consumer neutrality.
Skift: How much of Momondo’s revenue is skewed to advertising?
Hugo: Momondo derives minimal advertising revenues around the search results, unlike competitors. We believe that Momondo offers a cleaner, more honest, more relaxing start to your travel search.
Skift: How has the growth of mobile impacted you?
Hugo: We see mobile as an opportunity and rapid adoption as a chance for us in international expansion especially.
Skift: What is the breakdown of Momondo versus Cheapflights on revenue?
Hugo: Momondo is now the largest part of the business. I think it is around 60 percent of our revenues and is the fastest growing part of our business too. The acquisition in 2011 and the transition to metasearch, and investment in Momondo has really gone like a dream. It has been a textbook acquisition for us.
We can spend a bit of time talking about Momondo now rather than just studying Cheapflights because it is a slightly more complex story and of course is the business that we have been involved with the longest.
Skift: Yes, that would be great.
Pia: I think for Momondo one of the core focus areas has always been to ensure a really great user experience. Also, wanting to inspire people to travel. We believe we can help open up the world by inspiring people to travel because we know there is a key correlation between traveling and being open minded.
The user engagement and a great product has been core focus areas for us. Also, a strong brand because we knew that having a unique technology was one thing, but it was just a matter of time that somebody could catch up.
We wanted to build a strong brand. We wanted to deliberately look very different from our competitors and that’s why we like to use strong visualizations, we like to be playful and, again, the whole inspirational moment is special for Momondo.
We usually say that we want to inspire while we enable. We don’t just focus on the hardcore elements in being a metasearch site, where we’re just showing transparency and being accurate with data and facts.
Hugo: One of the reasons we we’re so excited to join forces with Momondo was that we felt the name was an empty vessel for moving other products and increasingly hotels are a big focus for us. Around 25 percent of our revenue is coming from hotels. Very excitingly, this is up to 50 percent in some new markets we’re operating in, which is a big transition and we envisage a much greater share of hotel revenue in the future.
It’s also worth highlighting that Momondo has leadership in the Nordic market. Over the last five years, we have been investing heavily in television in Denmark, Sweden, Finland, and Norway. We have really taken a market leadership in those markets. The exciting progression over the last couple of years is that we’ve expanded into continental Europe and are now TV advertising in 12 markets around Europe.
We’re very encouraged by the results that we see operating in Europe. We are building a pyramid too, not only a differentiated brand that stands for something different to any of the other slightly boring travel metasearch players, but we are making real strides and seeing phenomenal growth as a result of our strong multi-channel marketing activity which includes television.
Skift: Along those lines, is it more on the TV side or more on the digital side or pretty evenly split for the brand awareness part in the new markets?
Pia: It depends on what market we are in. Generally, we use a multi-channel strategy and we know that when we enter a market and we use TV it is very successful, because we also follow up on the other channels as well. It is the combination of using the different channels that really works for us.
Skift: You had approximately 62 million pounds in revenue last year, but negative operating profit because you are investing heavily in marketing and personnel. We saw you had the Q1 release where you put out guidance for over 30% revenue growth. Is profitability this year still going to be on the negative side with all the investments?
Hugo: We’re prioritizing growth over profitability. We believe that we’re investing for tomorrow rather than today and actually, we’ve seen accelerating revenue growth this year. We’re now forecasting 40% year over year revenue growth which was up from our initial forecast.
The last quarter was our strongest quarter. We showed very strong international growth (62%), remembering that only 10% of our revenues are in the UK.
We’re not concerned about trying to make a profit this year. We are concerned about growing, penetrating markets. We’ve actually decided to accelerate our investment into new markets this year because we believe that whilst we are the smallest of the global metasearch leaders we believe we are the fastest growing and we believe there’s an opportunity to build scale which will be of value to our investors. We believe we can build a loyal user base.
We are making a modest small loss this year. We are a prudent company. We’re used to being profitable in growing our cash flow but we are definitely prioritizing revenue growth. We think it’s the right thing to do given market opportunity.
Skift: When we look out five, ten years into the future, what does the future of metasearch look like from your perspective?
Hugo: Firstly, we see global players winning over national players generally, apart from in places like China, arguably. We see a tremendous trend towards the global metasearch players having global reach.
There is clearly a trend towards assisted booking or universal booking where you’re able to store your details and make purchases seamlessly on metasearch.
There’s discussion around whether metasearch is getting closer to being an OTA. We think that this hasn’t played out yet. We don’t think anybody has done it particularly well. We are not sure how it’s going to play out, but the dream would be to have one click universal search in an Amazon like format for metasearch. That is something that is the holy grail that still needs to be fought for.
We also have different people trying different strategies. You’ve got Kayak focused on hotels. You’ve got Skyscanner focused on flights. You’ve got TripAdvisor focused on instant booking. We’d argue that TripAdvisor isn’t metasearch. It has moved to an instant bookings comparisons model, which is not comprehensive but is trying to just make bookings quickly, but not an OTA model.
There are some really subtle nuances and explorations going on that we think will play out in the next few years. I would say that we feel very strongly that nobody has got it perfect. We would also say that we believe that metasearch is very powerful for the transparency it provides and the trust it builds with users. We are wary of over promising on assisted booking in the short term.
Skift: In general, for you and your peers, it seems when you do searches, the results tend to skew towards OTAs versus the airlines’ or hotels’ booking sites. Is that a function of better technology by the OTAs, better marketing, better pricing? Why does that typically happen?
Hugo: We love working with both …
Pia: We really like to work with the OTAs and the airlines. We like both. We want to show people transparency. That’s why we don’t exclude anybody. We just see that the OTAs often offer cheaper prices than the airlines and that’s why we really think it’s important to have the OTAs on not just the airlines.
We also recognize that some users actually prefer to go directly to airlines and that’s why we do have certain features. Where you are able to be redirected to the airlines, even though it’s not the cheapest price. For us, it’s always just about showing transparency and setting what we call the value proposition before the revenue stream. It’s user experience that’s more important than how we actually make money. We believe in repeat users and that’s why we focus on the value proposition.
Hugo: I also just want to highlight that online travel agencies tend to be severe and better at adapting to online marketing. The suppliers, I think to our frustration, sometimes are simply not as good or in a technical position to work with us as well. We would encourage suppliers to work with us. We think that they would be pleasantly surprised by the results. Airlines in particular are just very slow moving.
Pia: There are some airlines who are really doing well, but I agree with Hugo in general. We see that the OTAs are much more on the beat when it comes to new technologies, new platforms and they seem to move faster than the airline systems.
Skift: What changes would you like to see from your hotel and airline suppliers?
Hugo: Hotel and airline suppliers are the least online savvy players and tend to get rings run around them by OTA’s, whose focus is online marketing. We believe that suppliers would be best served by embracing meta-search and getting more direct bookings.
Skift: On the flight side of the business, are the connections direct to the airlines or do you rely on GDSs?
Hugo: We collect our own data and not reliant on 3rd parties or GDS – this is a competitive advantage. We want to be comprehensive for OTA’s and airlines.
Skift: On the airline side, in the U.S. there has been a congressional request for information on airlines not sharing full data with online travel sites. What are your thoughts on this?
Hugo: We believe there is a case that it is anti-competition and anti-consumer for airlines to try to restrict the distribution of their airfares.
Skift: Regarding the NDC initiative or New Distribution Capabilities where the language of data from airlines to suppliers has been static and based on price and scheduling, but airlines want to be able to sell whole experience rather than commoditized version, how does this play itself out?
Hugo: We like the principle of NDC but it has been painfully slow to roll-out. We embrace the principles and thinking behind it.
Skift: What are your thoughts on alternative lodgings metasearch?
Hugo: It seems a potentially attractive area, albeit I’m not convinced of the meta advantages in a sector where availability is the key consumer problem.
Skift: We’ve covered a lot, but what else do our readers, the market, investors, and general public need to better understand about Momondo and Cheapfights?
Hugo: It’s important you ask that.
Pia: I just wanted to mention that we’re really purpose driven. I think this is probably the biggest difference from any other in the industry. Today, probably is also a good day to really make sure that we focus on that there are more things uniting us than dividing us. That’s something that has been going on for a decade, and obviously, we try to take more and more into our product.
Hugo: I think also that’s a very good point and it’s a big differentiator for us. I don’t think any other travel business in the industry would have come up with the DNA journey and had that viral hit to the 170 million views. I don’t think it would have even crossed the minds of travel companies to create that kind of thing. I take my hat off to the Momondo team for living and breathing that differentiated purpose.
In terms of a broader trend for the metasearch industry, I do think that we believe that personalization is a cornerstone and foundation for a range of future technologies including chat box, voice search, artificial intelligence. I think we articulated that the human touch in bridging technology to give people relevant results is absolutely the core of giving a good user experience in future.
We have transitioned to a mobile environment where 60% of our traffic is mobile and we’ve been extremely successful. Over the next five years, it seems likely that new technologies will rise. We believe that tech search and voice search will be important.
It’s very hard to predict or have a crystal ball as to which direction things will go in but we believe at the core of those experiences and the next generation of travel search is personalization, being able to predict relevant inspiration and relevant results for consumers. That is something we don’t think, again, anybody’s figured out. We think that personalization’s done very badly on the whole by the travel industry and travel search. But we believe it’s an area of exploration and product development and certainly is one of our big bets when we think about the kind of products and technologies that we’re looking at over the next two years.
Skift Outlook for Momondo
Momondo’s niche in the metasearch world is its brand strength and savvy marketing. The Momondo site’s vivid images at the homepage to its Trip Finder and Inspiration features make the search experience atypical. Our conversation reinforces our belief that airline search is extremely useful to drive traffic to the website, but monetization and profitability is better driven by the hotel part of the business. With 50 percent of revenue in new markets from hotels, we expect to see continued strong revenue growth. In line with what it takes to build a successful meta brand, the company is aggressively spending on marketing to build brand awareness making it not profitable currently. We agree with the strategy and liken it to what Trivago has been doing at a much larger scale. The Cheapflights site is less differentiated visually and has a similar feel to something like Expedia.com. However, what matters here is that the U.S. continues down a steady path and the rest of the world markets benefit from the new metasearch model.
Momondo is the smallest of the big Metasearch companies, but has carved out a nice niche for itself and we expect strong growth to continue. Over time, marketing and ad spend will come down and profitability will follow. Given the private equity ownership, at some point an IPO seems likely.
The company was founded in San Francisco in 2010 and was recently sold to Concur (part of SAP) in 2016. The search results on air travel differ from the traditional metasearch site where it has a more visual portrayal of the price, duration, and time. Additionally, it defaults to sorting by “Agony” which combines price, number, of stops and duration. When clicking the “book” tab, the results tend to push the user to an OTA over the direct airline website.
On the hotel side, the default view is with a map and pictures with sorting typical to other sites with price, stars, etc. Like the airline searches, the results tend to skew to the OTAs.
The history of Hipmunk is telling about the challenges facing smaller metasearch companies. The company was seeking to disrupt the industry, but it seems that despite a strong product, a lack of advertising budget (versus the dominant players) was a significant headwind. The company had raised $55 million over seven rounds. It is unclear how much Concur paid, but according to tech crunch, its last valuation in 2014 was $96 million and the last round of funding was a down round. One of Skift’s sources suggested that other buyers declined to buy the company at a valuation below $55 million.
Skift Outlook for Hipmunk
At the time of the acquisition, Tim MacDonald, Concur’s executive vice president of travel, told Skift that Concur will keep the Hipmunk consumer brand going and hopes to improve Concur’s value proposition for frequent business travelers through learnings from Hipmunk. Concur management also noted that:
“Hipmunk is known for delivering some of the most innovative functionality in the travel industry, particularly features and functionality that are highly relevant to and beloved by frequent travelers. The company was the first to create a website and mobile app that sorts travel results not just by price, but also key factors that are important to business travelers such as duration, stops and hotel location. Additionally, its calendar integration and hotel map search allow business travelers to easily see the best hotel and flight options based on meeting time and location. Lastly, Hipmunk is a leader in the cutting edge space of artificial intelligence-powered travel search and travel bot.”
Our take is that the acquisition was more about buying technology rather than looking at the Hipmunk platform as a successful way to monetize the leisure traveler. Advertising investment will likely be minimal for the site where the main use will be helping to power Concur’s travel search platform.
Metasearch for Alternative Lodgings
A newer avenue for metasearch is in the alternative lodging space. Tripping.com is the leader in the U.S. with 8 million properties. The company is early to the game as online booking is key to monetization; younger companies in alternative lodging do not have large marketing budgets to pay for a CPC model. The larger players do partner with Tripping, but that will not be the key driver of results in the future as those players would pay much lower commission rates as a site like HomeAway already commands huge traffic and AirBnB acts as a closed ecosystem.
Tripping.com’s key partners are Wimdu, TripAdvisor, CanadaStays, HomeAway, VRBO, Booking.com, Roomorama, Travelmob, Stopsleepgo, Vacayhere, Bedycasa, Waytostay, Perfectplaces, Vacationrenatlpeople, Luxury retreats, Homestay and others offering over 8 million properties in 150,000 destinations around the world.
Search results are shown where the pricing differential is obvious. This reinforces the idea that Tripping is adding value to search and helps retain customers.
Tripping.com is a private company with limited financial data available publicly, but CEO Jen O’Neal did state on growthhackers.com that the company is on pace for $500 million in gross bookings this year. If we assume, that monetization is in the early stages of growth with 2 million of its 8 million properties instantly bookable, we can back into a very rough estimate of the company’s potential revenue. While the company uses a combination of CPC and CPA, it is moving more towards a CPA model. The large sites that charge 10-15% on their own would not likely give economics worse than half that rate. Realistically, a HomeAway may pay low single digits. Smaller companies looking to take share, would be happy to pay for traffic and bookings and the rate could be 10%+. For illustrative purposes, the chart below shows a potential range for 2016 revenue at $15 to $35 million. This is not indicative of future revenue potential, but our math suggests that Tripping is definitely in the early stages of monetization.
Below is overview of Tripping’s funding as provided by crunchbase.com.
Interview with COO Jeffrey Manheimer
For more insights into the company, Skift spoke to COO and Co-Founder of Tripping.com, Jeffrey Manheimer. Below is an edited version of that conversation.
Skift: Could you walk us through your story, and how you found the company and how the business model has evolved over time.
Jeff: My whole background is in the travel industry, and my co-founder’s background is all in online marketplaces. She was the fifth employee at StubHub, and one of the original employees that built up the sales, branding and marketing team for Viagogo, which is considered the StubHub of Europe. We have very complementary backgrounds with regards to what we bring to the table.
I worked for Hyatt Hotels for seven years. I did work on property in Boston, then I moved to Chicago in the corporate office, worked a lot on distribution, managing the deal between Hyatt.com and Expedia.com. I then went over to TravelZoo, when they were very much a startup, did sales development for them for a few years, before jumping into this endeavor.
