Report Overview

Over the past year, we published company deep dives on Expedia, TripAdvisor, and Ctrip. We also produced extensive research on the metasearch industry and hotel direct booking trends. We build on those findings in our latest Priceline report, which serves as an online travel capstone. We drill into Priceline’s OTA behemoth, Booking.com, along with Kayak (and its latest Momondo acquisition), Agoda, Priceline.com, OpenTable, and Rentalcars.com, providing brand-level economics and strategic insights. The report analyzes Priceline’s revenue trajectory and the drivers behind it including gross bookings, daily rates, and take rates. We also provide our outlook on corporate expenses and the company’s future margin path. Priceline’s massive digital advertising budget is both a competitive moat and a margin headwind. We discuss digital advertising trends both for Priceline and the industry as a whole, focusing on how much the top players spend on traditional versus digital ads and on search versus meta. Finally, we provide industry analysis comparing Priceline with the leading OTAs in Expedia and Ctrip and metasearch companies in TripAdvisor and Trivago. Given Priceline’s importance to the industry, this report serves multiple audiences. We offer hotels and vacation rental suppliers insights into the global leader in online travel. Online and offline travel distributors and advertisers will have a better understanding of a key competitor and potential partner. Investors will get a clear picture of the inner workings of Priceline and the online travel industry. They will also have access to U.S. online travel agency (OTA) market share estimates from our data partnership with Hitwise.

What You'll Learn From This Report

  • How the Agency model helped Booking.com rapidly scale its hotel business
  • Trends in merchant versus agent revenue for Priceline and Expedia
  • Why Priceline’s margins are so much higher than its peers
  • How Booking.com is growing its vacation rental business and its competitive outlook versus HomeAway, Airbnb, and TripAdvisor
  • Booking.com’s rationale for flight testing
  • Priceline’s approach to corporate travel and broader industry dynamics
  • Priceline’s strategy in Asia
  • Estimates of Kayak’s revenue, expenses, and EBITDA margin
  • Rationale for Priceline purchasing Momondo
  • Why metasearch is important for Priceline
  • Hotel spending trends on metasearch
  • How much Priceline and Expedia spend on Trivago, TripAdvisor, Kayak, and Google
  • What Kayak could be valued at as a standalone entity
  • Whether OpenTable is a good asset acquired at a bad price or a fundamentally impaired one
  • Estimates of OpenTable’s current financials and implied current valuation multiple
  • Agoda’s rapid growth path and our revenue estimates for the unit
  • How Priceline.com is phasing out the opaque merchant model
  • What Priceline.com actually contributes to the company financially
  • Why opaque bookings inflate GAAP revenue and deflate gross profit, but are neutral to operating income
  • How Priceline uses Rentalcars.com to have a more complete OTA platform
  • Analysis of Priceline’s revenue, gross bookings, room nights, daily rates, and take rates trends along with our forward outlook
  • A detailed look at the company’s margins, looking at the headwind from variable ad spend and tailwind from fixed cost operating leverage
  • Estimates of true U.S. revenue for Booking.com versus GAAP reported results
  • In partnership with Hitwise, U.S. OTA market share trends
  • Strategic and financial comparison of Priceline with Expedia, Ctrip, TripAdvisor, and Trivago
  • Does it make sense for Priceline to acquire TripAdvisor?
  • Airbnb as a threat to the OTAs — what is real, what is not
  • Why Booking.com can maintain its dominant position in hotel distribution

EXECUTIVE SUMMARY

Priceline’s acquisition of Booking.com and its push of the agency model have helped transform the company over the past decade into the largest and most profitable online travel agency in the world. By emphasizing the agency model, Priceline was able to scale up hotel inventory at a rapid pace. This was especially important in the European market where independent hotels and smaller hotel groups dominate the industry. Since 2013, Priceline has aggressively expanded its vacation rental business. While it is still much smaller than Expedia’s HomeAway or Airbnb, there are now over 700,000 rentals on Booking.com, all of which are instantly bookable.

Priceline’s market cap is much larger than Expedia’s despite comparable gross bookings. The reason for the gap is that Booking.com’s high-margin hotel OTA business has become the main driver of results, helping to push company-wide EBITDA margin substantially above peers.

Asia is a key growth initiative for Priceline both through its Booking.com partnership with Ctrip and Priceline’s large financial stake in Ctrip. Additionally, Agoda continues to do well throughout Asia on a much smaller scale than Booking.com.

Kayak’s importance to the Priceline Group goes far beyond its direct financial contribution. By owning a key meta channel, Priceline can capture ad spend that would have been spent at a competitor. The majority of OTA digital ad spend is on Google, but as much as 25 percent is on metasearch. By owning or having large stakes in meta assets (Priceline/Kayak/Momondo, Expedia/Trivago, Ctrip/Skyscanner), the big three OTAs can effectively remove part of their marketing spend and pay themselves via intercompany revenue. Having a meta also gives the OTA part of the business insights into bidding optimization and best practices. Massive ad budgets and this expertise helps explain why the OTAs dominate search engine marketing and meta spend versus hotels.

OpenTable sits at the other end of the spectrum from Kayak, which was an exceptional asset at what turned out to be a very fair price. The write-down of OpenTable stems from overly optimistic international expansion plans leading to an inflated acquisition price. Having restaurant reservations is valuable for travelers and makes Priceline’s offering more complete. We do not expect OpenTable to drive results at the corporate level, but expect that any further write-downs are unlikely at this point.

At the company level, we see annual revenue growth in the 15 percent range into the end of the decade with the volume of bookings growing above 20 percent, the value of those bookings growing in the 16 to 20 percent range, and the daily room rate and implied take rate continuing to slowly decline. The gap between booking and revenue growth is largely due to the maturity of the European and U.S. businesses versus the more rapid growth in Asia and other emerging markets. In those markets, the average daily room rate tends to be lower as does the average commission level. While each booking will be less valuable over time in isolation, the under-penetration of online travel in most markets makes the opportunity very much worth the tradeoff.

Priceline’s operating margin will continue to face competing dynamics with ad spend growing faster than revenue growth versus other fixed costs being spread out over a larger revenue base. The result will be modest margin compression, but we expect it to still remain in the 30 percent plus range.

Overall, we continue to see steady and strong growth for Priceline into the next decade despite its current size. A combination of solid organic growth, the ongoing global move of offline to online travel bookings, top notch management team, industry leading inventory, and continued advances in technology position Priceline quite well in the years ahead. One key headwind is its reliance on Google to generate traffic. Like other OTAs, this weighs on margins, but does act as a large competitive moat versus smaller players unable to match Priceline’s nearly $4 billion in ad spend.

Key Considerations

  • Priceline’s decision to emphasize the agency model enabled it to rapidly scale its inventory. Trading off near-term higher fees under a merchant model in exchange for longer-term growth proved prescient. Priceline has continued to grow its agency business with Booking.com driving results. The agency model now accounts for 80 percent the Priceline Group’s agency and merchant mix.
  • Airbnb and the growth of vacation rentals more broadly is a threat to hotels and hotel-focused distributors like Priceline. However, Priceline has made a conscious effort to quickly grow its own vacation rental business, focusing on instantly bookable inventory, and scrap its separate Villas.com brand in exchange for full integration into Booking.com. The vision is that people will eventually search for lodging with equal consideration to hotels and vacation rentals. Under that scenario, Booking.com remains the gold standard for a lodging OTA business.
  • Over the past several months, Booking.com has rolled out flights on its website. Rather than going with the OTA model, it is utilizing Priceline’s Kayak metasearch brand to make the travel search experience more complete on Booking.com. This is in the test and learn phase, but we expect the flights meta link to stay.
  • Asia is a key market for online travel companies. China is by far the largest opportunity in the region and Priceline has wisely partnered with Ctrip rather than go it alone in an increasingly complex and localized travel market.
  • Metasearch consolidation remains an important trend in the travel industry. After Ctrip purchased Skyscanner, Priceline followed suit, purchasing Momondo and placing it under Kayak and its CEO, Steve Hafner. This acquisition strengthens Kayak in regions where it had less market share including the UK, Nordics, and Russia. Keeping Momondo out of the hands of a rival, or potential one, also protects the Kayak brand.
  • Hotel spend on metasearch is growing faster than spend on the traditional OTA model. That being said, this is off of a much lower starting share of the distribution mix. OTAs themselves dominate metasearch marketing spend as they look to generate non-Google pushed traffic. By owning metas, the large OTAs own a key distribution/marketing channel and can effectively spend part of the OTA ad budgets internally.
  • The last remaining large meta brand is TripAdvisor. With industry leading website traffic, but a business pivot to instant booking influx, TripAdvisor could fit nicely into Priceline. Regulatory concerns and the purchase price required to get a deal done make an acquisition inherently difficult to get done, but the brand value and owning a key marketing channel could make Priceline explore a TripAdvisor deal (if they have not done so already).
  • The BookingSuite platform brings in small, independent hotels where Booking.com builds their website and takes in either a monthly subscription fee or 10 percent per hotel booking on the hotel’s own website. The size of this revenue stream is unclear, but the recurring nature of it would clearly be attractive for Priceline.

BOOKING.COM

Booking.com is widely considered to be one of the best acquisitions of all time; though technically it was two purchases. Priceline bought the Netherlands-based Booking.com in 2005 for only $133 million and paired it with Cambridge, UK-based Active Hotels, which Priceline bought 10 months prior for $161 million. These purchases completely transformed Priceline into a dominant travel company seeing operating income increase from $35 million in 2005 to nearly $4 billion in 2016. Priceline’s market cap has increased from under $1 billion at the end of 2005 to roughly $90 billion today.

Booking.com is included in Netherlands revenue, which accounted for $7.8 billion of Priceline’s $10.7 billion haul or nearly three-fourths of the total.

AGENCY MODEL

Booking.com primarily uses the agency model. Under the agency model, the OTA is literally an agent between the hotel and guest. Booking.com typically does not take on inventory risk or handle the financial transaction directly.

Under a merchant model, the OTA is the seller (merchant) of record and actually does the booking, handles the payment, and takes on the associated risks. In exchange, the compensation would typically be higher than under the agency model where the OTA simply gets a commission for bringing the traveler to book his stay with the hotel.

Prior to 2005, the major U.S. OTAs (Expedia, Travelocity, and Orbitz) were emphasizing the merchant model with its higher fees. After Priceline acquired Booking.com (and Active Hotels), the company continued to focus on the agency model that let hotels set their own prices and collect payments from the guests themselves. Because the agency model is easier to implement logistically, Booking.com was able to add massive amounts of inventory via direct agreements with individual hotel properties and chains.

In the chart below, we can see the split between agency and merchant revenue for Priceline as a whole. With Booking.com driving most of this revenue, it is representative of the unit.

The dramatic growth of Booking.com has led to agency revenue going from 45 percent of the split in 2010 to 80 percent in 2016.

Priceline’s largest competitor, Expedia, has historically operated under the merchant model, but growth in agency is surpassing merchant. The merchant share is still high at 67 percent, but it has been decreasing.

AGENCY MODEL FACILITATES INVENTORY GROWTH

Over the past decade, Booking.com’s inventory growth has been remarkable. Hotel inventory has gone from 70,000 in 2008 to 547,000 in 2016. On top of this, Booking.com started pushing more into vacation rentals over the past five years. The first disclosed annual inventory was 110,000 in 2013. At the end of 2016, that was up five-fold to 568,000.

As of Q2’2017, there were 1,340,000 properties on Booking.com with 721,000 vacation rentals and 619,000 hotels — compared to Expedia brands, which total 435,000 hotels.


Source: Company Filings


Source: Company Filings

HOTEL FOCUS BOOSTS MARGINS

We have discussed the various nuances of OTA commission rates in past reports (i.e. 2017 Outlook on Direct Booking, 2017 Outlook on Metasearch), so we will not go into great detail here. The key point that we want to reinforce is that hotel commission rates are in the 10 to 15 percent range for the large chains and 15 to 25 percent for smaller brands that make up the bulk of Booking.com’s inventory. This compares to airline commission rates that are anywhere from zero to one or two percent in most developed markets. The rationale for the airline inventory is having a complete product to drive traffic, but the margins on those bookings themselves are much lower than for hotels. Booking.com has recently added airlines, but this is simply pushing traffic into its Kayak platform (more on this later).

At the corporate level, Priceline has an operating margin that is in the low 30 percent range. Booking.com is likely in the 35 to 38 percent range as a unit.


Source: Skift Estimates

VACATION RENTALS

Prior to 2013, Priceline did not focus much on the vacation rental space. Once it became clear that this segment of accommodations would become more widely adopted, Priceline acted swiftly, disclosing 110,000 properties in 2013. In early 2014, the company launched Villas.com. Looking at a screenshot from January 2015, we can see that the portal had a very similar feeling to HomeAway and Airbnb.

Priceline continued to add to its inventory. We suspect that the brand awareness for Villas.com could not compete with HomeAway and Airbnb without spending aggressively to market the platform. In late 2016, Priceline pivoted, closing down the Villas.com site and placing all of the vacation rental inventory on Booking.com. Booking.com was already the most widely used lodging OTA on the planet with traffic that would dwarf Villas.com. Additionally, more and more customers are becoming agnostic between hotels and vacation rentals given equal quality and value. It is not the case that people do not want to stay at a hotel, but rather that vacation rentals are being considered in the equation far more than in the past for the average consumer.

From the Booking.com homepage, we click on vacation rentals and are taken to a platform that has the same feeling as Villas.com with the benefit of Booking.com branding.

Interestingly, and seemingly as part of Booking.com’s ongoing A/B testing, on July 25 we were shown a landing page with “BookingBnB” as one of the choices in the top black box.

Presumably, the company is testing out whether that gets more traffic than the existing vacation rentals tab below it.

100 Percent Instantly Bookable

While Expedia’s HomeAway and Airbnb were first to the market, giving the companies a jump on brand awareness and inventory, Priceline was able to create its platform with more visibility into the market at the start. As a result, Booking.com’s vacation rentals are entirely instantly bookable.

Why instant booking matters

Customers accustomed to booking hotels with the click of a button are less likely to try a vacation rental if it requires a lot of work (emails, phone calls, contracts signed and emailed/faxed, approval process, negotiations, etc.). By having inventory on the Booking.com platform and instantly bookable, Booking.com keeps users in the ecosystem.

When bookings start on a distribution site, but have offline components, a booking can “slip” where the booker and host agree to book offline and avoid paying fees to the platform. This is one of the reasons Expedia is pushing HomeAway toward the instantly bookable model. On Booking.com, there is no slippage; any booking that gets initiated on it gets filled and paid for there. There are of course fees, but it protects the consumer by having Booking.com behind the listing. For the hosts, they get the traffic from Booking.com and the incremental customer that was not a loyal vacation rental user.

The instant book model is also much more scalable, which is important for a $90 billion company like Priceline where it takes a lot to move the proverbial needle.

There are no registration or subscription fees, so the host does not risk listing properties without a financial return. Instead, there is only a commission on the booking like the OTA hotel model. The average commission according to Booking.com is 15 percent. Currently, the guest pays the host when they arrive at the property, but is “working on providing more options for accepting payments from guests, so there may be additional choices available…”

If the guest does not show up, the host does lose out on the booking, but would not be on the hook for the commission.

VACATION RENTAL INVENTORY COMPARISON

We believe looking solely at the latest data on online bookable listings rather than total listings gives an apples-to-apples comparison of Booking.com’s main competitors in the vacation rental space. Clearly, Booking.com is well behind Airbnb and HomeAway, for now. We expect the gap to close as hosts interested in offering instant booking on HomeAway and Airbnb are likely to also go with Booking.com as all three sites can be used for free with the only payment being on the commission, which is comparable across the sites. There are logistics of managing across platforms so inventory is not oversold. Some small users filling their rooms will simply leave things on one platform. In our metasearch report we discussed the opportunity for meta to play a bigger role in vacation rentals. Platforms like tripping.com have built the use case in the segment. The static inventory (i.e. those that list their properties on one site only) could be one case where meta plays a role in rentals. Priceline already has Kayak and to-date, the company has not expressed interest in the space. Nevertheless, we will continue to assess the business case for Priceline and what, if any, role metasearch technology could have in rentals.


Source: Company Filings and Commentary

Looking at total inventory, Airbnb has over four million listings and HomeAway has over two million. TripAdvisor via its FlipKey brand, among others, and an aggregated TripAdvisor Vacation Rentals site has 800,000 properties, but growth there has flattened.