We’ve been around now for just about eight years. Our first iteration of the website, in the early days was more of a community model, going after the couch-surfing type crowd. Right when AirBnB was coming to the marketplace, we saw there was a lot of opportunity within the peer-to-peer market, and the host/traveler type of relationship. We started building up the company and the original vision was a community website. Early press we got back in 2010 from The New York Times referred to us “couch-surfing 2.0,” and we really saw a vision to commoditize that experience through strategic partnerships, and advertising.
The long and the short of it is, you just can’t get a lot of 22-year-old backpackers to give you money. We decided at that time, it was probably a smart idea to pivot. We pivoted into this model in late 2011, and really, the reasoning behind that was we were just looking at all the data coming out from the industry, reading a ton of reports, and we saw that there was an insane amount of fragmentation in this market. Usually when there is fragmentation, a meta search engine wins, so we said “look, let’s really investigate the technology here.”
We built the technology, signed a few partners to launch and that was late 2011. It was really a few years early for the market and it was hard to get traction. I don’t think the market, or the online book ability had caught up. It was still very much send an e-mail to a host and hope they get back to you within nine days, which was the average. Then, maybe, maybe not, you’re going to get a vacation right where you wanted.
We kept looking at the data, and slowly, but surely, it was moving more to an online booking model. We were adamant about focusing on that. It was in 2014 where we started to see an inflection point. The suppliers were providing more and more online booking inventory, and we started monetizing it, and now it’s like the table is completely turned. We’ve hit that tipping point where that’s the new norm – online bookable properties.
Today, we have over 50 partner integrations through various sources like listing sites such as HomeAway and VRBO and TripAdvisor. We also do some channel management integration where there might be a website or local property management company that doesn’t have an e-commerce enabled website, so they use software companies to build connectivity and gain distribution. We partner with those to bring that booking process on-site as well.
Skift: What are the economics on a typical transaction? Is it cost per click? Is it based on the transaction as a commission?
Jeff: Yeah, the industry is still very much a hybrid. You do have some PPC partners. We push for the revenue share side of it. We like the commission model because it aligns our incentives with those of our partners. For the most part, the partnerships we have, the most lucrative ones are the ones where we’re getting paid for sending good, quality bookings to them.
We have a nice feedback loop. We have that booking data to understand what are the best properties that are converting in the best market, then we could obviously play around with our algorithm. You really can’t do that in a CPC world. We love the revenue share model. We have partners where they provide online bookings, but they might not have an on-site booking API to provide us. We would redirect the traffic there and drop cookies for when a transaction happens.
We do have some partnerships we are launching that are onsite bookable. The transaction does happen on Tripping.com. This is very similar to an instant book on Kayak or TripAdvisor.
We’re starting to dabble there and the numbers look really good. Again, I think it’s playing to the fact that vacation rentals, sometimes you go to these older websites with great inventory. People aren’t comfortable putting in a credit card number, just because it doesn’t look like it’s a web 2.0 feel. We’ll work with a lot of providers to bring that whole experience online.
Skift: How is the trajectory in terms of supply. Do you feel like you’re tapping out at this point, or do you feel like you still have a lot of room to grow on the supply side?
Jeff: Good question. It’s still kind an unknown out there, and the reason I say that is because every day, inventory’s coming online. It’s amazing where a company pops up in a part of the world.
You guys have probably never heard of Dobovo out of Croatia, or Kizaza out of South Korea. Those are the big competitors to AirBnB overseas, and they’ve kind of dug their moat and localized the content and are really just going after that one niche market. Right now, my guess would probably be, from the conversations I have going on, at least 14 million. I don’t think we’re there yet.
I’m expecting that number to also go up, again, it comes down to there being a lot of people out there who just haven’t brought their properties online.
There is a lot of the fragmentation, not only both on geography and accommodation type, but on the length of stay too. There’s some interesting companies that are really trying to target that three-to-five-week stay.
Skift: How much of booking is coming from the big players like Airbnb or HomeAway? Is it a pretty heavy percentage, or is it more fragmented?
Jeff: I can’t give out exact percentages, for obvious reasons but in the earlier days, back in 2013, 2014, it was pretty heavily concentrated with the big players just because they had the biggest presence. Every year, this gets less concentrated. Next year, we’re expecting a pretty even split between a lot of the partners we have. A lot of the European partners are gaining a lot more traction, every month we see that.
I still think it’s a race to get the supply online, and for Homeaway and VRBO, to get as much inventory as possible. We see it continues to diversify itself. It’s not two players owning this industry. It’s still a free-for-all, with regards to that. We see it in the data.
We also send a lot of leads to these guys, too. If you notice, you go to the website, we don’t take listings directly. If a homeowner or a property manager comes to us and they say “hey, Tripping, we want to be listed in your search results, how do you do that?” We’ll say “here are our partners that we have integrations with and we have some type of referral program arranged with them. We encourage them to go list for one of those partners.
Often times, not only are we sending consumer demand, but we also send a lot of leads. We help those guys grow their supply base. It’s actually great relationships that we have with all of the suppliers.
Skift: With those relationships, are there contracts in place?
Jeff: We have direct partnership agreements with everyone that’s on the site. We don’t scrape any data, we don’t do anything like that, everything is through direct APIs, direct relationships with each of the partners.
In a lot of the cases we have very, very deep integrations with them. I’ve got partners that fly to San Francisco once a month with their engineers and we sit down and work to make the booking experience better. A lot of the partners are pushing for real-time rates and availability. We want our first page of search results to be very accurate. That’s always a challenge in the vacation rental industry, when you’re dealing with so many calendars.
We are trying to put our stake in the ground and say “look, if you want to have that type of placement, we’ve got to have great technology behind it.” The only way you’re going to get great technology is by having direct partnerships that are contracted out and we have a strong relationship with them. From our perspective, that’s what we do with every single partner.
Skift: Just thinking a little bit about the competition, there was a story going around that Kayak might dabble in the vacation rental space. What do you think of that in terms of the reality, the practicality, the seriousness of that and how that could impact your business?
Jeff: Yeah, I’ve read about that, too. They’ve been testing for a long time, and Expedia’s been, obviously, testing with HomeAway for a long time. I think when you’re looking for a hotel, it’s more of a challenge to up-sell an unknown commodity, a vacation rental. If you’re looking for WiFi, parking and room service, and you’re looking for, typical, consistent hotel amenities, you’re sold on a hotel. Vacation rentals are not consistent experiences, harder to up-sell that on a hotel website.
From our perspective, we think that we’ll still be the leader in that space. I know we’re top partners for a lot of our suppliers. I think it’s still one of those things where anyone can get into it. We certainly know that it’s a big enough market for everyone. I’m not worried about it at all.
Skift: How may artificial intelligence and verbal booking impact the industry if you look out five, ten years?
Jeff: I think it’s interesting when you see the Hipmunks that are experimenting with that, and you have some of the Slack bots out there testing those integrations – the AI component. I think that we’re still years away from having it be perfected. I do think that it is something we are going to start to dabble with, the voice recognition, verbal command. I think it feels a bit more challenging in thevacation rental space, just because, again, trying to bring that whole experience online is step one. Then there’s step two, how can we make it even better booking experience. Where are the bells and whistles that you need to do things from voice control?
I think it’s there. I think it will probably happen quicker and easier with flights and hotels first. Then, vacation rentals second. We’ve been keeping an eye on it; our engineers are very hungry to do some tests on some things. We’re still focused on getting supply online as priority one.
Skift: Jeff, what’s the status with Airbnb in terms of their inventory? From what we understand, they have more of a closed model, where they don’t open up their APIs to partners, is that correct?
Jeff: Yes, that’s correct, at least, as of today.
Luke: Does it make sense for Airbnb to publish their data to partners, or do you think that they’ll be more of a “hold on to that” mindset?
Jeff: That’s a great question. I think they’re like the Southwest Airlines to most of the distribution world, kind of holding on and wanting to really establish their brand. The challenge with doing that and having that tactic is that you have every one of their number one competitors working with us actively, and we’re constantly working on building up relationships and sending traffic to them. It’s more of a matter of what aren’t you getting by distributing. How are you limiting yourself?
I think, in the long-run, they will probably have some type of API, and we certainly welcome the inventory. For us, the more inventory, the better. I think overall, the average length of stay, I couldn’t quote exactly what it is, but I know it’s a lot less than a typical vacation rental booking, or at least, a professional managed property. We tend to focus more on that side of the market. A couple that wants to go to New York City, crash in a spare bedroom for two nights, that’s really not our thing.
We do have some partners, in Europe that also provide that type of inventory like Homestay.com, so we have partners that do provide that experience. I think as far as the way we prioritize things, vacation rentals, professionally managed homes that have that five to eight nights for the length of stay, and $1,500 booking value is our bread and butter.
We’d certainly love the opportunity to work with them (Airbnb), if and when they’re ready, but it’s not detrimental to our business in any way by not working with them, given what we’re focused on.
If I were Airbnb, I would consider opening up distribution. Not only for the consumer demand side of it. Obviously, they have a lot of traffic from the lead side of it. It’s an opportunity for them to get more hosts and homeowners actually opting in and signing up on their platform, that’s something that we provide a lot of partners with as well. I think the distribution could help them on both of those fronts.
Skift: How do people find you? Is it usually direct? Are you getting most of your traffic from Google? Is it your app? How does that landscape look for you guys?
Jeff: We currently don’t have an app just yet, and the reason is because redirecting users to a site off an app isn’t a great experience. We’re really looking to see what an app is, how does it make sense for us, so we’ve intentionally held off on that. A lot of our demographic tends to be older and they’re not booking $1,500, $2,000 rentals on their phone just yet, more tablet than anything. We do have a responsive site for that. I think as far as that goes, we’ll probably be coming out with something in 2017.
For traffic, it’s a combination of things. It’s pretty diverse, actually. We do have search engine marketing, so we have some SEM going through Google, but we have a lot of organic traffic, and that’s a big push for us. Back when we were early, early days in 2009, 2010, I personally went out and signed a lot of deals with companies like AARP and the Peace Corps Association, colleges and universities, study abroad programs which helped gained SEO traffic.
Our organic footprint grows year over year. Our series A investor, Recruit Holdings, out of Tokyo were SEO experts when they funded us, and they worked very closely with our team on building that up. That continues to be a huge driver for us. Indeed.com, which was bought for one billion dollars, was 90% organic.
The nice part is, we don’t have to be 100% reliable on just search engine marketing.
Skift: In terms of the inventory that you guys have, how much is U.S. versus international? What are the main parts of the world you are in?
Jeff: Yeah, that’s a great question. For the most part, it’s been pretty split, 50/50, up to this point. We really focus, primarily, on the U.S., just because we’re here, based in San Francisco. There’s huge opportunity in Europe. I’m expecting that to be more 60/40 (60% European) as far as just overall inventory coming online.
In Europe, it’s a more mature vacation rental market. It’s a more accepted way to travel over there, and people have been doing it for a lot longer. We’re just scratching the surface over there and there’s big opportunity to capitalize on what’s happening. I would say mostly Europe, Germany’s big, Spain’s big, the U.S., we also see Canada really picking up speed. We do some great work with Canada Stays.
Skift: What are the unique challenges that you face by focusing on the vacation rental market versus what’s happening in flights or hotels? Is there anything that kind of sticks out in your mind in terms of this unique category that you work with, when you compare what’s happening with a Kayak or TripAdvisor?
Jeff: I think there are a couple of things. Obviously, bringing this booking experience online is super important in the vacation rental world. When you’re booking a hotel, when you’re trying to book on a branded site, like at Hyatt.com, there is a big push to go to the brand and then both the hotel and online travel site are trying to bring that experience to their consumers. There’s a lot of back and forth there.
I think the vacation rental industry welcomes the on-site booking idea through Tripping, which I know isn’t always a cut-and-dry thing in the OTA world. It just seems, because the industry is coming online now,they welcome that kind of guidance. That’s one differentiating factor. I’d say another important one is just price comparison.
I think because the vacation rental industry is so fragmented and you have a lot of individuals updating calendars, and you have people with multiple accounts, there’s duplication. If the consumer knows it’s listed on three sites at three different price points, it builds consumer confidence to show all of that in one place. That’s a big part of our technology push, is building the real-time enabled APIs to be able to detect that.
I’d say more importantly, though, if you think about the branded world, the Hiltons and the Marriotts, have rate parity as a necessary evil in that industry. You have to have consistent pricing across all of your channels. Whereas rate parity just does not exist in the vacation rental world. You could always inform people about how you think you should price your home or your condo, but you can’t really mandate it. They’re owning their own brand.
I think the fact that there’s really no rate parity causes more fragmentation and confusion around pricing, which puts us in a good position when it comes to comparison pricing. Obviously, people want a trusted source where they are making an informed buying decision.
Skift: That’s interesting what you said that in terms of the online, on-site booking, the instant booking functionality being welcome. Thinking about your bigger partners, then, are you a partner, a competitor, where is that conversation going right now?
Jeff: The conversation is let’s just drive more business. We don’t get push-back thinking we’re being competitive. At the end of the day, these guys are fighting for bookings and they’re fighting for supply. They want to grow, and if we could help them do both, then it works. Whether it’s on-site or off-site, it’s less relevant. I think the on-site partners are the ones where they’re really just pushing the envelope and trying to get creative of how to get more traction.
If you have more data on a property basis, that is because it’s happening on-site, we can quickly see, is this home a good home for a user, is it a reliable home? Do they update their calendar? As we perfect the booking experience, the feedback loop that we have with the partners is excellent. We can give that information back to partners and identify things that maybe they weren’t able to identify before it even materialized.
I would say we are much less looked at as a competitor. We have great relationships with these guys. Travel, as you guys know, more than anyone, it’s a funny market. Some people might look at it as more competitive. We haven’t run into that. We’re not expecting to run into that, just because we’re carving out one niche for ourselves, and we even do creative things like where maybe there’s no vacation rentals for a destination that’s searched, we’ll call Booking.com and say “hey, can we put up one of your hotels there, right?” They love that.
We’re really trying to diversify our relationships here, and say we’re all about finding the consumer a vacation home, but if there is no home in that particular area, or for that search, let’s show them something that is still good for the partner and consumer. To build upon that relationship.
Skift: Where do you see the company in five years?
Jeff: Five years, we’re going to be a billion-dollar company, if not bigger.
Jeff: This market’s massive, our traction is incredible, our investors are bullish on us, and we’re looking at the numbers, and the forecast, and we’re going to be huge. There is no doubt about it. I think that it’s just because we positioned ourselves in the market well, we’ve built good relationships, and we’re sticking to our guns.
I think, often times, at least in my experience, I’ve worked in the travel industry for 17 years now, and the difference between a company that’s successful and one that isn’t is when one doesn’t focus on product, and doesn’t make a good experience for consumers for the long-run. Good relationships with the partners; I think that’s absolutely critical. Because these partners are the ones that are on the front lines, really trying to get people to bring these homes online, if you can help them with that, then you become an even more valuable partner.
I’m extremely bullish on this company, for obvious reasons, and probably biased reasons, since I’m one of the founders. We think we’re going to be a billion-dollar company, if not bigger.