Source: Company Filings and Commentary

Airbnb has traditionally dominated the city landscape among individual property owners while HomeAway led in vacation areas (beaches, mountains, etc.) and among professional owners. The lines have blurred a bit, but in general, it still holds true. We see Booking.com competing in both urban and vacation markets. An inventory mix skewed toward traditional vacation rentals could also reduce some of the regulatory headwinds that Airbnb continues to battle with. Traditional professionally managed rentals are typically legal and accepted as legitimate accommodations businesses, compared to rentals by owner in urban areas. While we don’t think that regulation will stop Priceline from pursuing the urban by-owner rental category, there could be additional upside with a larger stake in the professionally managed category.

FLIGHTS

Booking.com has been able to dominate the OTA industry without offering flights itself. However, the Booking.com site recently put a flights tab on it (an example of testing by Priceline). This is not the Expedia OTA flight model, but rather taking Kayak and essentially “white-labeling” it as part of Booking.com with the Booking.com brand at the top and powered by Kayak to the side.

Placing the flights offering without building an OTA for it should help Booking.com capture more consumers at the earlier stages of search (people tend to book flights before the hotel). Without Priceline owning the meta (Kayak), Booking.com would not be in a position to plug and play into Kayak’s airline capabilities like it has done. The flight offering will likely generate incremental traffic to Kayak but accommodations will clearly remain core to Priceline’s overall longer-term strategy.

CORPORATE TRAVEL

Priceline entered the corporate travel market in 2015 via its Booking.com for Business platform. It has not attempted to become a full-service corporate travel manager like Expedia’s Egencia or the large legacy firms (Carlson Wagonlit Travel, BCD Travel, American Express Global Business Travel, and HRG North America), nor do we expect it to.

Instead, Booking.com has created what amounts to a modified version of the traditional Booking.com platform as it found that 20 percent of bookings were done for corporate travel. Booking.com is targeting small businesses without a managed travel service provider and focusing on lodging.

A user can easily sign up for free and automatically start to receive what Priceline calls “genius” rates, which leads to a 10 percent discount on various hotels. The search engine adds basic reporting functions to track travel spend to go along with discounted rates.

CHINA

Priceline is pushing into the China market with a multi-pronged approach. For inbound travel, its Booking.com brand brings visitors from the U.S. and Europe while Agoda is strong in Asia (excluding China). For outbound and domestic travel, Booking.com and Ctrip have a deep partnership where there is both inventory sharing between Booking.com and Ctrip and a large investment by Priceline in Ctrip.

CTRIP PARTNERSHIP

We discussed the Priceline-Ctrip partnership in our Ctrip report, but as a reminder, rather than moving aggressively and directly into China, Priceline took a more pragmatic approach and partnered with Ctrip. Many of the relationship terms are private, but the most important thing to know is that Booking.com provides international inventory to Ctrip and brings the outbound Chinese guest to Booking.com. Ctrip benefits from Booking.com’s global and massive inventory while Booking.com gets the localized expertise and client base of Ctrip. This partnership should prove lucrative for both sides. Anywhere between 60 and 80 percent of Ctrip’s non-China hotel inventory comes from Booking.com. Clearly, the partnership is mutually beneficial to Booking.com’s major hotel partners that gain access to China’s growing outbound travel market. This value-add gives Priceline more negotiating power when it comes to negotiating commission rates with the chains.

Priceline holds slightly more than four percent of Ctrip’s equity. When adding in its convertible debt stake, that stake hits nine percent. The current agreement allows Priceline to own up to 15 percent of Ctrip. For part of the debt, the conversion price is quite high, implying no conversion unless a very large increase in the share price (possible over time) or an acquisition by Priceline at a premium.

We expect a partnership to continue rather than Priceline outright acquiring Ctrip, especially with Baidu also owning 20 percent of Ctrip.


Source: Company Filings, Skift Estimates

KAYAK

Headquartered in Stamford, Connecticut in the U.S., Kayak operates 40 international sites in 20 languages, processing 1.5 billion queries offering air, hotel, cars, packages, cruises, activities, trains, and vacation rentals. The company primarily operates under a traditional metasearch CPC model (cost-per-click), but also does some CPA on meta and via facilitated booking, display advertising, and to a lesser extent, instant booking.

Kayak has been a leader in the U.S. market and is growing internationally. Priceline has taken a different approach with Kayak than Expedia has with Trivago as Priceline is not investing as heavily in advertising to fund revenue growth. Instead, Kayak has had a slower revenue trajectory with far more profits.

FINANCIALS

Priceline acquired Kayak in 2013 for $2.1 billion (around seven times 2012 revenue and six times 2013 estimated revenue).

REVENUE

At the time, Kayak was focused on the U.S. market with 79 percent of its revenue coming domestically. Airlines were a major source of traffic accounting for 85 percent of travel queries. That being said, with airline bookings being so much 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. The Momondo acquisition and the more recent Brazilian meta brand Mundi acquisition also suggests that Priceline may not be pursuing a unified global brand strategy with Kayak. While speculative, the Kayak brand has struggled to gain traction in Europe.

We see domestic revenue as being in the 60 to 70 percent range of total revenue for Kayak.

Since being acquired by Priceline, the details on Kayak’s financials have been limited.

We know or can approximate the following:

    1. Kayak is included in Priceline’s advertising revenue, which was $713 million in 2017.
    2. Prior to being acquired by Priceline, Kayak generated $293 million in revenue in 2012.
    3. In 2013, OpenTable generated $190 million of revenue before being acquired by Priceline.
    4. Given the write-down at OpenTable, we can assume that revenue growth there has slowed from 18 percent in 2013. Assuming a five percent drop in the growth rate each year would take 2016 OpenTable revenue to approximately $240 million or 27 percent of Priceline’s advertising revenue.
    5. Other advertising revenue includes display advertising and the Booking.com booking suite branded accommodation marketing and business analytics. These should be quite small; we assume five percent of segment revenue.
    6. Removing OpenTable and other revenue, we can estimate that Kayak accounts for just under 70 percent of advertising revenue or $535 million. Looking at historical revenue, this implies a 17 percent compound annual growth rate since the acquisition, which seems reasonable to us.

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Prior to being acquired, Kayak’s 2012 10-K 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 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 a comparable 25 percent to what Expedia did when Kayak was independent.

EBITDA MARGIN

If we assume that similar to the company as a whole, Kayak spends 32 percent of revenue on digital ad spend and 25 percent of costs otherwise (ex the OpenTable write-off), we would arrive at a 43 percent EBITDA margin. Next, we deduct likely additional brand awareness campaigns. Trivago’s combined ad spend is over 83 percent of revenue. If we assume both Trivago and Kayak spend 32 percent of revenue on digital, but Kayak spends one third as much as Trivago on other advertising (18 percent versus 53 percent), we arrive at a 25 percent EBITDA margin.

In 2012 and 2011, Kayak’s 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 to 20 percent plus per year range, the implied year/year growth trend from our estimates. Trivago’s margin is around 25 percent in mature markets, which serves as another comparison point.

MOMONDO ACQUISITION

Priceline acquired the Momondo Group on February 7, 2017 for $550 million.

MOMONDO GROUP OVERVIEW

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 flights, hotels, and car rentals. Like other metasearch sites, the flight and hotel results tend to skew toward online travel sites rather than to the brand.com sites directly given the better technology, and oftentimes pricing, the OTAs provide. Additionally, there are unique features seeking to influence travel earlier in the trip planning process.

Tripfinder lets the user choose criteria 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, and the ultimate guide to Whistler-Blackcomb ski resorts, where the reader can book flight and hotel directly within the story. Again, Momondo is looking to be a part of 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 over 175 million times.

Founded in 2003, Cheapflights focuses on English-speaking markets with the U.S. being its largest. Similar to the Momondo site, the results skew toward 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 accelerated growth with English speakers from Asia, the Middle East, and the Pacific.

Late in 2016, we discussed the Momondo group at length with then-CEO Hugo Burge and Managing Director Pia Vemmelund. Since the close of the deal, Hugo Burge has left the company as Kayak CEO Steve Hafner will oversee all meta for Priceline. Below is the conversation we had with Momondo at the time, which offers insight into the unit that Priceline acquired.

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 Burge: 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 U.S. 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?

Burge: 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?

Burge: 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?

Burge: We see mobile as an opportunity and rapid adoption as a chance for U.S. in international expansion especially.

Skift: What is the breakdown of Momondo versus Cheapflights on revenue?

Burge: 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 Vemmelund: 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.

Burge: 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?

Vemmelund: 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 percent revenue growth. Is profitability this year still going to be on the negative side with all the investments?

Burge: 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 percent 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 percent), remembering that only 10 percent 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?

Burge: 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 toward 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?

Burge: We love working with both…

Vemmelund: 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.

Burge: 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 U.S. 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.

Vemmelund: There are some airlines who are really doing well, but I agree with Hugo Burge 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?

Burge: 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?

Burge: 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?

Burge: 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?

Burge: 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?

Burge: 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?

Burge: It’s important you ask that.

Vemmelund: 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 U.S. 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.

Burge: 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 percent 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.

FINANCIAL AND STRATEGIC IMPACT OF MOMONDO

Unlike when Ctrip acquired Skyscanner, which was already quite profitable, Priceline buying Momondo was a much different type of acquisition. In 2016, the Momondo Group generated 90 million pounds in revenue with a 45 percent growth rate. However, it spent heavily on marketing and technology to grow, leading to a negative 9.6 percent operating margin. The pound has been volatile, but using the 2016 year-end rate of 1.23, revenue in USD would have been $111 million.

This means that Priceline purchased the Momondo Group for just under five times 2016 revenue. Looking at 2017, assuming a growth rate somewhere between the 45 percent in 2016 and 20 percent, the forward multiple would have been in the 3.5 to 4.0x range. These multiples are much lower than the 6 to 8x range we have seen in the industry. After the OpenTable write-down, Priceline is clearly being patient on acquisitions and that paid off with a premium brand at a discount price.


Source: Company Filings, Skift Estimates

Constant currency at 1.23x.


Source: Company Filings, Skift Estimates

The next chart looks at the financial impact to our Kayak estimates. Momondo would account for 17 percent of Kayak’s 2016 revenue. The negative EBITDA margin would drag down Kayak’s margin from roughly 25 to 20 percent in the short-term. We would expect revenue growth at Momondo to slow from its rapid 45 percent pace, but see margins moving up to the Kayak levels as cost and revenue synergies are realized over time. The first step is likely moving Momondo and CheapFlights onto Kayak’s technology platform.


Source: Company Filings, Skift Estimates

Far more important than the near-term financial impact is the longer-term strategic one.

Kayak was already fairly strong in France and Spain, and in Germany through its Swoodoo brand and Austria via its Checkfelix brand. The Momondo Group will help Kayak in the important UK market, where it has not made much progress breaking through against Skyscanner, which is headquartered in Scotland. It will also help in the Nordics, where Momondo is dominant, and in Russia, where the Danish metasearch brand has a significant presence.

Adding scale to Kayak enables Priceline to control a larger distribution/marketing channel and keeps the valuable Momondo brand out of the hands of a rival.

WHY META MATTERS TO PRICELINE

The three largest OTAs own, or have large stakes in, leading metasearch companies. Priceline has Kayak (along with Momondo), Expedia has its Trivago stake, and Ctrip owns Skyscanner.

META CONTINUES TO GROW IN IMPORTANCE FOR HOTELS

In our 2017 Outlook on Direct Booking Report, we found that 57 percent of independent hotels and 62 percent of branded ones saw meta increasing its share of the distribution mix over the next two years. Close to zero percent of the respondents saw meta decreasing.

Within our survey, we found that the ideal meta percentage of distribution was around 11 percent versus it being three to five percent now on average. Whether meta becomes that large remains to be seen, but the intent is clear and meta is likely to outpace pure OTA growth (as an industry). Booking.com continues to have outsized growth as it adds U.S. share and moves into new markets, but based on the business model, meta revenue growth should outpace that of the pure OTAs.

Many hotels view meta as a marketing channel rather than one of distribution, since traditional meta pushes traffic to the brand.com site (assuming the OTA does not “win” the meta click for the same property). The instant booking model differs with the booking on the meta, but even there, the hotel owns the customer data. With hotels pushing for more meta exposure, it is in Priceline’s best interest to own a leading meta platform to complement its Booking.com OTA behemoth.

WHY NOT PAY YOURSELF INSTEAD OF THE COMPETITION?

While much of the OTAs’ massive ad budgets primarily goes to Google, meta is the second most important marketing channel for them. Priceline does not disclose the exact revenue Kayak generates from different OTAs, but Trivago has disclosed that Expedia accounted for 36 percent of revenue in 2016 and Priceline accounted for 43 percent (79 percent total).

Priceline and Expedia account for 46 percent of TripAdvisor’s revenue.

For Kayak, we assume 40 percent of revenue comes from Priceline and Expedia. This is slightly higher than the pre-Priceline acquisition percent; we expect that Priceline increased spend there while Expedia decreased as a percentage.

Combined, we estimate that Priceline and Expedia spent close to $1.5 billion of their $5.8 billion (26 percent) digital ad budgets on the leading meta sites (Kayak, TripAdvisor, Trivago) with the remainder going to Google Ad Words (traditional search ad spend), Google Hotel Ads (meta), and other digital channels (smaller metas, Facebook, display, etc.).

By owning Kayak, Priceline neutralizes around $100 million in spending. By this, we mean that if Booking.com spends $100 million on Kayak, the net result to the parent (Priceline) is neutral. Additionally, while Booking.com and Kayak are independent, we expect that there is some knowledge sharing on best practices. Even simply bidding on Kayak and knowing how to optimize results helps Priceline as a whole when Booking.com bids on other meta platforms.


Source: Company Filings, Skift Estimates

The other subtle part is that with Expedia’s stake in Trivago and Priceline’s full ownership of Kayak and both Priceline and Expedia having massive share of meta spend, costs should be very reasonable on an effective CPC basis for the OTAs. If large hotels pay 10 to 15 percent in CPA-type effective CPC costs, the OTAs are very likely in the sub-10 percent range.

Kayak VALUATION

Based on our revenue estimate (including Momondo) and Kayak’s profitable growth path, we see six to seven times forward revenue as a reasonable valuation metric. This would value Kayak as a stand-alone business at somewhere between $4.5 and $5.2 billion ignoring the intrinsic value of owning the ad spend that would have gone to an external key marketing and distribution channel. Assuming zero perpetual growth, $100 million in ad spend, and a 10 percent discount rate, we can add another $1 billion in value for Priceline’s ad spend going to itself rather than a third party meta.

For comparison, Trivago and TripAdvisor are both worth around $5 billion.

We firmly believe that the Kayak acquisition was highly successful both strategically and financially.

OPENTABLE

While we believe Kayak has more than doubled its value for Priceline and become a crucial strategic piece of the portfolio, OpenTable is a much different story.

Priceline acquired San Francisco, California-based OpenTable in 2014 for $2.6 billion. The growth path has likely slowed some given the write-down, but even if we assume 20 percent revenue growth for 2014 and 2015, the purchase price would have represented over 11 times 2014 revenue and 9.5 times 2015.

If revenue growth was more in the 12 percent and seven percent range for 2014 and 2015, the multiple would have been 12x and 11x. On a trailing basis on actual 2013 numbers, the multiple was almost 14x.

In all cases, this was a case of Priceline paying a premium multiple for what it felt was a premium asset. We do not dispute the strategic sense of owning OpenTable, but clearly, given a $941 million write-down in November 2016, Priceline overpaid for OpenTable.

If we take the initial purchase price and reduce it by the write-down amount, the acquisition would have been in the 7x range, which in hindsight was a far more reasonable multiple to pay.


Source: Company Filings, Skift Estimates

THE WRITE-DOWN

We break down the various parts of the language from the filing in the write-down below and what it all means.

“OpenTable’s post-acquisition strategy was premised on significant and rapid investment in international expansion and various other growth initiatives, resulting in near-term reduced earnings and profit margins but with the goal of achieving significantly increased revenues and profitability in the long term.”

Skift Take: The initial plan was straightforward. Priceline would invest to push OpenTable more aggressively into new markets. Looking back at OpenTable’s historic filings, we can see that international growth was a challenge before the acquisition. While the number of diners grew meaningfully, converting that into profits was a headwind with international operating margin at negative 31 percent in 2013; this was a meaningful improvement from negative 55 percent in 2011. Despite trying to grow the international business and hurting profitability to do so, domestic revenue was consistently 85 percent plus of the mix.

While not disclosed, we estimate that OpenTable brought in roughly $240 million in revenue in 2016. Operating margin was likely in the 20 percent range, taking operating income to around $50 million. For Priceline as a whole, this is quite small, representing around two percent of revenue and one percent of operating income.