Skift: That probably would have been a great one to end on, but one more in the weeds. For the OTAs, they charge 10%, 15%, 20% fees for booking commissions. Meta, it’s going to be lower. For us, just backing into it, it seems like if suppliers like HomeAway itself, are charging 10% to 15%, they’re not going to eat at their whole fee to pay you guys. At best, they give you half of this for mid-single digit rates. Does our math make sense?
Jeff: I think with bigger partners, there is less margin to play with. With the brand behind them, it converts well. It’s a trade-off of margin to conversion ratio and do people recognize the HomeAway brand and feel confident booking.
I think that’s an ongoing discussion, but I think you’re right, for our new partnerships that we’re launching, a lot of the channels and distribution sources is over 10%, net to us. That’s because the industry is still maturing and a lot of these guys are vacation rental managers that want to get as much visibility as possible.
I would say, with our new partners, we’re going after double-digit, net, margin to us. Often times, some of the smaller guys are willing to pay it and some of the niche players and some of the big vacation rental markets are open to paying it. I think it’s fair to say that the bigger guys have a little less to work with. Their brand also makes up for it in conversion in several cases.
It’s like a balancing act, like anything. I feel like as we collect data and try to learn on a property-by-property basis, that’s the more important thing that we focus on. If there’s one home where, maybe we’re getting less margin, but it’s just a gorgeous home in a great neighborhood, it converts nine out of ten clicks. It can make up the difference for a partner, what we’re getting, 12% margin.
It’s a balancing act in the vacation rental world. I’d say, in the hotel world, your assumptions are probably more accurate. I think, for us, that’s what puts us in a good position, because we can really dial it up or down depending on how it works with these specific homes.
Skift Outlook for Tripping
We agree with Jeff’s assessment that the vacation rental market remains fragmented – with the exception of Airbnb which has become the go-to alternative lodging platform for the consumer. While Tripping has built up a successful company with steady revenue growth, the challenge with be scale and cost effectiveness on marketing spend in order to scale. Similar to low-cost carriers in the air market, Airbnb keeps its inventory closed off to third-party distribution channels. Without this crucial inventory, alternative lodging meta could struggle to take hold.
Beyond Airbnb, the HomeAway family and TripAdvisor capture the remaining share of the consumer market, which leaves little in the way of unique inventory for smaller players. With that said, there may still be significant alternative lodging supply that remains offline. But any newcomer hosts and property managers will likely gravitate towards the big platforms. That begs that question of intrinsic value of metasearch in alternative lodging space.
Another challenge will be monetization. Will the big sites e.g. Tripadvisor and HomeAway be willing to pay 10%+ rates to Tripping as they mature? Would HomeAway start getting volume from parent company OTAs/metasearch sites and pull inventory off a site like Tripping? The inventory is there and Tripping was early to the game, but it would be a mistake to underestimate the deep pockets of a company like Priceline, should they move into this area. That being said, the market for vacation rentals is vast and there could be enough room for Tripping to grow nicely even if larger players come into the space. It is an exciting concept that we look forward to watching play out.
Roomlr has a similar model to Tripping, but focuses in Europe. It has a smaller inventory with 1.4 million listings across 192 countries.
Key partners include Booking.com, eDomizil, Flipkey, Way to Stay, House Trip, Homestay, HomeAway, Bungalow Net, Inter Chalet, Hogenboom, HappyHome, Dan Center, Tui, and others.
While management from Tripping was extremely bullish about meta for alternative lodging, the tone from Roomlr was much more cautious and the conversation progressed to a more general conversation about metasearch. Our sense is that CEO Bass Lemmens believes conversion and monetization will take time to scale in the space.
Interview with CEO Bas Lemmens
Skift: What’s happening on the vacation rentals front? There was some word that Kayak may be jumping into that space. Do you have any updates on that?
Bas: A couple of things are happening. At this moment in the villa and apartment business, metas are having difficulties. Even at my company, we have difficulties. Why? Because of the conversion rates. If you see what also happened in hotel (meta) industry, you get visitors to your door and you hope that they go for it like airline metas, like Kayak, like TripAdvisor. Of course, is that the conversion of partner websites for them, likewise like Airbnb, they don’t convert. Why is that? Because they’re not bookable. A lot of places are single request. We have Airbnb, a closed community with billions of dollars to fund things, building their brand, build a community.
A lot of other metas raise a lot of money, but are not performing very well. Why is it? Roomlr, still same thing; why is that? Because we have partners like HouseRent and others who are still really in the beginning stage of getting their product right. That means you send people away to HouseRent and then they don’t convert. That’s of course the biggest issue now. It’s difficult.
Skift: Can you discuss the CPA model?
Bas: CPA will not make it, conversions are low.
What I know with Roomlr, I said give me $20 million, then I can spend it, but my conversion is not at the level as a hotel website. Everything I spend, I spend the same CPC I would have if I would have hotel website, will not convert at a level of 2 or 2.5 percent. It will not. I need twice or four times as much marketing money to get same booking. The booking is more. It’s bigger. The conversion is so low that I will not make my money back. That’s what you see in the market.
Skift: Airbnb is a closed community, they don’t have APIs that you can connect with, etc. what about Hipmunk though?
Bas: Hipmunk is all contracts from the past. It was sold, as you know (to Concur). We can see the properties, but there’s no commercial teams to get people like there is for Airbnb. There’s no commercial contracts for people who are staying with Airbnb on their website. It’s nice, they have it, but they will not make money on it because there’s no commercial terms.
Skift: Got it.
Bas: The most interesting thing of course is every month I’m in a talk with a lot of CEOs for travel companies, hotel chains, metas, everything, and we talk always together about things happening. What, of course, happens is metas becoming OTAs. OTAs becoming metas. That is the marketplace.
Skift: What are your thoughts on Trivago?
Bas: Trivago has really managed, especially with their campaign on television, a successful debut in Europe and a successful debut in the U.S. Very smart, very clever. They did this successfully. To really see who’s gaining market at this moment, in the states or in Europe, you have the OTAs, big ones and the only one taking market share from these guys is Trivago.
Skift: On the advertising side, some people talked about how some metas make as much if not more on banner ads and alternative advertising versus the CPC. What is your sense on that part of it? Mobile seems not to work very well anymore for advertising?
Bas: 50 percent of users are still using desktop. It’s very valuable because people always ask me, “Why is TripAdvisor not as smooth as Booking.com to book something?” Because they make money on clicks. TripAdvisor is a good example. Go for yourself to TripAdvisor, and it’s unbelievable that if you look somewhere that all the 5 star hotels are on top. Why they do that? A lot of people like to look at them, but they will never be booked, so they make the money on these expensive hotels.
For an OTA, you’re stupid to feed TripAdvisor with 5 star hotels, because they will not convert. I had an OTA, and I spent 200,000 euros per month on CPC only on TripAdvisor. I made 100,000 on reservations. What I did? I cut out all 5 star hotels. I only had to spend 100 euros, I made 150. That’s really what I’m now coming to.
The OTAs have everything in order. They know exactly on the one cent what they’re doing with CPC and CPA, metas, but hotel chain websites don’t. I can bring you a thousand visitors, but if it doesn’t convert, it doesn’t matter. You’re pitted against your neighbor. You need to do something about it.
What now is really happening is that hotel websites are finding it fast, get the conversion constant or up on hotel website, because then you are in control of how you can advertise. Most people ask me, “I need more business.” No, you need to get your conversion under control. Then you can spend more money. Hotels never look at this. They only think about I have to pay much CPA, much CPC. It doesn’t matter. If the version is under control like the OTAs are doing, you can compete. That’s where the world is heading now.
Skift Outlook for Roomlr
Our sense is that monetization and scale will remain a challenge for Roomlr. The upside is Roomlr’s focus Europe, a very fragmented market both on the supply and demand side. If more properties become online bookable, Roomlr has laid the pipes for future growth.
Metasearch Sites Specializing in Latin America and Asia
While the focus of our report has been larger metasearch players in the U.S. and Europe, those companies continue to push into Latin America and Asia. For perspectives on those regions, we dig into Viajala in Latin America and Qunar in China.
With the largest online travel companies in the world continuing to push into Latin America, Skift sat down with Co-Founder and CEO of Viajala, Thomas Allier to gain insight into that crucial market. After just three years, Viajala is a leading metasearch provider in Colombia with operations also in Argentina, Chile, Mexico, Peru, and Brazil.
The Latin American market is much earlier in acceptance of metasearch and online travel in general. The growth potential is large and bigger players like Skyscanner and Kayak are moving in to compete with local companies like Viajala. Low cost airlines continue to be added and metasearch as a model is becoming more valuable. We found Thomas’ insights into Viajala, and, perhaps more importantly for our readers, into the Latin American market, to be extremely insightful.
Skift: Can you give an update on what’s happening on your end in terms of Latin America. The last time we spoke you were expanding your business across the region into Argentina and Peru and Mexico, with a strong focus on Colombia still.
Thomas: Yes. Still 50 percent of our traffic and the searches we process come from Colombia, but we now operate in 6 markets. We still focus on LatAm. The last market that we opened was Brazil. We did that differently. Usually we have a central operation in Colombia and we operate all of our countries from Colombia, which is possible, because the metasearch model is very easy to scale. We don’t necessarily need to be present in all of the markets where we operate. We decided to take a different approach for Brazil because first, Brazil it’s a much bigger market. It’s somewhere close to 50% percent of the online travel market of Latin America, so it justifies having a specific operation there.
We decided to do a big push in Brazil as well because it’s like the big piece of the cake where we are not fighting yet. We need to get there if we want to be the number one in the region.
If you look at numbers right now, until last month, we were operating in the Hispanic part of Latin America which is Argentina, Colombia, Chile, Peru, and Mexico, and we were the leading flight metasearch in this market. We should look at the global numbers for the regions, but including Brazil I would say that Skyscanner is bigger than us and maybe Kayak as well because they are strong there and it’s a big market. That’s why we decided to expand there.
We still really focus on LatAm and have no plans yet to go to Europe, the U.S. Asia or other markets. Things here are still pretty basic. We don’t do metabooking. We don’t do anything like that because when you deal with the metasearch, you are building something on top of the online travel agencies and suppliers, and here they are not very sophisticated. The local OTAs are not very sophisticated. They are rather small. Even correctly deep linking to their websites, it’s something that requires some effort. Sometimes they have to do technical developments in order for us to be able to do the integration. I would say that we are maybe five years behind what you see in the U.S. or Europe. That’s the state of the market in LatAm.
Skift: Is competition in the region increasing?
Thomas: I think that what’s interesting is that five years ago you would not have been able to do anything, because metasearch would have only one online travel agency to work with. Now you are seeing a bit more competition. A few more OTAs expanding and becoming bigger. So, it makes sense to build metasearch.
I think that Kayak saw that and recently started operations in these countries as well. Skyscanner also is putting in much more effort, because we cannot put down the barriers to entry by being the fast mover negotiating with the OTAs, having them bring the technology developments in order for them to share their inventories for us to their websites.
I think that now the panorama is a bit more competitive in LatAm. Maybe one year ago, I would have said to you that I’m alone in Colombia, Chile, and Mexico. Turismocity was alone in Argentina. Now we are competing between each other, and also Kayak and Skyscanner came in. When I say that they came in, it’s not like something that they are doing remotely on their spare time. They’re actually recruiting sales guy on the ground because they are seeing an opportunity in this market as well.
Skift: That’s really interesting what you mentioned about the technology just in terms of the level of sophistication and how that impacts your ability to connect. What about the supplier ecosystem in metasearch? Are you finding it challenging to connect with the local airlines, the hotel groups?
Thomas: We don’t do integration yet with hotel groups. We only work with consolidators and OTAs. Hotels is less than five percent of our business. It’s growing a lot, but it’s still very small.
Now if I look at the airline suppliers, I would say that it’s complicated as anywhere else. Most airlines, they don’t have web services or APIs, so you have to work with GDS to list them or maybe some are doing scraping. We don’t do scraping, but that’s the only option that you have, works with GDS or scrape them, because they don’t have APIs most of the time. If you want to list the traditional local airlines, you have to go through Sabre or Amadeus or whatever.
Skift: Is that prevalent with American and European airlines? Are they now building in APIs to help connect to meta?
Thomas: Yes. I think that those guys, they have APIs. We don’t work much with U.S. airlines, because they have a very aggressive commercial policy, but we work with some European airlines and they have APIs. I would say that they are not good APIs. They are slow. They are complicated to implement.
Something interesting, it’s not something that’s available for us already but I think it will be soon. Something that Amadeus have done with Kayak, they’ve released recently what they call instant search, which enables Kayak to respond with airline search within a few milliseconds. It’s almost something that you get the results at the very moment you push the button. That’s very important for user experience and I think that’s very important for Kayak if they want to be better than Google Flight for example. They need to be fast.
Amadeus, they have all the content and they can warm up their cache constantly, like doing five searches in order to have the most important search results in their cache system. That enables them to be very accurate and respond very fast. That’s something I think that we’ll be able to do and that will be available for us within six months as well. I think that will be a strong differentiator and I think that’s why we prefer to work with the GDS than directly through the suppliers.
Skift: When you talk to people at Skyscanner, they tend to talk about how they connect more directly with the airline. I guess in Europe it’s a bit of a different story because it’s more of an inventory issue with the low-cost carriers that don’t work with the GDS’s. Right?
Thomas: Yeah. Right now, every month, you have new local carriers coming in, so the market here in LatAm is also turning towards low-cost airlines. I think that the earlier market to adapt the low cost was Mexico where you have Volaris. Actually, I read an interview, I think it was on Skift last year. I think it’s very interesting and they’ve done very good. I think Volaris, they are going to beat Aeromexico this year so they will be the number one airline in Mexico, at least for domestic flights. They have Interjet, they have VivaAerobus, which is partially owned by a bus company.
Here in Colombia we have VivaColombia which now is 100% owned by the holding of Ryanair so it’s a very aggressive low-cost. It’s like a Ryanair and I think that they own somewhere around 10% of the market. They are launching another low-cost in Peru which they just released the brand name today. I think it’s Viva Air Peru or something like that.
You will have 3 Viva. The one in Mexico, the one in Colombia and the one in Peru. I think they have plan to launch one in Argentina. In Colombia, Copa Airline, the airline from Panama, they are launching their low-cost which is called Wingo. I think it’s for next month.
You see more low-cost offers every day. In these particular scenarios, you don’t have the contents with the GDS. Most of them, they don’t distribute their content with travel agencies or with the GDS, so what we do is we connect directly with them. Usually the content is very simple so they have rather good APIs, so we have direct connections.
If you look at Viajala, our situation right now, I think we have 32 API connections. Some of them are airlines, some of them are GDS contents, and most of them are online travel agencies.
Skift: Can you talk a little bit about the business model? I know that at least the hotel space a lot of times, it’s cost per click. Sometimes it’s cost per acquisition. How do you guys operate?
Thomas: We are really trying to be a PPC channel.
Skift: Pay per click? PPC?
Thomas: Yeah, pay per click model. We sell clicks. Depending on the CPC we get and some other criteria, we try to send more traffic to the travel brands that they use more. That’s how we do business. Sometimes it’s very difficult to monetize your core results.