Source: Company Filings, Skift Estimates

“As this strategy was achieving limited progress, in the third quarter of 2016 OpenTable modified its strategy. As a result, while OpenTable intends to continue to pursue and invest in international expansion and its other growth initiatives, it intends to do so in a more measured and deliberate manner. This change in strategy resulted in OpenTable updating its forecasted financial results to reflect (a) a material reduction in forecasted long-term financial results from these initiatives, partially offset by (b) improved earnings and profit margins in the near term as a result of the reduced investments. As previously disclosed, based on the updated forecast, we estimated a significant reduction in the fair value of the OpenTable business and, for the quarter ended September 30, 2016, recognized a nondeductible goodwill impairment charge of $940.7 million.”

Skift Take: Priceline will be pulling back on spending in the international business and instead focusing on slower, profitable revenue growth. We believe that the unit complements Booking.com with it adding the restaurant tab to the Booking.com homepage. This feeds traffic to OpenTable given Booking.com’s massive scale. At the same time, it makes the product more complete for the Booking.com user.

BUSINESS MODEL

Prior to the acquisition, OpenTable generated 60 percent of its revenue from reservations, 33 percent from subscriptions, and seven percent elsewhere.

It has an Electronic Reservation Book, or ERB, where restaurants pay a one-time installation fee, a monthly subscription fee for the use of the software and hardware, and a fee for each seated guest that reserved through the system. There is also a purely online platform, Connect, where the restaurant simply pays per seated reservation booked through OpenTable.

In its 2013 10-K filing, OpenTable stated the following:

“We target our offerings to full-service restaurants that accept reservations. We believe based on our internal estimates that our ERB has a target audience of approximately 35,000 restaurants and Connect has a target audience of approximately 20,000 restaurants in North America. In 2013, we believe these restaurants seated approximately 740 million diners through reservations, though this number may fluctuate annually with economic and other conditions.”

Based on the number of diners and OpenTable’s results, it would have penetrated around 20 percent of its domestic target market. If this estimate by OpenTable is reasonably accurate, the decision to pull back from international expansion and focus on the U.S. market could still leave OpenTable with steady and profitable growth ahead. Again, it is not a case of a bad business, but simply paying too much for an asset.

AGODA

Agoda is an online travel agency focused on lodging in the Asia-Pacific region. The unit was founded in 2005 and acquired by Priceline in 2007. The co-founder of Agoda, Robert Rosenstein, remains CEO of the unit.

It primarily operates under the merchant model with headquarters in Singapore. It has “hundreds of thousands” of hotels on its site and gives instant confirmation of booking. The site has over 10 million verified hotel reviews. Similar to Booking.com, it uses flights by pushing the traffic to Kayak.

THE ACQUISITION AND FINANCIAL ESTIMATES

In November 2007, Priceline acquired Agoda for $16 million in cash and up to an additional $141.6 million if Agoda achieved certain targets. Given the success of the company and growth in Asia, we believe it is likely Priceline paid the entire amount. In its 2008 filings, Priceline notes that Agoda accounted for around one percent of total revenue or $14 million. That would suggest the multiple paid by Priceline was around 10x revenue.

While little is disclosed today, we can estimate how much revenue Agoda likely contributes to Priceline. If we assume Agoda grew at the same rate as Priceline as a whole, Agoda would have generated $81 million in 2016. Given its early and rapid growth phase at the time of purchase, it is more likely that growth was two to three times that of the parent. This would make revenue likely in the $150 to $250 million range, accounting for three percent of parent revenue. While the absolute contribution to Priceline is small, Agoda is certainly an attractive asset in the Asia-Pacific region.


Source: Skift Estimates

PRICELINE.COM

Priceline.com focuses primarily on the U.S. consumer and is headquartered in Norwalk, Connecticut, offering both the traditional OTA model and an opaque one where information is withheld prior to booking a discounted rate. Despite Priceline.com being the namesake of the Priceline Group, we estimate that Priceline.com is actually quite small in its contribution to the company compared to Booking.com; the company’s name was changed from Priceline.com to the Priceline Group on April 1, 2014.

MERCHANT MODEL

Priceline.com became known for its “Name Your Own Price” feature, where customers could bid at steeply discounted rates for airlines, hotels, and cars, but without knowing the actual provider until after the booking. The iconic ads with William Shatner made Priceline a household name in the U.S. for the average consumer. However, as more consumers used mobile devices to book, the opaque booking method became outdated. In September 2016, Priceline killed name-your-own-price for airlines. It’s likely that hotels and cars will be next.

There are still opaque booking options where the supplier is not known until the booking is complete, but a steep discount can be found. The suppliers let Priceline do this to sell unused inventory. By keeping the name of the hotel or airline a secret until booking, the consumer cannot game the suppliers; if he knows the supplier beforehand, the consumer would push to book on Priceline.com where the supplier would not only have a reduced rate, but also pay the OTA fee.

OPAQUE MODEL IN DECLINE

The company has been transparent that the opaque model of not knowing elements of the trip before booking is in secular decline. In its 2016 annual filing for example, the company notes:

“In general, we expect that over time our opaque services will continue to decrease in relative importance to our overall business due, we believe, to a variety of factors, including the growth rates of our retail businesses, competition, relative complexity, travel restrictions often required by the travel service provider, difficulty in offering these services on mobile devices, increased discounts available to consumers through closed user groups, and limited availability of discounted travel reservations from travel service providers, particularly during periods of high consumer demand.”

Taking apart a few of the key comments gives insight into what has happened here and how the company focusing on Booking.com was a smart move.

…the growth rates of our retail businesses…

In more simple terms, Booking.com and other units have grown much faster than Priceline.com.

…competition…

Expedia’s U.S. brands have taken U.S. share over the past decade.

… relative complexity…

For the consumer, bidding on travel plans without knowing the provider and then not even knowing if the bid will win makes the process complicated and time-consuming. Some people love the ability to find lower prices this way, while many others find it not worth the trouble and simply go to other sites to book quickly. Mobile has made this complexity more burdensome with smaller screens and shorter attention spans.

… travel restrictions often required by the travel service provider…

Hotels and airlines do not give full inventory here and as occupancy increases, they will give less.

ESTIMATED FINANCIALS

Priceline.com revenue is not directly disclosed, but we provide our estimate below.

METHOD 1: COUNTRY ESTIMATES

Priceline counts Booking.com revenue as the Netherlands regardless of where the consumer and travel may be. We discussed that in the Booking.com section, but the point here is that even though the country disclosures are not directly useful for true country exposure, it does help us estimate other items.

We start with $1.7 billion for disclosed U.S. revenue. We then strip out our U.S. Kayak revenue estimate of $348 million ($535 million total with 65 percent from the U.S.). After that, we subtract $203 million for OpenTable where we assume 85 percent share of its revenue is from the U.S.; like Kayak, OpenTable revenue is not disclosed and is solely Skift’s estimate. While Booking.com functionally has U.S. revenue, it is not classified as such in the financials so we leave it out.

The result is $1.1 billion in Priceline.com revenue.

METHOD 2: MERCHANT ESTIMATES

Next, we start with the total disclosed merchant revenue. Not all of Priceline.com revenue is merchant based, but we believe a majority is. Subtracting our estimates for Agoda, Rentalcars.com and our assumption that 12 percent of Booking.com’s revenue is merchant based, we get to $809 million for Priceline.com.

As a check on this number, we go back to the 2003 filing before Priceline owned Booking.com. Revenue at the time was $870 million. If we take the growth rates for merchant revenue from that point, we get to $2.1 billion. Stripping out Agoda, Rentalcars.com, and our Booking.com estimate, we get to $900 million.

Averaging Method 1 and Method 2 gets us to just under $1 billion, making Priceline.com account for nine percent of the company’s revenue.

However, this would be gross revenue for Priceline.com versus net for the others, meaning the economic impact is much lower than 10 percent for Priceline.com.

Gross profit is likely in the two to five percent range of the company total.


Source: Skift Estimates

RENTALCARS.COM

Priceline acquired a majority stake in TravelJigsaw LTD, which became Rentalcars.com, in May 2010 for an undisclosed amount; the company was founded in 2004. Priceline then exercised options to redeem its non-controlling stake starting in April 2012, taking it down from 19 percent to 12 percent. The following April, Priceline bought the remaining position, taking full ownership.