If you think about Google, they are not monetizing their organic results, right? No one’s pay per click for the organic search results of Google. They are only monetizing their top results through ad words, so for metasearch I think it’s not the case yet so we still monetize the core results. Especially because there are a lot of OTAs competing to be there.
If you look at the US market for example, the airlines want exclusivity. They are willing to distribute their content through metasearch, but only if you give them exclusivity. For example, Delta Airlines for example, will only show Delta Airlines website content. You would not show Expedia’s content for Delta or Priceline’s content for Delta. I think you’re not a metasearch anymore doing that because you’re not comparing airlines and redirecting traffic towards our websites.
I think that people, sometimes they want to buy through the airline’s websites, but many times they’d rather book through the OTAs. That’s especially the case for example for a traveler from Colombia, that’s very difficult to book a ticket from airfrance.com or iberia.com because the user experience is not adapted for this market, so that’s much easier for them to book through an OTA.
To go back to the point, the airlines, I think that they are always very aggressive with any distribution channels. They do not see metasearch as marketing channels. They really see us as distribution channels and so they are trying anything to not pay us. In order not to do that, first they have to put the OTAs away, because the OTAs, they are willing to pay to get traffic. As soon as the OTAs are not there, they can maybe not pay you in some cases. I think that’s what happened in the U.S.
More on the U.S from Thomas:
I think in the U.S., it’s very complicated for Kayak to monetize through their core results, but they manage to monetize anyways through advertising. We do pop-up marketing, pop-under marketing, text links. We have future results which are similar to core results, but actually they are advertising. We send these models usually on a CPC basis. That’s how we manage to monetize our audience and make a living out of this complicated business.
Skift: In terms of direct search on the platform, it’s more just to drive the traffic. Then you have other advertising products on there to monetize that traffic.
Thomas: Exactly. We try to provide the best user experience possible, but sometimes it can be very expensive to provide a good user experience because some content is very hard to monetize. You have to provide this content while monetizing through advertising formats. When I started to build Viajala, hopefully I could have built a product without any advertising.
I think that would have been possible if we could monetize through core results, but the travel brands they are asking that this content is variable for us and maybe they should not pay to give us access to this content. That’s why we have to do the ad formats at the same time. That’s why you see so many ads on Viajala or Kayak or Skyscanner or whatever metasearch websites. It’s because most of the monetization comes from there.
Skift: What about Trivago where it’s mostly hotels? Is there a better monetization there?
Thomas: Yeah. Hotel is very different, because I would say that in hotels the suppliers of the hotel chains, they are not in position to be aggressive commercially, because it’s so fragmented that it’s not possible for them to be aggressive. They have to give away very big commissions to the OTAs, to booking.com, Expedia. Commissions in the hotel industry are big. Somewhere between 15 and over 20% depending on the kind of content. You have a lot of commissions there in hotels. That’s a very big business for metasearch, for anybody.
Also, I would say that the barriers to expand worldwide is much less for hotels, because most of the content is available through basically booking.com and Expedia. If you look at LatAm, I would say that most of the content is available through booking.com and Expedia. You just integrate two inventories and you have most of the content. That’s not an issue to monetize. That’s more an issue to find your competitive advantage in front of the others because everyone has the same inventories.
I think Trivago, they are very aggressive in terms of how they do marketing and they are doing a lot of building offline marketing. Even here in Colombia, you can see TV ads for Trivago all the time and they are very aggressive building a brand and having people coming directly to their website. That’s how they drive a lot of traffic. That’s how I think they build such a strong business.
Skift: What are the next steps for your team?
Thomas: This year we’re opening new markets in Argentina and Brazil so we really need to consolidate in these. I think that if we do as well in these markets as we did in our previous markets, we should become the number one travel metasearch for the region. We’re already first in Colombia, in Chile, and Peru. In Argentina, we have to beat Turismocity. In Brazil, we would have to beat Skyscanner. Mundi was the first mover and the historic leader, but I think that they kind of went down a little bit and now Skyscanner took the first spot. I think that Kayak is trying as well. I don’t believe they are as good as Skyscanner in terms of expanding outside their own markets, the U.S.
I think that Skyscanner is much better in terms of doing international expansion. We really see that. Skyscanner is doing extremely well in Brazil, even with a name that nobody can spell. I don’t know how they do it but still they have a lot of traffic there. I think that Skyscanner is going to be the one to beat in Brazil. That’s where we want to focus and we want to become stronger in these countries.
Also, something that we started to work a lot this year is we started to work a lot on our B2B tours. The tours that we put available to the travel brands, to our advertisers, to our partners. They can monitor their API integrations, how they do in front of their competitors. They can monitor their marketing performance, their advertising expense on Viajala or how much impressions, how much clicks, how much sales. This way it’s very easy for us to monitor their ROI at the root level. They can start to do some optimizations. I think in the long term what we want to build is, we’re not going to build a Google ad words platform, but something that’s sophisticated for product marketers to optimize.
Skift Outlook for Viajala
Thomas and his team have done a remarkable job building up scale in a fragmented and emerging market. He will have his hands full competing with Skyscanner and Kayak, but if Viajala focuses on its niche markets and can take decent share in Brazil, the company should be well positioned for growth. Like other airline metasearch companies, the challenge will be monetizing users. Will ad dollars still flow to Viajala if Skyscanner and Kayak aggressively expand? We will monitor the region as it matures to see how this plays out.
Quanar translates to “where to go.” It is a hybrid between an OTA and metasearch site where it is a booking site in some cases and others it aggregates inventory and is paid on a CPC model. Ctrip acquired close to 50 percent of Qunar further consolidating the Chinese online travel industry. The total industry is more offline driven and that part is fragmented with 27,621 travel agencies in China according to the China National Tourism Administration (2015).
2016 Growth Slowing as Airline Business Hurt
On September 1, 2016, Qunar reported revenue growth of 17 percent with mobile making up 75 percent of the total. Flights were clearly an issue with a 7.5 percent year/year decline. Accommodations were still strong with a 52 percent increase.
Airline Business is Now Contentious
In January, 2016, some domestic airlines suspended operations and withdrew branded sales. By April, China Eastern joined China Southern and Air China in protest of customer complaints about irregular bookings on the site. Additionally, the government is now mandating that airlines get half of their flight ticket revenue from their own websites within two years. These are large headwinds for airline metasearch in China.
Company is Going Private with $4.4B Equity Value
On October 19, 2016, the company announced that Ocean Management will take Qunar private at an implied equity value of $4.4B. Based on 2015 revenue, the acquisition multiple was just under 7x revenue. The company has not been profitable yet on a net basis and has not achieved positive adjusted EBITDA since 2012. However, it was in rapid growth mode with revenue up 128 percent last year.
Skift Outlook for Qunar:
Our takeaway from Qunar is that Chinese travel market will be incredibly complex for any foreign company to break into directly. We have seen Expedia sell its eLong stake and Priceline partner with Ctrip. It seems that hotels will do well in metasearch while airline metasearch will be a challenge. Predicting how government policies change the landscape is impossible, but clearly travel in China is a large market and non-Chinese metasearch companies will need to partner with local players to gain traction in the region.
The Supplier Perspective
Not surprisingly, this is a topic airlines did not want to discuss in detail with Skift. We reached out to numerous airlines, all of which declined to participate. For the large U.S. airline carriers, our belief is that they will continue to use metasearch to drive traffic, but fight against full transparency with the online travel providers. We believe that the airlines are more than willing to work with companies like Kayak, Momondo, or Skyscanner where they are reputable and true partners. The economics of the transactions will likely remain low and monetization for the metasearch providers will be a volume game (and how much hotel inventory they can sell off the airline website driven traffic). Smaller meta companies that solely screen scrape instead of truly partnering with the suppliers will continue to have a contentious relationship with the metasearch providers.
On the hotel side, there continues to be a push for direct booking. Interestingly, metasearch, if successful, can help drive more direct booking. The issue is that that the OTAs own the large sites and market heavily to push OTA results ahead of direct hotel ones.
We spoke to the CEO of Viceroy Hotel Group, Bill Walshe, and Standard Hotels Chief Revenue Officer, Jimmy Suh for a deeper look into the hotel mindset. They are both high-end boutique brands, but differ in how they use third party digital distribution. As a larger global player, Viceroy utilizes metas and OTAs to help drive traffic to their urban hotels. Standard Hotels is more of a special case where their primary marketing success has been emailing their customers, who are incredibly loyal. Standard’s direct bookings are well over 60 percent. Standard is an example of how distinct branding and customer targeting can drive more direct bookings than focusing on price where in reality, rates are virtually the same in the U.S. for direct bookings and online travel sites.
Viceroy Hotel Group CEO Bill Walshe Interview, Mary Bennett VP of Digital and Commercial Partnerships
Skift: In the way of background, some people may not be as familiar with Viceroy as the big chains. Can you give a high-level overview of the company and how you guys are positioned in the market?
Bill: First, we are an independent, modern luxury brand. We have 13 open and operating hotels today. We have a pipeline with another ten hotels we operate in North America, the Caribbean, in Mexico, in the UAE, in Abu Dhabi. Our development pipeline sees us building our presence in those markets as well as expanding into new ones. We have three openings next year. One in Istanbul, in March, we will open Dubai, in April, and then we’ll open Viceroy Chicago in September. We love Latin America at the moment. We’re pushing hard into Latin America. We have a project in in Columbia. We have an extraordinary resort project on the Caribbean outside of Panama, which will uniquely feature the first stilted, over water villa product in this part of the world. It’s a very sort of Bali, Bora-Bora, Maldives, type product.
This is in addition to having our first European presence in development which will be a golf resort in Portugal.
We are one of the smaller brands but I’d say for a brand within our space, we are probably the fastest growing in relation to our size of any modern luxury brand in the world today. Our hotels are all unique and individual. In fact, the positioning that we have in the market, specific to your question, our positioning is probably an oxy-moron, which is that contradiction that is consistent individuality. We operate by having an identified and maintaining that sweet spot between a platform that is sufficiently robust to allow for consistent delivery of distribution, of governance, of policy and procedure, but the purpose of all of that is to facilitate growth through spontaneity and individuality, authenticity, and energy.
What we’re here to talk about today, clearly, is one of those areas of consistency, and maturity in approach where we like to think that our organizational capability is greater than the size of our portfolio. We’ve invested over the last number of years in talent and in systems and processes that have allowed us to prepare to trade as the company we are becoming. The size of that organization rather than just simply the portfolio that we are today.
Skift: That’s a great background, lets dig into the digital side. There’s been a lot of talk, aggressive advertising by the large chains on direct booking. For you guys, what percentage of bookings is direct versus through third party channels right now?
Bill: There’s some diversity within our portfolio. It’s a very difficult question to answer to simply take all of the percentage, statistics, of direct bookings into the individual hotels and roll them up into one number would be misleading. It would give the impression of a much greater than reality contribution of direct bookings to some of our hotels and much less than others. We run the spectrum for a company like Viceroy. You have types of experiences that consumers will either book direct or feel comfortable hitting a button on a mobile app or on a website to book. Within direct itself, one of the interesting trends that we’re seeing is a resurgence of voice that people are using mobile in such a manner that to be on a mobile site or an app, receiving the information that helps them to make a buying decision, instead of just going in and pressing one button to talk to a human being.
The resort component of our portfolio is such that we will have people coming at peak times, and peak times being Easter, July 4th, Thanksgiving, and obviously, we’re coming into the festive period of Christmas and New Year now, where it’s not unusual for us, at checkout, for people to have a check north of 100 to 200,000 dollars. What we’re finding, if you’re going to a Caribbean resort for 10 nights to stay in a villa, which could be, say a $200,000 booking, you’re not going to book that by pressing a button on a website or on an app. We’re seeing that the significance of the interaction, verbal interaction, with a booking agent who can create confidence, who can answer questions, who can assist with the programming that our customers are looking for during a stay, has not diminished. If anything, we’re seeing that increase.
For our urban hotels, it is so much easier for somebody to go onto Viceroy.com, check that there’s availability, they understand the product. It’s probably for a 1 or a 1.5 night stay, and they hit a button and book. It’s high double digits of direct booking into particularly the leisure component and the resort component of our portfolio, but overall because of the brand recognition that Viceroy has, we have a healthy contribution.
Mary: Yeah, the thing I would add, a lot of the brands have come to market with these book direct campaigns. That’s tied to their loyalty program. Viceroy has our loyalty program, Viceroy Discovery, and our message in digital channels is, here’s the benefits when you join our loyalty program. Our loyalty program is quite different than the others in that it’s recognition based. We’ve had the program in market now 18 months. I think our members and our customers like that it’s all based on these really unique experiences and that it’s not a points-based program. That’s a point of differentiation.
Bill: The other thing, it’s about our loyalty program, as Mary said is Viceroy Discovery. We operate on the discovery loyalty recognition platform, which is a part of our membership of the global hotel alliance. The other unique thing that we’re trying to do is not only to get customers to book directly with brand, but to retain customers within an alliance structure where there are now close to 30 like-minded independent brands.
We have duel intent in what we’re trying to achieve at the moment, which is yes, to get the customers to come directly to brand, but also to get the customer to come directly to GHA and to bring cross-brand benefits so that the Viceroy customer will also book directly with all of the other member brands. Exactly the same model as the one world alliance for the airlines or star lines.
Skift: Would you say that that’s something unique that you’re doing? Are you seeing this alliance model across the independents developing out?
Bill: I think it’s something unique that we’re doing as a brand. I think any collaborative recognition model that existed in the past came through associations for independent hotels such as leading hotels of the world, or small luxury. The global hotel alliance was inspired by the star alliance, in fact, the founding CEO of star alliance was an advisory on the board of GHA for a number of years, initially. It is the only brand alliance of its nature that I know of. It’s extremely beneficial.
For a company like ours, just put it in perspective, the discovery database at the moment has 8.3 million card holding members. All of whom have been recruited within the alliance brand at point of sale. All of whom, therefore, have come out of strong, proud, independent brands that attract affluent customers who will pay a premium for individuality. In terms of profiling, I know that we’re up against some of the larger hotel brands that probably have 20, 30, 40, 50 million members. There’s such a degree of auto-enrollment in those programs, that it is, on occasion, a battle of quantity versus quality. Whereas within the alliance model, what we’re doing is we’re recruiting, as I say, at point of sale in a hotel, somebody who by the very nature of being there is perfectly profiled to bring benefits not only to the brand who recruited them but to all of the brands in the alliance.
The cross-brand revenue that’s been generated from Discovery are really quite enormous.
Mary: One thing I just wanted to add here is, ultimately, at the end of the day, we want to be easy to do business with and be where our customers are. Whether they’re on an OTA or if they’re in an app, or on our own site, we want to be present and make it easy for them. What’s occurring in digital, sort of thematically, is a convergence. Because a large part of mobile, that people are shopping across devices, depending on where they are. They’re researching a hotel, or reading a book, and across platforms.
Let’s say a few years ago, five, six years ago, you would look at how is brand.com performing and measure it almost in a silo. Now, because of this convergence that we’re seeing, a lot of the digital activity that we would traditionally measure as an ROI against, perhaps are driving, we know, a lot of offline behavior. Again, there’s a broader theme of convergence that is occurring, that’s an important take away here and comes into, when we’re analyzing the data and looking at performance and measuring direct, it’s something we always need to be very mindful of.
Skift: On the metasearch channel, do you typically use a CPC model, CPA, or instant booking? Can you give a sense of the range that these sites charge a hotel on each of those metrics? Obviously, you can’t share exact numbers, but we were hoping you may some thoughts on a general just industry range.
Bill:Sure, we’re paying all aspects of what you asked about at the moment. Still, kind of, I think, finding our feet as a smaller brand. Every dollar that we invest to the greatest degree possible needs to be measurable in terms of the impact and the revenue that it generates. I think by our nature as well, as a third-party management company, whereby we’re managing other people’s assets and those ownership groups have asset managers who are looking at how well we are investing what is essentially the owner’s money and not the brand’s money. They would have a preference for paying upon receipt of business. If it’s CPA, or if it’s a commission model where, from a direct booking, we reward true payment of commission, such is the TripAdvisor direct booking model.
The CPC, I think we’re probably more within paying that a little bit longer. Obviously, CPC, is what we would consider to be something that is a behavioral influence model. We’re trying to direct future behavior from a consumer through a click to transact with us in a particular way. That may or may not happen. We’ve nevertheless committed to the expense at that point. CPA and direct book, if we’re not benefiting, they’re not benefiting. I think that as a management company, it does provide a greater degree of measurability of value of the investment in metasearch.
Mary: To your particular question, this range that you’re looking for, it’s a very broad question. It’s like what’s asking what’s the CPC for paid searches. There’s, sometimes, CPCs are dollars on the metasearch site, other times they’re up into the high-teens. It really depends market by market, seasonality, demand, no different than other acquisition channels.
Skift: On the CPA side, TripAdvisor is public with their 12 and 15 percent rates for the independent or smaller chains. Are CPA rates effectively the same thing where hotels are paying a commission basis even though it’s not instant booking. Are those rates going to be comparable?
Mary: Yes, they’re comparable.
Bill: I think what you’re going to see more and more is the collaboration alliance model becoming a participant in those negotiations on behalf of its member brands. It appears something like the global hotel alliance, with, as I say, close to 30 member brands and a couple of thousand represented individual hotels, the opportunity that that presents us to come to the table and negotiate as a totality of members as opposed to trying to do it as smaller brands that some of them have five hotels and people like us have 13, others have 50, 60 hotels. We are aware of the benefit that some of the larger chains enjoy from their scale when we’re at the negotiating table. That’s something that we’re trying to figure out as a smaller brand, how to take advantage of.
Skift: As you guys said, CPA aligns interests. From an integration perspective, whether it’s the APIs, how much is technology a challenge to accurately capture, click through … I go onto Kayak and I book your hotel but I click off to take me there. Capturing that data, is it much harder to do on mobile and with apps?
Mary: For us, this is where we’re quite fortunate because we have great partners such as Favor Hospitality and other smaller companies. Our iterations are quite turnkey. It’s easy to capture and track whether they’re booking on desktop or from an app. We have no integration issues. I can imagine some of the larger brands that are probably built on these legacy CRS systems, probably have had some issues there. For us, we have no integration issue. It was more of a question of when do we add this into our mix of acquisition strategy and how does it play and not cannibalize other things we’re doing. At the end of the day, how does it drive incremental bookings to our hotels.
Skift: Of the big metasearch players, which ones do you think are the best to work with in terms of driving new traffic and being true partners?
Mary: With our metasearch budget, we’ve seen the most success with TripAdvisor and Google. We do a blended approach for most hotels and test and optimize to see which is performing better historically. I think this is a very fluid space, because some months, if I split my budget, say just half is being spent with Google, half is being spent with TripAdvisor, some months for certain hotels, TripAdvisor is performing and driving more bookings and stronger revenues. Other times, Google is. I don’t think we have enough historical data to have the insight to say okay this metasearch partner, such as a TripAdvisor, is unilaterally the best. That’s why we do this blended play. Our investment right now is just with TripAdvisor and Google.
Bill: Again, recognizing the diversity that exists within our portfolio, it is difficult to answer a question like that with specifics in terms of this is this, these are the sites that we prefer. This is the manner in which we try to activate our presence within the sites, driving incremental revenues. As a management company, we have these conversations with ownership groups all the time. They’ll say what is your position on metasearch. If we’re talking to the asset manager who’s representing the owner of a Caribbean resort with 50 rooms and villa product that sells for $5,000 a night, the answer is going to be very different than if we’re talking to the asset manager representing a hotel in a U.S., urban location that has 250 rooms where there’s a very transient, 1 to maximum 2 nights, say customers coming in.
One of the challenges for a brand like us is to try to find that position and deploy our budget in accordance to where we will bring great benefits to all of our hotels, recognizing that as Mary said, from channel to channel from site to site, partner to partner, month to month, we can have tremendous success on behalf of five hotels in the portfolio and another five see zero benefit from that very same sales activity at the same time.
Mary: One thing to add, if you keep a historical perspective on a set of markets. Depending on who the key source markets are for that hotel, also plays into what’s the best metasearch partner. If we’re trying to drive a lot of European business, then that’s very different than driving domestic U.S. business into the hotels. That also factors into who we’re working with and why.
Skift: You mentioned Trip and Google and they both have an instant booking. Are you guys working with them on instant booking? What are your thoughts on the instant booking push by those guys?
Mary: We were an early adopter for TripAdvisor’s instant booking. We rolled it out wide in early, 2015. Like I said, it’s a fluid area. Candidly, it performs for some hotels. Other hotels, it hasn’t performed to what we thought it would. I think very much the jury is still out. In talking to TripAdvisor, specifically, they are very interested in wanting to make it work. Like any OTA or intermediary, it’s important they talk to the brands. I think the owners as well want to see how they can see returns on their side but also deliver qualified traffic and kind of this incrementality. We’re participating. It’s performing for some hotels, other hotels we don’t see it being a big driver of business.
Skift: You TripAdvisor metasearch as well as the instant book. Is there a difference in terms of cost per acquisition across those two options?
Mary: There is, yes. There is a difference. We measure and analyze the acquisition cost. We also actually talk about diving into the details, from whether it’s CPA model or CPC model, both from TripAdvisor, what is the percentage of those leads that are coming to us that are doing availability searches and things like that. We try to look at a lot of different APIs to rate how qualified is this customer. For a lot of our asset managers, they’re also interested in what are the acquisition costs by channel compared to other digital channels as well as more traditional sales channels.
Skift: Comparing the costs on the metasearch side versus the instant booking and what you hope to get out of the instant booking option. Is it more, you are not getting enough traction on instant booking or is it that instant booking is coming out to be more expensive than the metasearch option?
Mary: Instant booking on TripAdvisor, specifically, they’re making the booking on TripAdvisor. That transaction occurs through TripAdvisor and then shows up into our reservation system. With the CPC model of metasearch within TripAdvisor, that link comes directly to us. It’s worked for measuring two different things but in totality, I’m looking at what is the net profitability, whether the booking is a direct booking, actualized booking comes to the CPC model, or the CPA model. The answer to that question varies on each hotel and what is the ADR and the length of stay and so it varies. I think generally speaking, we have seen more success with TripAdvisor under their CPC pure metasearch play.
Skift: On the instant booking part for you guys, are you guys in that 12, 15 percent public rates bucket or are you guys bigger where you’re privately negotiating?
Mary: We’re in the range.
Bill: We don’t have visibility of what specific deals competitors, larger or smaller than us have negotiated. One would assume that scale comes to their aid at the negotiating table. We’re in the range and we’re comfortable. We’ve been in that range and have value for the bookings that we receive.
As we talk about the cost of acquisition of a booking, whether it’s through what we’ve just been talking about with people like TripAdvisor or indeed back to where we started with the OTAs, your very first question was about hotels and hotel companies investing in trying to get more bookings to come direct. I was on a panel in New York a couple of weeks ago and this came up for conversation. A point that I made, for a company of our size, was not super popular as they’ll tell you. It concerns me that the conversation has gone to a point where there is an inference that every OTA booking is a bad booking and that OTAs are cannibalizing business that would otherwise come direct. I don’t agree with that.
As I said we operate this ourselves. We’re headquartered in Los Angeles. We have no operating product in a country like Australia. I don’t have a sales office open in Australia. I’m never going to have a sales office open in Australia. I don’t want to have to send my director of sales or general managers on flights to Australia to make sales calls. I’m actually doing nothing to penetrate that market. I’m not investing a dime. Whereas booking.com, Expedia, TripAdvisor and others are spending significant amounts of money to bring my product to a point of visibility within the market that I have done nothing to penetrate.
If that results in a booking, from that market to my hotels, that is the best, 12, 15, 19, 20 percent that I could possibly spend. I’ll take that booking 7 days a week. I see all the stuff that we’re talking about as being an extension of the reach available to company like Viceroy and commission is not a bad thing. Commission is an alternative to me having to invest dollars directly into those key source markets through permanent presence of a sales office, through hugely expensive brand advertising, be that digital or traditional, or deploying boots on the ground through sales trip which is also an extremely investment both in terms of time and dollars.
We are, just to be clear, if we pay somebody 12, 15 percent commission upon receipt of a booking from a key source market that we’re not doing anything in, we do not begrudge that for one second. We are, in many respects I often say for a company of our size, the day that I sign the commission checks is the happiest day of the week. It means that our third party, intermediates and partners our there representing us in markets where we have no standard of representation of our own.
Skift: That’s funny, we wrote a pretty lengthy piece on that, talking about how it doesn’t have to be a war and hotel groups like yours are going to be happy to take share from Hilton in the thrird party channels. You can wind up having a case where you guys are happy to pay the commission, Hilton gets a little more direct booking and the OTA is happy. It doesn’t have to be this war.
Bill: Sure, if I was running Intercontinental, Marriott or Hilton, and I had made the investment to create a sales platform globally and I see other people competing in the markets that I’ve invested in for that customer and sending them to my hotel, I would think that they were cannibalizing my business. I wouldn’t think it’s good. When I hear people within companies that have 10, 20, 40, 50 hotels saying oh yeah the OTAs are cannibalizing my business, I go, what have you ever done to deserve to receive a reservation from Japan? Nothing? Then shut up and pay the commission. Take the booking and move on.
Skift: That’s very interesting. That’s very consistent with what we’ve been saying here.
Bill: It is, but not always popular when I say it, trust me.
Skift: Yeah, we can imagine. In terms of the metasearch sites, the OTAs, what do you think can be improved on those partnerships?
Bill: I think building on what we were just talking about, what we like to do with those partners is to identify opportunity markets and to try to, as much as we can do, book our records on those markets. I think for the OTAs, the metasearch players, to come to the table not just to negotiate the financial components of a deal, but to try to understand what the success measures are for a brand and help us achieve our strategic goals. To sit down with the partnership manager and those entities and to say, hey, we see tremendous opportunity within our competitive sales front, from Australia, from Japan, from wherever it might be, from Europe, as Mary mentioned earlier, where rather than making that investment in distribution and sales ourselves, how do we focus, how do we buy that activity and the opportunity on those markets where we’re not yet achieving fair share within our competitors.
That would be one. Secondly, to be aligned with those guys in terms of what their loyalty play is going to be going forward so that we are aligned in terms of what loyalty means to the end consumer that we’re not delivering that consumer competing messages about should they be joining our loyalty program, should they be joining the discovery program, which is Viceroy’s loyalty program. Who is recruiting for who? How do we best use a loyalty recognition platform and the data that comes with a member joining such a platform to create benefit for all entities?
Mary: I think also, given the fact that OTAs and metasearch sites, their origins are digital in nature and with any digital vendor I work with, there is a product road map that is shared. Where they’re talking about here’s new features and functionality and you think of the OTAs and TripAdvisor, what they have is tremendous data. How do they leverage that data that they have that they know about their customers and share more of that with the hotels as well as being a little bit more transparent of what their product road map is to more effectively sell our product on their channels if that’s what the customer is doing.
Skift: Great. When we look out five, ten years into the future, artificial intelligence, verbal booking, how do you think that changes the travel search, travel booking process? How are you guys positioned for that?
Bill: Mary and I were chatting about this earlier. As more of an operator, I’m looking at AI in terms of how do we incorporate into the guest experience within our hotels. We talked about developing Amazon’s Alexa. That an increasing number of people are using it in their everyday home life and at what point will an AI presence be a prerequisite to an in-hotel stay experience for trips for people to utilize? I’m of the generation where I remain to be convinced. I know it does it, I know it’s working but I think there are many people like me who just got fed up of asking Siri for direction to the nearest gas station and getting the nearest McDonald’s opening and closing times as a response.
I think how people use AI be it in the booking process or thereafter, will depend on their comfort levels. Inevitability, it is becoming an important component of behaviors.
Mary: I would agree. There’s lots of technology that is introduced and ultimately if customers don’t adopt it, then it’s meaningless, ultimately. Whether it is Amazon Echo or things like that, I think we just kind of need to see how customers embrace it. At the brand level, we need to figure out how can we use these types of tools, whether it’s AI, or merchant reality, to make the experiences and the interactions with our guests more engaging, make it more seamless. They have better efficiency. I think there’s an operational aspect, there’s an engagement aspect. There’s certainly marketing and sales aspects related to it.
Bill: Embracing progression, reflecting modernity is something that’s very important to this part of our DNA. There are areas that we wish to be a first or early adopter then there are areas that we’re happy to see other people break the back. Then we’ll come in when those mistakes have been made. We simply don’t have the financial resources or capability to make an early push on AI. We’ll continue to use that money to access the business and be easy to do business with, whether that’s through traditional sales, whether that’s through what we would even call traditional digital, whether that’s through making the investment in the ways that we’ve been talking about, which we are very enthusiastic about. We’re aggressive and we’re progressive.
Where it comes to say, let’s divert some of our R&D available funds into AI because it may be something that will happen in the future, we’re not going to.
Mary: This is somewhat of a similar comparison to our code. Five year ago, you saw QR codes everywhere, in a lot of places they didn’t make sense. This was a technology that industry and digital marketers in particular saw everywhere. No one uses QR codes. I think there’s lots of things that are current in the space because of digital or technology that sometimes brands jump into and the customers aren’t using it for whatever reason. That’s when people start to talk a lot about artificial intelligence, we have to see how customers adopt it and then reflect that on how it impacts for business.
Luke: Given Brexit and the U.S. election results, how do you see these issues impacting the travel industry and what do you think the travel industry needs to do to promote openness?
Bill: I’m not going to comment on the politics of it, but as a small brand with an evolving portfolio, we’re increasingly moving into international markets, all we look for is stability and clarity to enable us to plan and forecast accurately. With Brexit, all I know is that we have a number of hotels that do very well with British customers traveling from the United Kingdom. As a result of Brexit, it became 30 percent more expensive for them to travel to those destinations via US dollar destinations here in the U.S. or places like Abu Dhabi where we have a 500-bedroom hotel.