At the time of the 2010 acquisition, Rentalcars.com had 4,000 locations in 80 countries in North America, South & Central America, Europe, Asia, Australia, the Caribbean, Africa and the Middle East with consumer support in 20 languages. Under Priceline, these numbers have grown exponentially. Today, it has 8.5 million rentals, 43,000 locations in 160 countries, and support in 45 languages. The unit remains headquartered in Manchester, England.

STRATEGIC ASSET

Similar to how clicking on flights on Booking.com takes a user to a Booking.com powered by Kayak portal, clicking on rental cars brings one to a similar interface for Rentalcars.com. The difference here is that even the direct website of Rentalcars.com has the Booking.com logo prominently on it; Kayak does not do this given its own powerful meta brand.

We do not believe that the car rental business by itself is a large driver of financial results for Priceline. Instead, it is a case of making Booking.com a more complete product and keeping users in the ecosystem. The more time someone spends on Booking.com, the more likely it is that a “looker” converts to a “booker.” Additionally, making the platform more complete keeps users engaged and loyal to the brand.

Given Booking.com’s massive global inventory and best-in-class app, incremental offerings increase its competitive moat versus smaller peers. Outside of the U.S., the car business is just another part of the equation helping Booking.com dominate. In the U.S., consumers are accustomed to Expedia’s full suite of products. Having cars, flights (even if flight is just linked to meta), and restaurants to complement the key lodging piece, helps Booking.com in its push to take share in the U.S. market.

FINANCIAL ESTIMATES

There is even less information on Rentalcars.com financials than other units. We know it is primarily under the merchant model. The unit’s career section discloses 8.5 million rentals. We then assume an average of $50 per day and two days per rental arriving at a very rough estimate of $850 million in gross bookings. The commission rate for rental car OTAs is likely in the five to 10 percent range, well above airlines but below hotels.

Using the midpoint of 7.5 percent would get us to just under $64 million in revenue while 10 percent would imply $85 million. In both cases, this amount to slightly less than one percent of Priceline’s total revenue.


Source: Skift Estimates

COMPANY FINANCIALS

The growth in revenue and operating income for Priceline over the past decade is nothing short of spectacular. We will dig into the company financials on a more granular basis, but the chart below gives a very high-level view of the growth path.


Source: Company Filings

The obvious takeaway is that revenue, operating income, and free cash flow have seen massive increases after the Booking.com acquisition.

A subtle point is that advertising expense has ballooned from $146 million to $3.8 billion. This advertising cost, most of which is digital, and now focused on Google, has been a headwind by itself, but has led to Priceline taking share of a rapidly growing industry. As things have matured, Priceline’s and Expedia’s ad budgets act as a drag on margin, but that is counteracted by the associated revenue growth and operating leverage in other cost line-items where costs are more fixed versus variable in nature (growth of the expense is less than that of revenue). More importantly, the ad spend makes Priceline (along with Expedia) dominate Google search results (and meta).

REVENUE

Building out a global inventory of close to 550,000 hotels and 570,000 vacation rentals is extremely difficult from a technology perspective along with the associated staffing needed for customer service. The search and booking process for the consumer needs to be seamless where the inventory is complete and updated and the platform (app and site) is easy to use. Additionally, brand loyalty is incredibly difficult in travel distribution. Priceline spends nearly $4 billion to bring web traffic to its platform.


Source: Company Filings, Skift Estimates

GROSS BOOKINGS

Gross booking data has some swings due to currency, but broadly speaking Priceline experienced rapid growth in the first half of the decade. At its current scale, that pace is simply not possible anymore. Instead, a steady 15 to 20 percent pace is sustainable and still quite strong.

ROOM NIGHTS AND IMPLIED DAILY RATE

Room night growth has far exceeded that of gross bookings. At the same time, the implied average daily room rate (gross bookings divided by room nights) has declined nearly 20 percent in the past two years. A large part of this is Priceline’s growth in Asia and other emerging markets where room prices tend to be lower than in Europe and the U.S. These markets are underpenetrated and an important growth driver, but will continue to weigh on the average daily room rate.

IMPLIED TAKE RATE COMPRESSION

After stripping out advertising revenue, primarily Kayak, we can take OTA estimated revenue and divide that by gross bookings to estimate what the take rate would be (what percent of the booking does Priceline convert to revenue). Broadly speaking, this metric has declined over time. We believe there are several factors at play.

The first is the large hotel chains have consolidated and pushed for better terms on their commission rates. This would not be a big direct factor as only mid-single digit share of Booking.com’s bookings are likely from the mega chains, but it would have an impact.

The second drag is increased competition. TripAdvisor, for example, launching instant booking with a 10 to 15 percent commission rate, Google pushing into metasearch, and alternative lodgings having around 15 percent commissions would all push down what hotels are willing to spend for a booking.

The third factor is the move into emerging markets. China, for example, has lower commission rates in the 10 to 15 percent range. Booking.com will not win much hotel business charging 25 to 30 percent rates when a local player charges 10 percent.

The final part of the story is likely offense. As Priceline looks to add smaller hotels around the globe, we can see a gradual decline in overall commission take. In isolation, this reduces profit per booking. However, as total revenue grows, fixed costs elsewhere are spread among more revenue, making a “less profitable” booking still potentially add to company margins; things like salary, infrastructure, and other non-variable costs would account for a lower percent of revenue over time. Priceline can honestly tell its hotel clients that it’s working to lower costs for them by letting them share in Priceline’s scale benefits.

STRONG REVENUE GROWTH TO CONTINUE

We see annual revenue growth in the 15 percent range into the end of the decade with the volume of bookings growing above 20 percent, the value of those bookings at a 16 to 20 percent range, and the daily room rate and implied take rate continuing to slowly decline. We note that the scale of decline for the take rate should be quite small unless emerging markets growth (including China) accelerates meaningfully. The net result would be very positive for the company if that occurs, but the impact is worth noting.

SEASONALITY

Over the long term, the timing of revenue versus spend within a calendar year means very little. However, it does impact reported quarterly results so it is worth discussing briefly.

Priceline pushes advertising more heavily in the first quarter of the year to drive gross bookings during the planning season for many consumers. The ad spend is incurred then, but since revenue is not recognized on the booking, but rather on the stay, the first quarter experiences have lower profitability and higher spend than the second and third quarters, where more travel occurs and revenue is recognized. This lagged result can make margin swing from quarter to quarter, but does not change the annual path.

In any period of very strong booking growth, margin will come down along with profitability until the revenue is recognized. Under steady growth, there is a less noticeable lag effect as older bookings have revenue realized in the quarter where the new booking weighs on margin.

The summer travel season is the strongest part of the year for revenue.

OPERATING MARGIN

Operating margin jumped 1,000 basis points from 2010 to 2012, going from 25.5 percent to 35.5 percent. Since that time, it has hovered around 35 percent as online advertising expense continues to grow faster than revenue.

PRICELINE.COM ACCOUNTING TREATMENT AND THE IMPACT ON GROSS MARGIN

Unlike the rest of the company’s business, both Name Your Own Price and Express Deals count as opaque and are recorded on a gross revenue basis. This means when a sale takes place here, a contra cost of revenue line item is added.

Example:

$100 booking, $15 commission

In most cases, there is no cost of revenue line. The commission of $15 simply goes into revenue.

Under the opaque Priceline.com legacy model, the reported gross sale would be $100 and the cost of that sale $85. The net result is the same to the bottom line.

Because Priceline.com has been dwarfed by Booking.com, gross margin has jumped from 61.9 percent in 2010 to 96.0 percent in 2016. We provide cost items as a percentage of sales as well since that is a common metric, but the more important value is percentage of gross profit as this effectively removes the accounting impact of gross versus net revenue. Under that metric, most line items have been steady with the exception of online advertising, which has gone from 28.9 percent to 33.7 percent of gross profit. With our estimates putting Priceline.com at under 10 percent of reported revenue, the current cost items as a percent of gross profit and revenue are comparable. However, the further back in time we go, the more the picture is distorted by the accounting treatment. Again, the impact to operating margin is neutral, but using percentage of gross profit gives a more accurate portrayal of the impact of ad spend on margins over time.


Source: Company Filings and Skift Estimates


Source: Company Filings and Skift Estimates

The next two charts compare the year/year growth rates of revenue, profit, and costs. The first one is simply the rates and the second is the difference in growth between sales and expenses (a negative number means the expense grew faster than revenue). For the past seven years, online advertising expense has grown faster than revenue.