I think from our perspective, whatever happens in the world, the effect can be on limiting people’s willingness, ability, or courage, to travel.
We don’t like when anything happens that impacts on people’s willingness, ability, or courage to travel. Nor do we like it when there are world events that significantly shift things like exchange rates which can create unforeseen barriers to travel through reactions to world events. We like stability. Election years in the U.S. always create a pause. Irrespective of its the kind of campaign we just got through or what would be considered a more traditional presidential campaign. We like the end of an election cycle because typically, irrespective of outcome, I would say, we find that people who have been putting their plans on hold will now start to travel again. They will book meetings. They will book conventions. An election year is just an unusual year for travel, not specific to any candidate or not specific to any party. Happy that it’s going to be three years before that particular machine winds itself up again. Hopefully we see stability, politically, socially, and in every respect to the great parts around the world.
This generation of travelers are a generation where there is an unforeseen or unprecedented desire to travel. I would say, this generation of travelers are the most resilient. I think that any impediments to travel will be overcome much quicker than previous generations would have overcome them. People’s confidence to travel returns much more quickly as their willingness to spend does as well.
Interview with Standard Hotels Chief Revenue Office Jimmy Suh
Skift: There’s been aggressive advertising in the hotel industry from the large chains, like Hilton and Marriott, for the direct bookings against the online travel sites. One thing I was wondering for Standard … Do you see yourself and other smaller chains taking share within that channel? By that, I mean the OTAs have said they haven’t seen any economic loss and it’s just been a share shift so to me, when I look at who would benefit, it would seem to me the Standards, the Viceroys, those types of hotels. Any updates there or comments?
Jimmy: We haven’t seen the obvious benefits of metasites, especially for brands are more concerned with loyalty. However, we have participated in the bidding wars, the CPC, and then of course, the CRS companies like Sabre have played a great part in giving us some direct links for our website as well. From an overall perspective, we talk about the technology resources coupled with the marketing dollars that the OTAs have and we see the benefits greatly swaying towards the OTAs. Not to mention the relationships that they have within the company. You can’t ignore the Trivagos and the Expedias of the world. I think for the brand, it forces us to compete in another portal but the resources greatly favor the OTAs.
Skift: It seems like you get these ad campaigns, and obviously, I understand they have a lot of sales operations globally, but for other hotels, middle size, small size, even if you’re paying the OTAs (and metas), it’s an acquisition channel. Instead of hiring people and a sales force and advertising on television, it’s just another way to bring in business. After you bring them in, they’re loyal and they stay and they go back to Standard, but as an initial traffic generator, it seems like it’s going to stay with OTAs, with meta, helping you guys. What your thoughts are on that.
Jimmy: No, I think I revert to the earlier comment I just made. If you take a step back and look what the metasites are doing, they’re further commoditizing the brands that are so sensitive to the brand position, where it’s not relegated to the price and the positioning. Also, the fact that once we are to compete at times where our paid dollars could surface our hotel and get our fair share of impressions through that, but again, we talk about hundreds of millions versus thousands of the marketing dollars at the OTA. The economics just don’t play out.
But to your point, is that in those situations when we’re able to get anything greater than 5:1 look-to-book ratio, yes, you’re absolutely right. That certainly beats the commissions that we would pay for an OTA booking.
Skift: Okay. Any updates on The One Night app that came out? I was wondering if that’s part of a future where boutique hotels help drive traffic on shared models. Or is it just about optimizing revenue of spare inventory? Secondly, do you see the partnerships among boutiques helping to negotiate … Whether it’s rates on commissions on the OTAs or just partnering together more in general?
Jimmy: Yeah, totally. I think that was one of the reasons for us doing what we did with One Night because One Night is all about making sure that a channel is positioned to actually enhance the brand equity in terms of the associations amongst the curated group versus going against the sides of or just lining up against OTAs over other OTAs within the metasites. Along with a great diversity of hotels, where a boutique hotel could be lined up right next to a Marriott Courtyard or a Hilton Garden Inn where it confused not only the consumer, but also increases the likelihood of driving the wrong demographic to the individual brands who may not understand or appreciate the experiential value for the hotels that are showcased in One Night.
Yes, that is one of the aspects that triggered our development and our case study, prior to One Night with One Night Standard, that the benefits of having such a channel where you’re not relegated to compete with hotels, or even with an audience who do not know your brand, greatly benefit a boutique hotel.
In addition to that, we also need to remember the incrementality value that One Night poses versus other channels. We’re committed to our participating hotels to not give something that they could have gotten on their own. The cannibalization effect for metasites and OTAs are minimized or possibly even nonexistent in a channel like One Night. It’s been received incredibly well. We’re launching more cities in the next 60 days. You’re absolutely right.
Skift: Do you see that progressing down the road to further-out bookings or do you see it staying as the one-night model?
Jimmy: We are committed to stay with the spontaneous travel. With One Night, there’s absolutely no thoughts or any discussions that were had to expand what One Night is about today. It’s all about spontaneity. There is an opportunity that we may indeed lengthen the booking window. I mean not the booking window, but the stays for greater length. Today, you can book, actually, a two-night stay on One Night, but it always has to be triggered with the same-day arrival after 3 pm. There has been some discussion and we’re contemplating whether we may expand the stay window, but that definitely an aspect of last-minute spontaneous travel.
Skift: Would it ever be the case where a derivative of that … Where it wouldn’t be discounted, it’s just a channel where the boutique like-minded hotels pool, not as an OTA or meta, but just like a joint distribution channel. Is that a possibility or not really?
Jimmy: No, no, because I think that conflicts with our commitment to the participating hotels.
That’s why boutiques are boutiques and that’s why they’re individual brands. Again, I don’t want to compromise what we’re promising to the hotels of getting advance-stay bookings which they could get on their own or even the OTAs that they’re currently participating in. We don’t want to marginalize our creativity for the sake of doing that. Then I think that would be the start of the end of our niche. The answer’s no.
Skift: Okay, great. That makes a lot of sense. For direct bookings for you guys, how much, roughly, comes directly to you guys versus third-party channels?
Jimmy: We get definitely the lion’s share of our bookings direct from our website and from our immediate sales force as well as our reservation centers. We definitely do. We get roughly between 65 and 70 percent on average across our portfolio, but that’s also the type of brand that the Standard … That’s what we’re all about. We’re not for everyone and the people who know us are far more engaged. That higher level of engagement often transmits to just coming to us as our direct channel first and foremost, without even a secondary thought of trying to find the lowest rate somewhere else. Even if they do, and I’m sure you heard this a hundred times over from other companies … We do always ensure that you get more … Not only the lowest rates, but also more product portfolio, if you will, of the types of rates that you can book on our own channel.
The Standard Time is a prime example of what we did to ensure we offer some things that other hotels or other sites can’t offer.
Skift: Right. For you guys, you probably have a lower spend rate on things like AdWords or Google Travel Ads or metasearch with the CPC bidding. It seems like you would probably skew less towards that because of the brand that you have. Is that true?
Jimmy: Absolutely, yeah. That’s true. We focus a lot of our marketing dollars on building the cultural aspects. What company, for example, has an editorial team on staff? We spend a lot of time partnering with or doing events and activations on-property that generate the social buzz for our local community. One thing that the whole Internet and social media world has provided was to equalize the playing field, in which more times than not for our brands, it’s the local community who brings out the viral effect for the consumer markets as well.
Skift: Yeah, that’s a really interesting perspective because it’s so different. You guys aren’t a mega chain, you’re not just another nice hotel that really benefits from the OTAs and being on distribution channels. It’s interesting to hear your perspectives on this… almost as a third-party observer on the third-party distributions … because it’s not really a big factor for you guys, it seems.
Jimmy: Don’t get me wrong. We only participate in less than a handful of OTAs. They do drive business for us but our concentration has been to do what we do best and that’s to spend our marketing dollars expanding our cultural effectiveness. That’s for sure.
Skift: It’s not the type of thing that the typical hotel could try to follow. It’s not a typical business model of the hotel. It’s something that takes time to build and there’s a culture. A lot of things that you guys are doing are unique. When we look at industry-level perspective, we see the validity of the OTAs and the metas, but for you guys, you’re definitely much different than the typical hotel.
Jimmy: Right. We are. I’ve been with the company two and a half years, and outside-looking-in before I joined, I was absolutely intrigued. When I got onboard, it was a learning curve for me to understand that your traditional best practices in the revenue management and the marketing side have very different effects for our brand and our hotels. It’s very similar to our sister properties, for Bunkhouse, where we’re the majority owner for that.
You can try to take the strip hotel approach of just trying to compete with dollars, but at the end of the day, the churning and burning practice just doesn’t bode well for us and possibly a lot of the other boutique companies that are starting to surface. I do think that from a trend element, people are trying to find their cultural pillars and it’s hard to try to reinvent a brand to evolve and develop that versus a brand who set that tone out from the get-go and has always lived and breathed it.
Skift: From your pre-Standard days, what would be your advice to the metasearch companies, to the OTAs, and to other hotels?
Jimmy: I think the metasearch industry is a very convenient portal for the consumers, so if it proposes a convenience factor, a convenience economy that we’re all striving for, it’s definitely a secure place in the industry. I couldn’t give any advice for the metas, because obviously I have the utmost respect for what they’re doing and how they’ve evolved from the early days of Kayak, and all of that, so kudos for them. I don’t think there’s any technical advice that I could offer them that would add any incremental value to them. As far as the OTAs’ participation with the meta, I don’t know if anyone out there can out-compete the Pricelines and Expedias of the world in maximizing or exhausting their returns from the metasites.
The part that I would caution … not caution, but maybe just lend a different perspective from the hotel sites, is to know what the consumers are doing in terms of the behavior on the metasites. I have absolutely no concrete intelligence of how much business the OTAs are getting from the metasites as part of the origination for the distribution, but I think they purposely mask that and try to sell the hotels on their own merits versus competing for brands that other hotel companies have worked so hard to build up and just squat on that on the metasites.
I think hotels, the smart operators are starting to come around and are developing certain provisions in their contracts to avoid or put in the clause of not being able to bid on their branded terms and I’m not sure to what degree that success has been for hotels to be able to include that in their agreements signed up with OTAs. I think that’s what, obviously, the higher concentration point for suppliers, or it should be anyway, for the suppliers in the future. Obviously, by doing that, it lowers their cost of paid media, the CPC, and all that because you’re competing with less squatters if you will. I do hope the hotels do realize that.
Skift: What are your thoughts on Google as a distribution channel, the importance there? Both on AdWords and the new hotel platform.?
Jimmy: It is the nature of the business and I think every hotel, including us, we bid on our own brand on Google. As far as their recent developments like the HPA (hotel ads) and some of the other developments that they’re putting on the search site so that you can book directly from the search, like on the side window, that … For years, it was like watching the grass grow. For that to actually take off, I don’t think OTAs or metasites or even the hotels have seen any real benefit from doing that. I do think that the recent developments … Google has been incredible in what they do in search, but the likes of Google, Facebook, Apple and so on, just confirms the statement of saying that “There are industry or vertical marketing specialists that will always do a much better job and outdo a generalist.”
We talk about unsuccessful attempts by Amazon of trying getting to the travel field itself. I think, in theory, it looks great but there will always be a more potent portal or platforms for the hotel or the travel sites and the OTAs.
Skift: Just for you, in terms of effective marketing channels, if you had to rank digital versus TV versus other channels? Facebook is now starting to do targeted ads, dynamic ads. What are your thoughts?
Jimmy: Yeah, no, totally. I think this goes back to what we talked about for the life of Standard. There has been nothing more effective than our internal email campaigns. That, by far, is the cheapest, most effective and so on. Again, targeting to the most engaged audience will obviously have the biggest benefits. Outside of our internal database marketing, PPC and Google definitely ranks up there as well. Again, we haven’t had the dollars nor necessarily the concentration of playing too heavily in the CPC world for the metasites.
We have developed some products to be able to book directly from some of the meta sites, but outside of that … I think you had also alluded to the likes of Facebook and Instagram ads. They’re starting to show an obvious increased trend of worthiness and return, so we have been doing that. We’ve also been doing that for our apps as well. I do so the Facebook ad evolution starting to come into play.
Skift: Have you done the TripAdvisor instant booking?
Jimmy: Yeah, you have to be part of the business listings in order to get that, so yes. That coexists with their CPC model. I haven’t been able to tell which side of that coexistence we’re getting more bookings from. When we do show up on the CPC searches, we do get a pretty good return.
Skift: It’s interesting because they have 12 and 15% commission rates but I’m guessing … I don’t know if it’s confirmed or not … I’m guessing on the CPC probably your effective cost of acquisition is going to be lower and you’re probably getting the same traction. Is that the case with them?
Jimmy: Yeah, no, no. That’s exactly the case. Of course, you have to weigh that or support it with the number of impressions you get, too.
Jimmy: But you’re right.
Skift: Great. It’s been really helpful hearing your perspective. Is there anything else you think, broadly, that we should know? That our readers should know? That you want to get out there in either metasearch or Standard in general?
Jimmy: No. I think you’ve asked all the right questions. Again, I think the only possibly … Not a counterpoint, but maybe a different perspective, like you said, from the way we look at it, the benefits of metasites are very far and few in between for lifestyle or whatever you want to call brands like us.
Industry Thought Leaders
Former Expedia CEO and Investor Erik Blachford
After spending time with management at the metasearch companies and suppliers, we reached out to a few experts in the space. Our interview with former Expedia CEO Erik Blachford is below. He is now a Venture Partner at Technology Crossover Ventures along with investing privately himself. According to his LinkedIn profile, he has made angel investments and served on boards since leaving Expedia in early 2005. His current board seats include Zillow, Glassdoor, Liftopia, Bloomspot, and Terrapass. Former board seats include Sharebuilder (sold to ING) and Farecast (sold to Microsoft).
Skift: It would be great to get your insights on what’s happening in metasearch, the different business models, and the relationships with OTAs specifically?
Erik: The way that I come at this is form, I had the OTA background and then invested in HotelTonight, Tripping, a couple of those kind of travel related things. I shifted over, HotelTonight’s pretty much an OTA but, I shifted over to the metasearch model because, and I think it’s sort of playing in, it just feels to me as though the notion of having to take the transaction on your own servers feels like it’s probably not the way of the future.
Increasingly, as you’ve got more server to server transactions happening, it’s our field, this is what the suppliers want. They really don’t mind an intermediary, as long as they have a little bit of control over it. I think you’ve seen that play out across the board. The basic idea behind Kayak way back when was, “Hey let’s funnel traffic directly to suppliers so they’re not upset about having a middle man.” Of course, Kayak kind of is a middle man but it’s a middle man that suppliers can live with.
I look at that and think, “You know I think that’s where the industry is headed.” The travel industry in general, things do move fairly slowly, you guys know that. It’s one of those things where, it’s easy to say the future of travel is metasearch, but that doesn’t mean the OTAs go away tomorrow by any stretch. It just means that the long arch here, I think is towards, it’s kind of like, we always used to say that the new GDS is actually the internet.
It sort of seems like eventually you have everything available through different sites that’s all pushing traffic back down to the individual suppliers and I think that is starting to play out. What’s interesting is that you have to have a little bit of infrastructure around that.
Getting your rates and availability up there accurately, is super important. You’re going to have a certain amount of infrastructure that is going to be required as you go. I do think that metasearch is where we end up. Speaking of hotels, by the way, I think the airline industry is sort of different but I’m just thinking the hotel, and also non-hotel lodging, I’m a big fan of Tripping.
Skift: In terms of what’s happening with Trivago and Kayak and their alignment with the OTAs, where does the space go in terms of independent versus OTA owned metas? Are OTAs and metas converging or do you think it is a slow process? Do you see more consolidation in the space is the question?
Erik: That would be my bet. The basic economics of metasearch are pretty tough. You don’t have the same margin that the OTA has so you don’t have as much to spend on marketing. You do end up with a bit of a squeeze whereas, from the OTA’s point of few, picking up the metasearch site makes a lot of sense if you believe, like I do, that that’s probably where we’re headed in the long run. It’s a great pitch. I looked at the Kayak purchase and the Trivago big investment, it makes perfect sense to me.
Right now, you look at HotelsCombined, Skyscanner, those are the two that jump to mind as being the big independent players, maybe they’ll stay independent, but it’s hard to imagine.
I would think eventually they get bought up but maybe not by one of the big OTA holding companies, Expedia, Priceline. Maybe you find one of the big European operators. These days it seems like there’s increasing appetite for investment out of the Chinese market too.
Skift: Interesting. Google recently announced, that its hotel search jumped by twenty-five percent year over year. Is Google a potential buyer for any of these brands or do you think they’re just going to continue to just eat up market share over all and do their own thing?
Erik: Well, I mean sort of, unencumbered by data as they say. My bet would be if they make acquisitions, I think it’s going to be more, I think their ITA acquisitions is a pretty good example. I think for those guys to figure out how to get deep into the data sets and use that to farther their ambitions on the front end, that would make a ton of sense to me. I’d be surprised to see Google go and buy one of the metasearch players just because Google doesn’t generally want to start up or own separate front end companies.
They have done it with YouTube obviously and a couple of others, but in travel I think they’ve made it pretty clear that they really want Google to be that place. You’ve got that good structured travel data, you’ve got people using Google anyway for everything else, it kind of makes sense to just stay down that road. I could see them making purchases in and around travel data, but I’d be surprised to see it up at the front end.
By the way, I think you can’t count out Facebook here either. Whether they would buy a site, probably not, but again in terms of M&A activity in the travel space, it’s pretty easy to imagine Facebook deciding that the economics of actually selling travel or directing it in a more structured way is better than travel advertising.
Skift: Can you discuss the economics of the CPC versus CPA commission models? Can you talk a little bit about that, how that works perhaps in the vacation rental space with Tripping.
Erik: I can. I mean, evolving is the key word. Right now, there’s a huge range of different compensation models and sort of meta search for non-hotel lodging, for alternative lodging. It goes all the way to a full commission, trackable bookings model. In the middle is this kind of question about, well how technically sophisticated are the individual property owners going to be? What’s realistic? What’s the platform that they’re going to use.
In an isolated ecosystem like Airbnb, you’re full-on CPA, it’s a percentage, but that’s not necessarily something that everybody is going to participate in. I think you’re going to see in that space, I bet there’ years yet where we’re going to see a big range of different models and I really do think all the way from flat fee, annual listing fee, all the way down to pretty sophisticated commission agreements, which by the way couldn’t even, there’s no reason that that can’t end up with Uber rides, bonuses for getting extra volume and stuff.
I think as you get more operations sitting over multiple units, they’re going to act more and more like distributed hotels, and I think that’s going to definitely increase the sophistication of the commission models too.
Skift: For Hipmunk, it seems like it got in early into the rental space or at least with Airbnb there was the affiliate program that they ultimately closed. Do you see that as a big advantage for Hipmunk because from where we sit, it doesn’t seem to really make sense for Airbnb to open up their inventory via an affiliate program later down the road, at least in the short to mid-term.
Erik: So why do you say that? It seems to me that anybody who’s got a big batch or supply wants to figure out how to get it used up. The big new supply basket, the more channels, you generally want to light up. Why would you think they wouldn’t want to do that?
Skift: Well, I guess just to keep the user base within their own ecosystem. We’re seeing just their reach in terms of inventory within particular city markets like New York or LA, the vast majority, particularly within the primary residence, those units that are owner occupied, they own the inventory let’s say. Our thought is that they have little incentive to diversify their reach with everybody on the supply side already on Airbnb.
Erik: I think that’s sort of the standard of assumption there. The interesting thing here is does Airbnb act more like Southwest in the airline space or every other airline? I think the jury’s still out on that, right? Way back when at the dawn of meta-search, you might remember Kayak and everybody sort of held out. All the OTAs said we’re not going to distribute to those guys, that’s crazy.
Then eventually what happened was the different airlines, the different hotel companies, different OTAs, when you run up against a little bit of a demand problem, it could be in specific markets, it could be more global, you do tend to open it up. JetBlue, for instance, started out saying they were never going to distribute through Expedia. We said, “Well, we’ll see how that works out, you guys, if you find that you actually get a new channel, you just might find that getting a ten percent, or whatever it is, bump in your bookings might just help you.”
Eventually, of course, they did. They came and decided to distribute. I would think that eventually what happens in Airbnb gets to the point where they say, “Okay, in markets around the world we’re having some difficulty actually filling the inventory. We’re starting to get supply that is not getting filled and those hosts are starting to look at other services, we don’t want that to happen, let’s figure out how to get more demand and we’ll sort of co-op demand from other partners.” That would make sense to me. Whether it plays out that way or not, that’s a hard thing to say.
I can’t really believe those guys who’ve got all their units filled all the time are ready, they’ve expanded really quickly. New York, and San Francisco maybe, but I don’t k now, you think all the Airbnb’s in St. Louis are filled every night? No.
Skift: That’s a good point. It just seems like they have such a strong grip on the consumer on both the supply side. I guess the question is why did they decide to close out their affiliate program early on? I guess to build the brand.
Erik: Definitely. I mean I’m a little partisan here, but there’s an awful lot of listings that aren’t on Airbnb. I mean Tripping’s got a lot more listings then Airbnb does.
Airbnb is certainly the largest single aggregator under a single brand, but if you look at the Tripping inventory across all their metasearch partners, you realize that there’s this sort of perception that Airbnb has kind of locked up the inventory side, but it is not really true.
Skift: For TripAdvisor, are you optimistic or pessimistic about the direct booking model that they’ve set out to work on?
Erik: In terms of them becoming more like an OTA?
Skift: In terms of their longer-term profitability, the verdict is still out on which is the best way to go. Clearly, different categories have their own different challenges and maybe hotel is better suited for Direct Booking.
Erik: Well, that’s a technology question really. I think Direct Booking makes sense from a consumer experience point of view. I would imagine Direct Booking becomes the dominant booking path both for hotels, but I think it will happen in alternative lodging too. It’s just that right now you don’t have the technology on the other end, on the owner end to allow it really.
Give me a one-click booking, and yeah I understand that it’s happening on a third-party site, but I don’t care about that, I’m just a consumer, I just want it to work easily.
What’s going to happen is the technology is going to evolve to suit that demand. Right now, it’s difficult because it takes a certain amount of sophistication to be able to actually handle Direct Booking. There’s a server to server protocol that has to get put in place and it’s not that hard for the big guys who are on CRSs but you know, a lot of the TMS systems don’t support that all that easily. It’s probably a good thing in the long run for SiteMinder, but you do have this sort of technology gap right now that I think has to get filled.
To me, the main thing is it just makes more sense, particularly in the mobile world, by the way, clicking off to some hotel website on your phone, you know that’s a sub-optimal experience for sure. You’d much rather just be able to click a button and get your booking done and move on.
Skift: Obviously, a large portion of the business for metasearch comes from the OTAs. In terms of sheer volume, clearly the OTAs will provide much of the inventory for the metas. Does this change over time?
Erik: It depends a little bit on what you think the long-run purpose of the meta-search tools are. Originally the meta idea was to compare prices against the other distribution channels. It gives the hotel a price differently on Expedia versus Booking and so on. These days, I think that’s a little less what’s going on. It’s more of a distribution channel. Long-run, it’s not at all hard to imagine that hotels are going to have Direct Booking up through all the different metas and maybe they’re complimented by some OTAs around the edges. That’s easy to imagine, I think that’s probably where we’re headed.
It’s just the technology gap there. There PMS systems in most hotels don’t really know how to just automatically talk to metas. Again, it’s just sort of a SiteMinder that sits in the middle, there’s this sort of a middleware need there. I do think in the long-run to me, if you’re a hotel right now, you don’t really want the OTAs to be representing you on the metasearch site, you’d much rather have your own direct booking path in there just because it will cost so much money.
Skift: Switching gears to the air market, in terms of the technology adoption, will the bigger players have the capabilities to adapt their front ends and connect all these different bits and pieces that airlines ultimately want to push through their intermediaries, or is it going to be a slow burn?
Erik: I think it’s a bit of a wait and see.
The air business, it’s just so different, especially with the consolidation over the last couple of years in the U.S. market anyway. Let’s face it, airlines don’t like intermediaries, they put up with them and they try to pay as little as they can. Anything that brings down the airline cost of distribution is going to be readily accepted, anything that pushed it up isn’t going to be.
Skift: On the airline side, how low do you get a sense the commission is? We’ve heard some say it could be as low as six dollars per booking.
Erik: Oh, boy, that’s a tough one. That’s a bit of a tough one to get into because I’m not super current on it but it’s low. I think there’s cases of airlines who were insisting that everything’s free actually. Airlines have a different leverage profile because there’s not that many of them and for certain cities, you have to have certain airlines and they know that, otherwise you’ve got no product. That’s always been the push, pull here.
On the one hand, you get distribution, but on the other hand your metasearch product creator doesn’t work super well if you’re missing any of the majors. I think that’s the dynamic there. It’s totally different from a hotel where, any given hotel meets the demand and they’re all independent. It’s very fragmented, it is sort of a classic, economics thing. My hunch would be that there’s a bunch of airlines that are paying next to nothing for metasearch distribution or maybe they’re paying nothing on a commission base but they’re doing some sort of a side deal on advertising. I would suspect that if it’s not true now, it’s going to be true soon.
Skift: We’ve been talking to some of these companies and they’ve talked about how there was a big push to the hotel side. We believe that the metasearch sites are using airlines as a source of traffic to the websites, but it’s so incredibly hard to monetize it that it’s really just to get the traffic to use the hotel part of the business. Does that make sense to you?
Erik: You took the words right out of my mouth, that’s totally what I think. That’s what I would do. At Expedia, way back when, I said that the air traffic was just the milk at the back of the store. Air was the thing you sold because people needed it. Then, what you did was you tried to sell them everything else in the aisles and I think that’s still true. You don’t try to make a lot of money on it, but you’ve still got to do it.
Skift: The Hipmunk acquisition by Concur, was that a technology play? It seems like, hey we love the technology, we want to learn from it and apply it to our corporate clients, is that what it was? What do you think, how’s that going to go?
Erik: That’s the sense I got. I haven’t talked to Adam a whole lot about it but that is, and that’s consistent with the way Concur has done a lot of stuff, right? I think they’re pretty savvy at looking at different technologies that they want to have in house and thinking, “Okay do we want to build that or do we want to buy that?” That’s what it felt like to me. I’m sort of uninformed on it but just from the other side, I can think that.
I’m an investor there but I’m not a board member or anything so I don’t have insight.
Skift: It seems like that they buy the technology, it powers the business side, but then from a consumer part, they’re probably not going to spend much in the way of advertising trying to promote the site. Do you think that’s the case where they’ll exist as a consumer site but you’re not going to see a push to be a competitor to the big metasearch sites.
Erik: I just don’t know. That’s a question for Concur really. They haven’t shown, unless I’m missing something, they haven’t shown a lot of appetite for the kind of consumer marketing and outreach stuff that you need to do to really build a metasearch site up so I’d be a little surprised but I don’t know. I’m just not, I don’t know what their strategy there is.
Skift: That’s fair. What do you think, Trivago or Kayak just in terms of relative success or optimism about their future?
Erik: I think they’ll both do great. Once you’ve got critical mass like both of them do, you’d have to make some pretty serious missteps I think. Once you get to a certain critical mass and a certain awareness at the market, what do you think the unneeded awareness for that site? It’s got to be up in the thirties now, forties maybe even. You’ve got the critical mass, as long as your product works and you’ve got good inventory you’re good, you’ve got long momentum.
You’ve got to think about these differences. Once your repeat base is locked in and people are used to using you, it takes a long time for that to go away. You can’t stop marketing obviously; you’ve got to keep marketing but I don’t see anything that stands in the way of those businesses being successful. I think it’s hard as an up and comer, I think it’s hard to break into. I think once you’ve gotten to the scale that those guys have got, I think you’re in a pretty good spot.
Siteminder is a platform that hoteliers use to acquire guests on the internet. The platform scales from you’re a B&B up to large chains. The company has different technologies and different features that can be tailored to small players and larger chains. Siteminder is building out its offering, giving hotels a complete and automated guest acquisition solution.
We reached out to Mike Ford for his insights into the metasearch industry.
Interview with Co-founder and Managing Director Mike Ford
Skift: We’ve seen TripAdvisor pushing instant booking. There’s been some issues both on customer awareness and the technology side. How much is technology an impediment for smaller chains or independents to participate, and how does SiteMinder help here?
Mike: The issues depend on what the metasearch strategy is for each particular metasearch, but certainly the ones that want to get relationships with a hotel directly, I think technology is a big barrier for them. Also, the way they pitch their offering to the independent hoteliers. I think there’s a big awareness challenge amongst bringing on and contracting independent hoteliers directly. I think TripAdvisor really does rely on connectivity partners like SiteMinder to push their hotels to TripAdvisor connection. You can now add your property on TripAdvisor, and it costs this much and you can rent some inventory out there through SiteMinder. TripAdvisor didn’t have a way to get inventory other than through for example SiteMinder and other connectivity partners.
In order to show the rates on instant booking they have to go through somebody like us. That’s the role that we play. We play that role of supplying the dynamic rates and availability to TripAdvisor, Booking or to Trivago or to Google, but the real problem for a lot of these metas is that if they want the relationship with a hotel directly they don’t have the 5,000 foot soldiers that Booking.com has going around directly contracting the properties. They do rely on connectivity partners from a marketing perspective as well. Then obviously, they might try and build up their own acquisition teams over time, but their problem is trying to get the hotels aware and involved in the program.
Skift: On the CPA model, how much integration is needed between the metasearch site and the hotel? You go on Kayak, you click to book at the small hotel in Sydney. Kayak wants to track the click through and the booking. How much integration goes on? Is it harder on mobile? Is it even more difficult on the apps?