Source: Company Filings and Skift Estimates


Source: Company Filings and Skift Estimates

MARGIN OUTLOOK

Looking ahead, we expect modest margin pressure from ad spend without the benefit of gross margin expansion; we are at 96 percent now, so four percent is the absolute max margin bump from cost of sales going away as a line-item (and likely to occur as the opaque model for Priceline.com is phased out over time).

Ad spend growth should be in the 20 to 25 percent range while revenue growth will likely be around 15 percent for the next several years. Other line items like personnel and G&A should have the reverse situation where they grow in the 10 percent range, leading to some counteracting margin expansion.

Overall, the net result should be operating margin in the low- to mid-30s.

GEOGRAPHICAL BREAKDOWN

Priceline’s geographic disclosure is not that useful to determine actual country exposure. It includes Booking.com as Netherlands regardless of the point of sale or destination. As a result, the filings show 72 percent of revenue from the Netherlands, 16 percent from the U.S. and 12 percent other. Clearly, 72 percent of revenue is not for travel to and from the Netherlands.

We utilize Hitwise data and Expedia’s filings to help better determine U.S. exposure.

HITWISE

Hitwise is a consumer insights platform that helps agencies and brands across all industries track website behavior, understand their audience and keep tabs on their competition. With a panel of eight million people, 20 million website visits and 500 million monthly searches, Hitwise gives marketers the unique insights they need to get ahead.

Hitwise provided Skift with U.S. hotel online booking market share data since the start of the year. This data was pulled during the months of January 2017 to July 2017 using Hitwise Competitive Intelligence, and measures the share of visits to booking confirmation webpages among eight major online travel agency websites. Data is based on website visitation and mobile website visitation, and does not include in-app bookings or bulk corporate bookings completed through private servers. The Hitwise panel consists of eight million consumers, 20 million websites and 3.5 million mobile devices.

The first chart shows the shares of Priceline brands and Expedia brands. We note that Hitwise does not track smaller OTAs that do not have enough traffic volume to be statistically significant. With Expedia and Priceline likely controlling over 90 percent of the OTA market, the data gives a clear picture of market share of the brand-agnostic user. The loyal app user booking on a Booking.com app would not be counted, but it is likely each brand has a share of loyal app users comparable to the share of website bookers.

Over the past year, Priceline has gained share in the U.S. as Booking.com went from 29 percent to 31 percent and Priceline.com from eight percent to close to 11 percent. The biggest source of share shift was from Hotels.com at 300 basis points.


Source: Hitwise

At the parent level, Priceline showed a 42 percent share versus Expedia at 58 percent. If we assume there is another five percent of uncounted brands, Priceline would be at 40 percent and Expedia at 55 percent.


Source: Hitwise

U.S. OTA HOTEL REVENUE ESTIMATE

We can use Expedia’s financial disclosures combined with Hitwise market share estimates to back into Priceline’s U.S. OTA hotel bookings and revenue.

      1. Expedia generated $8.4 billion in revenue in 2016
      2. 61 percent of this was attributed to the U.S. or $5.2 billion
      3. 64 percent of total gross bookings were in the U.S. or $46.4 billion
      4. Assuming an average 15 percent take rate on $5.2 billion in hotel bookings implies $34.4 billion in Expedia U.S. hotel bookings
      5. Using January market share from Hitwise and normalizing for five percent of bookings not on Expedia or Priceline brands, U.S. total hotel bookings would be $57.5 billion
      6. Priceline’s U.S. bookings would come to $20.3 billion or 31 percent of its total
      7. Assuming a 15 percent take rate, U.S. OTA revenue for Priceline would be $3 billion or 28 percent of total revenue


Source: Hitwise, Company Filings, Skift Estimates

PEER ANALYSIS

We have written about Priceline’s key competitors at length via our Expedia, Ctrip, TripAdvisor, and metasearch reports over the past year. In the chart below we show some of the most important metrics when comparing the big three OTAs and the smaller pure meta players. The most glaring difference is the massive size of Priceline at approximately a $90 billion market cap. The consistency of Priceline has been remarkable and the company continues to generate mid-teens revenue growth with a high EBITDA margin.


Source: Company Filings, Skift Estimates

PRICELINE VS. EXPEDIA

Priceline dwarfs its largest U.S. competitor, Expedia, at four times its market cap. On the surface, one could wonder why with comparable revenue and Expedia having more gross bookings, why Priceline would be so much bigger than Expedia. The answer is fairly straightforward: profitability.

Airline bookings accounted for nine percent of Expedia’s 2016 revenue. If we assume a one percent take rate on those bookings (some more, some at zero), airlines could count for as much as $9 billion of Expedia’s gross bookings. The margin differential here would be quite large versus hotel bookings and is a key reason that the Core Expedia OTA EBITDA margin is at 27.8 percent versus 38.7 percent for Priceline; Expedia’s company margin is 18.4 percent with the drag from its stake in Trivago and Egencia being at 17.5 percent and HomeAway at 25.4 percent.

U.S. SHARE DATA VS. HOTELS HITWISE

OTA AD SPEND REMAINS A HEADWIND


Source: Company Filings, Skift Estimates

Over the past few years, advertising spend, which is driven by digital ad spend (primarily on Google), has been a headwind for online travel agencies in the U.S. and Europe.

Consolidation of OTAs by Expedia and Booking.com’s continued growth and domination of the European market has made competing with Priceline and Expedia extremely difficult.

Customers have brand affinity to the extent they know a website is trustworthy and gives the best prices. However, among the five big travel brands plus Google, most customers are indifferent to where they wind up booking a trip. Brand advertising on television and through display ads helps to some extent with the OTAs, but the predominant spend is on search engine marketing (Google), metasearch, and a small but growing amount on Facebook and its Instagram platform.

MARGIN PRESSURE

The pace of advertising spending has continued to exceed organic revenue growth for both Priceline and Expedia, creating a continued margin headwind. Both companies are pushing more to diversify ad spend away from Google, but the reality is that search engine marketing is necessary to capture traffic. Google’s 20 percent plus revenue growth has persisted and we see the battle for market share among travel companies driving OTA digital spend growth at well over 20 percent per year for the foreseeable future.

THE SILVER LINING

While both Priceline and Expedia would prefer to spend less on digital advertising, the subtle positive is that it creates a massive barrier to entry for competing OTAs. Priceline’s and Expedia’s scale have allowed the companies to spread fixed operational costs over a larger revenue basis, helping to minimize total margin compression. Smaller distribution platforms would not be able to do this and attempt to compete with the top players. This is why running a search on Google for “hotels in NYC” or any other major destination constantly returns some combination of Expedia- and Priceline-owned OTAs and metas along with independents (TripAdvisor) or pseudo-independents (Trivago).

Not even the largest hotel brands pushing direct campaigns can match the budgets of the OTAs and the smaller independent ones have a fraction of the spend.

TOTAL MARKETING COST

Total marketing cost includes operational expenses and is not necessarily an apples-to-apples comparison as personnel and other costs could show up in different line-items. That being said, it is worth showing that these expenses are by far the largest costs for online travel agencies.

ADVERTISING EXPENSE

Priceline provides performance ad spend and brand ad spend in its filings, which had been classified as online and offline until recently. Expedia discloses ad spend in the footnotes to its financials, which is a reason this metric tends to get overstated sometimes, where some cite the entire marketing bucket that is more prominently displayed in the income statement. There is nothing misleading here, but simply a less straightforward way of showing a partial cost item.

For Priceline, it spent $3.8 billion on advertising in 2016, which was a 25 percent year/year increase. As a percent of gross profit, total ad spend has grown from 31 percent in 2011 to 36.6 percent in 2016. The digital component has gone from 29.8 percent to 33.7 percent over the same period.

Expedia has had a similar trajectory with ad spend going from 29.7 percent of gross profit to 37.6 percent. Expedia does not disclose its digital versus non-digital spend trend, but we use 85 percent as an estimate as its brand marketing on Trivago would drive non-digital spend growth higher than Priceline’s. We estimate that digital spend has gone from 25.2 percent of gross profit to 32.0 percent.

In absolute terms, the dollar value of total ad spend is remarkable with Priceline going from $955 million in 2011 to $3.8 billion last year and Expedia jumping from $797 million to $2.7 billion.

Combined, Priceline and Expedia spent $6.5 billion on advertising in 2016 or 37 percent of combined gross profit.