Mike: If you’re looking at it in the context of a hotel going to metas versus the booking agent, that’s one of the very daunting things even for technology providers as well as the hotels, that all these metas work in a very different way. That’s one challenge in connecting to the metasearch environment. For example, from a mobile perspective what TripAdvisor and Google were finding was that they’d hand off the guest to the booking engine of the hotel and they didn’t have a mobile booking engine experience or they had a really terrible booking engine that doesn’t convert very well. It was actually a bad experience all around because the hotels didn’t have the technology that obviously that Expedia and Booking.com have where they’ve got people checking that stuff all the time. If everyone used, for example, our booking engine, SiteMinder could provide that service, but everyone uses different booking engines and some of them aren’t mobile.
That gave rise to the book on Google and the Trip (instant) booking trying to drive that mobile point of sale, but I guess the challenge is the book on Google and the book on Trip introduced other challenges because what happens with those is then the guest feels like they need to go back to Google to resolve any issues with the booking. It’s not so straight forward for the guests to understand how I’m being handed off and now I need to deal with the hotel.
There’s a couple of big challenges, but essentially from a technology standpoint they work in different ways. Google, if you do for example CPA on Google they will give you a tracking … This is now not Book on Google where they complete the transaction, but this is the one where Google you actually bid and Google sends it off to your booking agent. They work two different ways. That one they offer CPA, but essentially they give you a tracking pixel. They actually do store something on your booking engine where they will track completed bookings.
Then there’s a reconciliation process which some vendors handle and some don’t. Tech vendors like ourselves or the hotel needs to let Google know which clients canceled and all sorts of things. It’s quite complex, because what they’re doing is everything that’s handled in Booking.com or Expedia all the way through is split between Google and the technology vendor in terms of functionality. That’s the challenge in closing that gap because Google provides the jump off point, but the technology vendor has to provide the reconciliation and that sort of thing of what happened to that booking.
Then you’ve got your Trivagos who don’t actually have a CPA. They’ve stayed on CPC, because of the CPC you’re just paying per click so you don’t need to prove conversion in order for them to get their money. The ones that are moving to CPA would need that tracking fixed or they have to rely on the honesty of the vendor to let them know how many bookings happened.
Skift: Does Google focus on CPC or CPA?
Mike: Google very much does CPC. For a lot of groups, they’ll do CPC where the groups actually have a dashboard where they do bidding. We’ll actually send the rates and availability through to Google and the hotel group will manage their own bidding. They’ll manage what they want to bid and they’ll manage their bidding budgets and that sort of thing. Google provides a dashboard for doing that, but really Google doesn’t want to deal with anything that’s not a big chain directly. They want to others to go providers like us. We need to handle the bidding updates and the budget updates. We have to front the customer from a financial perspective. In other words, Google wants the commission from us, they don’t want to get commission from every independent hotelier.
SiteMinder has to collect commission for example and we pass that back on to Google. Google doesn’t have a direct relationship with the hotels and they don’t want one. It’s quite a complex universe because Google is very much doing this through a partnership scenario.
From the CPC perspective or the CPA perspective, SiteMinder really, or other vendors like SiteMinder, actually have to front the customer and Google just intermediates themselves through us. They don’t actually deal with the hotels directly, but, yes, Google offers both CPA and CPC.
Essentially the hotel can choose which of those services it wants. If they can make CPC work better for them and they’ve got a great converting and booking engine and they can make CPC work, then it can be cheaper than CPA. If they don’t, then CPC is just going to be a waste of money. It depends how well they manage the environment because it’s not just bidding, you have got to make sure that your rates are as good otherwise you’ll pay the cost click, but then they’ll go to Expedia to book. You’ve got to make sure your rates are good.
You’ve got to make sure you’ve got a booking engine that converts because from a CPC perspective they bounce you from Google to the hotel booking engine. You’ve got to make sure your booking engine is mobile. You’ve got to make sure it converts well otherwise you’re wasting your CPC dollars because the guests will bounce. For most of the independent market, the CPA model is best. The independent hotelier, they don’t have a chance of making sure all of those things are right all of the time for all the meta sites, so for them, the CPA is a better model because it’s risk free. They only pay if they get a booking.
Skift: For the larger chains, they’ll use CPA for some, CPC for others?
Mike: The larger guys, there’s still a blend. It depends how much attention they want to put to managing the CPC, because you’ve got to make sure you’re getting the bookings through it otherwise it doesn’t pay. You need to give it attention. Some chains would give the attention it needs, spend time on measuring what return they’re getting. Others would just go, look, we just want to set and forget and use a CPA. It really just depends by chain but generally when a chain decides on one method they do it across the chain.
Basically, you could do a CPC or a CPA to be on Google places where it redirects you to the hotel’s booking engine but Book on Google is now their new offering and you could be on both. Book on Google is where the booking takes place on Google, but they put it into different places within the Google application and the Google experience. Book on Google is still not rolled out through the globe but it’s rolled out in certain regions. They complete the booking, but they’re not replacing the referral one, they’re supplementing with Book on Google.
Skift: Similar to TripAdvisor.
Mike: Yes. Exactly. You can be on both. With Trip, you could be a hotel that you can do a hotel direct, which is where you pitched up your hotel brand that’s next to Expedia and Booking.com on the list of providers. That’s the bidding, that’s where you’re doing CPC. Then the instant booking is available as well and that’s where you’re doing a CPA. A hotel could be on both.
Skift: Just in terms of TripAdvisor’s longer term competitiveness they’re banking a lot on getting instant book up and running and driving a bigger share of the total revenue, but it sounds like CPC, CPA is really, that blended approach is really it’s not going to go away any time soon?
Mike: Yes. I don’t think it would go away. From TripAdvisor’s perspective when you click trip instant booking you’re either going to be booking on the hotel or you’re going to be booking on Expedia or booking on Booking.com. Whereas if you have that plus the array of sites offering different prices then you’re going to get more clicks, more advertising revenue. If you’ve just linked it to Trip instant booking you’d only be getting money from one provider at any one time.
I think then having both would be a wise strategy because they’re getting money for clicks as well as money for conversions. They’re making too big of a leap I think if they just do Trip instant bookings only, unless they want to go out as a full-fledged OTA. In which case, their tech would have to change because like I say the tech vendor takes some of that responsibility right now.
Skift: That makes sense. For an independent hotel property that is already entrenched in using a lot of the OTAs for their distribution does it even make sense to connect directly with the metas because I ultimately the OTAs use their inventory to bid against the rivals on the different meta platforms?
Mike: Absolutely. There’s no doubt that every independent hotel should be on it but they should be on the CPA model. For example, if I was a hotel I would definitely list on Trip instant bookings and I would list on Google. The reason being both of them have lower commissions than Expedia and Booking.com. Why wouldn’t you try to lower your cost of acquisition?
Skift: In terms of the Booking.coms of the world in terms of what they would pay a meta search site, would it be pretty low, like 3 to 5%, or do they actually pay the full 10, 12, 15?
Mike: I think it varies, because basically at certain times of the year Booking.com might even be making a loss, but I guess Bookings strategy and Expedia’s strategy is to acquire the guest. If you think about it as a lead cost of a guest what happens is once they’ve got that guest’s email then they can get them to download their app. They can re-market back to them and sell directly to them.
Booking.com and Expedia obviously will make some money off metas but it’s also a lead engine to get more guests into their preferred program and to re-market back to them. It’s like a lead acquisition thing as well as a profit engine. I think Booking and Expedia, I don’t have the numbers in terms of what they’d spend but they would be obviously better at converting. Therefore, their effective cost goes down. The better you are at converting the better your return is. I would imagine it’s lower than the hotels.
I think some of them are really good at it, like Expedia and Booking.com convert very well. They’ve got a way of making sure that they capture their guests. I wouldn’t be surprised if some of their acquisitions cost 5%. Then you are going to have some OTAs that aren’t very good at converting and they’ve probably got much higher costs. It all comes down to how good they are at converting as to how low their cost is. Expedia and Booking are very good at that, so their costs are going to be quite low.
Skift: On a CPA basis, do you think the commission would be substantially lower than the hotels pay?
Mike: I would say at certain times and certain properties and certain regions that they are very good at managing it. I would say it would be lower because they wouldn’t have a lot of competition because they don’t have … A lot of the other OTAs don’t have stock, which is again Booking.com’s advantage is they’ve got so much more supply. In some cases, Booking.com might be the only OTA showing up, in which case, they could reduce their bids for that. I would say blended I wouldn’t have any idea but in some cases, yes, they would achieve lower than meta cost to themselves for sure.
Skift: The big hotel chains it seems like they would privately negotiate rates.
Mike: From a CPA perspective, yes. I wouldn’t be surprised if they do a volume deal of sorts.
Skift: For a smaller, let’s say independent property or a mid-sized property in a mid-market, not like Paris or New York, how would you say instant booking is performing for some of these properties in terms of total distribution mix? Are properties hitting a ceiling with instant book?
Mike: I would say the traffic is a relatively small percentage because Booking.com is capturing a lot of that traffic from the web and also the fact that they were a review site. They’re trying to capture that guest that’s looking at the reviews. TripAdvisor is just one channel, that wouldn’t drive anything like the same volume as Expedia and Booking. If a hotel just went TripAdvisor only they’re going to definitely lose traffic from Expedia and Booking who are getting guests from many, many other sources.
Skift: It’s clearly a nice to have auxiliary channel there that could save you a little bit of money.
Mike: Yes. I mean if they play their cards right and Trip gets the tech right and they get enough direct connections, they could become the third big source of bookings, but I think at the moment they don’t have enough properties signed up directly on instant book. At the end of the day, Trip is a lot smaller and they rely on organic traffic a lot.
They don’t have the same SEM power and that, and the affiliate power, and all that that Expedia and Booking.com have built up over the years. The reason I would say an independent should definitely participate is because if they actually find that they are doing well on Trip instant booking then what they are doing is diluting the commissions that they’re paying and the cost of acquisition and increasing their profit margin. What I would do if I was an independent, is I would say, how many am I getting?
Then if I’m getting a lot at certain times of year, you can actually limit the availability you’re giving other OTAs so that you get a higher percentage, but then at other times when it’s not so busy or your occupancy isn’t so high, you might want to open it up to more channels.
I think if a property is really keen on maximizing the benefit they could, but I wouldn’t, shutdown all the other channels. I think you need to open yourself up to all the possibilities but try to be smart about what segments of the market are booking at what times and then give more emphasis to the channels that serve those segments at a lower acquisition cost. It’s more about reducing your acquisition cost as opposed to totally getting your bookings through one channel. It’s more about just averaging it down.
This is why we have products like Canvas, our website product, and we invest a lot in our booking engine from a conversion perspective because if an independent hotel can convert well on their own website, they have a great website with a great booking experience they’ll obviously get a lot of referral traffic from these OTAs and that coming to look at their website directly. That’s another way for them to utilize the site, to average down their cost of acquisition by getting the booking direct. By being on the sites you’re obviously opening up yourself to pay commission but you can average it down by being very good at converting directly.
Skift: Do you think that the OTAs are under considerable pressure now to reduce their overall commissions as a result of some of these platforms or do you think that they’re still kind of keeping up the status quo in terms of what they are getting on commission take?
Mike: I don’t think they’re under pressure yet because I don’t think Book on Google and TripAdvisor have made enough of an impact in terms of in-roads into the relationship with the hotels directly. They don’t have enough supply. Book on Google isn’t even rolled out properly yet. Trip instant booking is still finding its feet in terms of the model, like I say there’s some compilations.
I think once they find their feet, the key is if they can get all the supply they want which is one part of the battle, but they’ve still got to get that guest coming to their booking point of sale. Once they start proving that they can get a lot of top of funnel guest activity coming to the Google places or whatever and actually hitting that book button. Once they prove that they can command that traffic on instant booking or Google direct, then I think that will change the landscape but I don’t think they’ve proved that yet.
Skift: What are your thoughts on metasearch for alternative lodgings?
Mike: We have small hotel products which we connect into these things, but for me quite a simple thing is that when you think about going somewhere are you just going to go straight to Airbnb or are you going to think, hey, there’s a whole bunch of these things I should compare? I think Airbnb has got such a big organic direct following that you type in Airbnb you don’t go, oh I wonder which one of these things I should use. Kind of like Uber. That’s just my opinion.
Skift: If there is anything else that you think we should be thinking about from the hotelier perspective?
Mike: In summary, I think the metas from a hotelier’s perspective the meta search landscape offers opportunity to get cost effective booking directly but it is a very complex technical landscape for an independent hotelier, even for a chain. I think because they operate such different models even though Trivago has now got an independent hotelier dashboard they still don’t want to go and log into many different portals. It’s really up to the technology providers like us to make that a uniform environment for the hotelier, because the metas operate in so many different ways. Google won’t collect money form the hotelier direct for commissions. They want us to do that, but TripAdvisor will, but TripAdvisor still needs our rates and availability. The business models are so disparate between all these metas that an independent hotelier couldn’t possibly have the time, or patience, or knowledge to navigate all of them directly.
I think the only way these metas are going to successfully engage with the independent hotelier is to engage with platforms like ours where we can make it one simple interface for the hotel, so they don’t have to think about all those complexities. That’s the sort of stuff we’re working on is saying, hey, we’ll take the complexity out of it and provide the interfaces for the hotel. That’s the only way these metas will actually get a direct relationship with a hotel, because they don’t have the foot soldiers to go out and contract the hotels directly.
Skift Outlook for SiteMinder:
In an incredibly complex metasearch market, independent hotels would be well-served to work with vendors like SiteMinder. When going at it alone, CPA and instant booking seems to be the best path forward.
Endnotes and Further Reading
- Travel Flash Report 2016: It’s Going to Be a Mobile Summer, Criteo, October 2016.
- By 2016, Most Digital Travel Bookers Will Use Mobile Devices, eMarketer, November 2015.
- Internet Trends 2016 Code Conference, KPCB, June 2016.
- U.S. judge dismisses price-fixing claim against hotels, websites, Reuters, February 2014.
- New U.S. Rules Could Bring Unprecedented Change to Booking Flights Online, Skift, October 2016.
- Importance of GDS for Travel Agents and Tour Operators, Orisys Infotech, 2016.
- Google’s Travel Business Is Already Twice the Size of Expedia’s, Skift, November 2016.
- Companies House, 2016.
- U.S. Securities and Exchange Commission, 2016.
- Skyscanner Raises $192 Million in Funding at $1.6 Billion Valuation, Skift, January 2016.
- Cheapflights Owner Momondo Group Gets $130 Million in Funding from Great Hill, Skift, October 2014.
- Momondo Group Forecasts Continued Accelerating Growth Following Strong Q1 Performance, Momondo, May 2016.
- Concur Buys Hipmunk to Bring Consumer Tools to Its Business Travelers, Skift, September 2016.
- Crunchbase, November 2016.
- Concur buys Hipmunk to add search to its travel and expense management platform, TechCrunch, September 2016.
- AMA with Jen O’Neal, GrowthHackers, July 2016.
- Chinese Travel Site Qunar Doesn’t Care About Any Labels Other Than ‘Largest,’ Skift, January 2014.
- China Eastern Becomes Third Major Airline to Pull Its Flights From Qunar, Skift, April 2016.