CTRIP

Ctrip has surpassed Expedia in market cap, but has a long way to go to catch up with Priceline. Its margin is low at under 13 percent, but price rationalization following industry consolidation should take Ctrip’s EBITDA margin to a comparable level to Priceline over time. That margin improvement along with continued growth in domestic leisure travel, a booming outbound market, and the move from offline to online bookings position Ctrip to generate 20 percent plus revenue growth with meaningful margin expansion.


Source: Company Filings, Skift Estimates

Ad spend as a percent of gross profit has been lower for Ctrip than Priceline and Expedia; in 2016, Ctrip came in at 19.3 percent versus 37 percent for Priceline and Expedia. A key difference here is the nature of competition in China where Ctrip dominates online travel by itself versus the battle between Priceline and Expedia in other markets combined with meta bidding on search results.

Baidu has 76 percent of the China search market, which is a comparable market share to what Google has elsewhere in the world. Ctrip will still spend on Baidu via search engine marketing, but would not need to be as aggressive as its U.S.- and Europe-based counterparts are on Google. Ctrip also would spend more of its digital ad budget outside of search utilizing channels like WeChat.

Ctrip has guided to it reaching an adjusted operating margin of 20 to 30 percent in the next few years. While it seems like a stretch at first glance, it’s a very reasonable goal with both revenue growing faster than fixed costs and synergies from M&A taking effect. In Q1’17, operating margin has hit 15 percent already.

TRIPADVISOR

While TripAdvisor is not an OTA, it’s worth discussing its position given the importance to the online travel industry. The market cap has fallen to under $6 billion as EBITDA margin has declined and revenue growth stagnated as the company continues to roll out instant booking. Despite its struggles, the company still has close to a 24 percent EBITDA margin with nearly $1.5 billion in revenue. If revenue can return to 10 percent plus and margin stabilizes, we expect the value of the company to rebound.


Source: Company Filings, Skift Estimates

While TripAdvisor has tremendous brand recognition with roughly 400 million unique monthly users, it has had difficulty in monetizing this traffic as well as it did in the past. Its first pivot in 2013 to meta from non-transactional comparison click-based revenue was successful, and necessary. EBITDA margin came down as TripAdvisor ramped up ad spend to push its meta capabilities. However, margin was still quite high at 37.6 percent in 2014 with 31.9 percent revenue growth (44 percent ad growth).

As mobile became increasingly important for consumers, TripAdvisor looked to diversify its revenue stream away from traditional click-based meta into an OTA-like instant booking commission-based model where it expected that the promise of lower commissions and data ownership would make it an attractive platform for the suppliers and drive robust inventory, and subsequently, consumer usage.

Hotels tend to like bookings through TripAdvisor over OTAs. However, consumer adoption has been slower than anticipated and weighed on revenue and margins. In 2016, revenue actually declined slightly and EBITDA margin hit 23.8 percent, less than half the 2011 level. The ad spend line item has been well above revenue growth and unlike with Expedia and Priceline, TripAdvisor has not been able to reduce the effective costs elsewhere to minimize margin pressure.

TripAdvisor’s ad budget is well below that of Priceline’s and Expedia’s at $543 million versus $3.8 billion and $2.7 billion respectively. The OTAs not only outspent TripAdvisor on Google to win paid search traffic (TripAdvisor gets the vast majority of its search-related traffic organically), but also dominated meta spending on TripAdvisor itself, accounting for around half of TripAdvisor’s revenue. With Priceline and Expedia possessing huge scale and marketing/distribution expertise, we fully expect that its cost of acquisition on meta was far below what TripAdvisor would have gotten from a hotel on meta and much lower than the potential mid-teens instant booking rate.

WOULD PRICELINE ACQUIRE TRIPADVISOR?

After Expedia consolidating the U.S. OTA industry, most recently with Orbitz and Travelocity, and metasearch following suit with Priceline owning Kayak, which now also controls Momondo, Expedia owning Trivago (though it had a partial IPO), and Ctrip buying Skyscanner (as well as consolidating OTAs in China via Qunar and eLong stakes), TripAdvisor’s long-term future as an independent entity remains uncertain. When we say this, we do not mean that TripAdvisor could not succeed by itself over the long term. Instead, it’s more that consolidation has continued and with TripAdvisor’s latest struggles and distressed stock price, an attempt at an acquisition seems almost inevitable at some point.

For Priceline, it would effectively convert hundreds of millions of dollars per year in advertising spend into an asset holding and give it control of two of the most important channels outside of Google for driving OTA traffic (Kayak and TripAdvisor). Regulatory hurdles and whether TripAdvisor would sell at a price Priceline believes is fair are significant hurdles to this actually happening.

Trivago

Trivago is investing aggressively in advertising to gain market awareness globally, spending 87 percent of its gross profit on advertising. Revenue growth has been impressive at over 50 percent in 2016. Margin is depressed from the ad spend, but mature margin would likely be in the 20 to 25 percent range. The risk with Trivago is that revenue declines as ad spend drops over time. We see a more likely case that revenue slows to a mature 10 to 15 percent rate once ad spend slows down. That being said, Trivago could stay in rapid growth mode into the next decade and trade margin for revenue growth as it looks to build brand awareness and loyalty.


Source: Company Filings, Skift Estimates

SKIFT OUTLOOK

CAN PRICELINE’S VACATION RENTAL BUSINESS BECOME AS LARGE AS HOMEAWAY OR AIRBNB?

We do not expect Booking.com’s 721,000 inventory level to catch up to Airbnb at over four million listings and HomeAway at two million organically. With less marketing spend and inventory integrated into Booking.com, we can see profitability margins being higher for Priceline however. Much like Booking.com’s growth as a whole, we expect steady inventory and revenue growth from the vacation rental business.

WHAT ABOUT AIRBNB TESTING HOTELS?

Some speculate that Airbnb could take meaningful share in the hotel booking space. While it may build out its offerings of small hotels to complement its core product, moving too far away from the existing model risks hurting its brand image and upsetting suppliers that would now compete with hotels. Additionally, many hotels gripe about OTA commissions, but at least Booking.com helps drive occupancy with hotels being the core product and driver of web traffic. With Airbnb, hotel chains putting inventory on Airbnb encourages a new indirect channel.

SHOULD PRICELINE ADD FLIGHTS TO BOOKING.COM VIA AN OTA MODEL?

To build out a true OTA model to compete with Expedia in flights is possible, but likely requires heavy technology investments to connect with individual airlines or costs to use GDS flight inventory. In either case, the current experiment of meta via Kayak white-labeled to Booking.com makes a lot more sense. Booking.com still has more complete products and Priceline as a whole still gets paid as visitors click through Kayak to an airline booking.

WHAT COULD GO WRONG?

Priceline continues to generate impressive growth, but there are a number of threats and potential headwinds.

MACRO SHOCKS

Priceline is not immune to macroeconomic weakness. To the extent there is a recessionary environment in the Europe or in the U.S., total bookings and revenue growth could slow or even decline.

Terrorist attacks continue throughout Europe. Typically, the impact tends to be more local where the country of the attack faces declines, but other countries replace that lost travel. If the threat of terrorism continues to grow in Europe, there is a risk that travel to Europe faces more broad pressure. With Booking.com having large exposure to Europe, this would be a meaningful headwind.

DESPITE RHETORIC, SPEND ON GOOGLE IS NOT DECLINING

OTAs would love to reduce the use of Google to drive traffic; we expect continued 20 percent plus growth on that channel, both via traditional Hotel Ads and meta. As discussed earlier in the report, this spend will likely outpace revenue growth and weigh on margins. Facebook is a nice, lower-cost way to drive bookings, but Google will continue to dominate OTA and meta ad spend.

OTA RATE COMPRESSION

Priceline’s effective commission rates have continued to decline over time as it moves more into markets outside of Europe and the U.S. This is likely to continue.

CAN BOOKING.COM MAINTAIN ITS HOTEL OTA DOMINANCE?

The simple answer is yes, as scale begets scale. It takes time, money, relationships, people, technology, and expertise to build meaningful OTA inventory. Even if Google, for example, wanted to pivot to the OTA model away from advertising and meta, it would not be cost effective to do so as Google would be trading off steady $10 billion plus travel revenue that is growing over 20 percent per year for an uncertain path as an OTA. With the exception of Expedia- and Ctrip-owned brands, most OTAs cannot compete globally outside of their niche markets.

ENDNOTES AND FURTHER READING