Report Overview

For one of the most important companies in the world, Amazon’s impact on the travel industry has been surprisingly small to date. It is unlikely to stay that way for long.

This report is effectively divided into two parts, each trying to understand what Amazon means for the travel industry. In the first section, we dive deep into the company’s business model. We distill four lessons from Amazon’s model that we believe can apply to the travel companies large and small.

In the second half of the report, we look at what direct impact Amazon could have on the travel competitive landscape. We imagine at least three scenarios whereby Amazon could enter the travel industry: 1) It could offer its own travel product and compete directly as an online travel agency or metasearch engine, 2) It could play an increasingly large role in direct marketing by virtue of its growing display ad business and its leading position in voice search, and/or 3) Its expanding line of smart devices could open up new avenues for search or place it directly in-destination as part of the guest experience.

Companies and investors may be obsessing over that first scenario — direct competition— but the other two scenarios are arguably more likely, even if potential impact may be smaller. For instance, we take a close look at Amazon’s advertising business which has quietly grown to overtake better known platforms such as Twitter or Snapchat. Could Amazon provide the travel industry, with much needed leverage against the Google and Facebook Duopoly?

Amazon has the potential to impact your business, no matter what part of the travel industry you are in. It is crucial to understand how it operates and what its latest thinking is. Waiting to react until Amazon has already rolled out its newest operations will be too late.

What You'll Learn From This Report

  • A deep dive into Amazon’s business model today and context on how it has evolved
  • Four lessons that the travel industry can learn from Amazon’s success
  • A focus on what Amazon Prime can teach us about customer loyalty
  • Our take on three ways Amazon could impact travel
  • Ways in which Amazon could directly compete with travel incumbents
  • A closer look at Amazon’s little-known, but rapidly growing advertising business
  • Thoughts on what voice assistants and smart devices could mean for the future of travel

Executive Summary

From humble beginnings as a small online bookseller, Amazon has gone on to reshape whole sectors of the U.S. economy. Amazon is a dominant force in ecommerce, accounting for a third of all US online retail sales. We estimate that it participates, even if just in a small way, in categories that represent upwards of 25% of all household spending. It has disrupted brick-and-mortar retail and groceries, and is rumored to have its eyes on healthcare and financial services. The “Amazon effect” has been coined to describe the damage it does to incumbents when entering a new market.

It’s no wonder then, that it seems every executive wants his/her company to be the “Amazon of travel.” How to accomplish that? Why not look to Amazon itself? In the first section of this report we take a deep dive into the company’s business model. We distill four lessons from Amazon’s success: 1) Find your flywheel, 2), Obsess about your customer, not your competition, 3) Remember that customer loyalty is an emotion, not a points program, and 4) Invest in the unsexy parts of your business.

In the second section of this report, we seek to understand what direct impacts Amazon might have on the travel competitive landscape. The company launched an online travel service in 2015 but pulled the plug on this initiative after just six months. It has not expressed much interest in travel since. But Amazon plays the long game, and it seems unlikely to us that it would ignore a market as large as travel.

If Amazon enters the travel market directly, it would pose the greatest threat to metasearch companies and online travel agencies. But there are other ways that Amazon can influence our industry, through a growing advertising business and its smart device technology. While many analysts focus on the danger of Amazon, these two developments could add significant value to the travel industry, and are arguably more likely to occur than direct competition.

Executives from all walks of business life have been forced to learn the lessons of how to compete with Amazon. Waiting for Amazon to spell out its latest travel intentions to draw up a business plan will likely be too late. Travel leaders need to prepare today, or risk being caught flat-footed tomorrow.

Lessons That Travel Can Learn From Amazon

It seems like everyone wants to be “the Amazon of travel” these days.

We fear that to some, an “Amazon of travel” announcement may just be a clever PR ploy, with few business model changes being seriously contemplated. And to other managers, these announcements are a fancy way of saying they intend to offer a wider range of products.

In our view, building an “Amazon of travel” means truly understanding what has made it such a success as a company.

We distill four lessons from Amazon’s success for the travel industry: 1) Find your flywheel, 2) Obsess about your customer, not your competition, 3) Remember that customer loyalty is an emotion, not a points program, and 4) Invest in the unsexy parts of your business.

1. Find your ‘Flywheel’

Make sure your business model can build upon its own positive momentum

No, not the spin workout class. Perhaps the most important aspect of the Amazon story to understand is its ‘flywheel,’ or the virtuous cycle that helps drive its growth. An apocryphal story around the water cooler at Amazon HQ is that Jeff Bezos sketched a version of the diagram below on a napkin. In it, each node of the Amazon flywheel reinforces and accelerates each other point. A good customer experience drives higher sales traffic, allowing Amazon to bring more sellers onto its platform and increase its product selection, which in turn creates a better experience for new and returning customers. Repeat. Similarly, Amazon’s cost structure allows for lower prices and a better customer experience. Customer experience will merge back into the original flywheel loop of traffic, sellers, and selections.

Not to put too fine a point on it, but we emphasize that there are multiple loops at work here that both intersect at the customer experience. This means that an improvement at any point on either the ‘cost’ or the ‘selection’ loop will accelerate both at the same time. We will dissect some of these nodes, like the cost structure and seller marketplace, further below.

 

Exhibit 1: The Original Amazon ‘Flywheel’

Source: Amazon Company Filings

 

In real life, a flywheel is a device that can store energy through its rotational energy. Similarly, we would draw the distinction that “business flywheels” are designed to store the forward inertia of the business. A flywheel can capture the positive momentum of a sale and use it to drive other parts of the business. A simple example, where an ad leads to a sale, is a success, but not a true flywheel. In this situation, the sales process will have to start from ground zero with the next customer.

Platform companies in travel like Expedia and Booking.com have easy analogs to Amazon. As they grow their user bases, their marketplaces become more attractive to suppliers, which in turn attracts even more users. This scale can then be used to negotiate pricing power with suppliers and advertisers. The internet is particularly well-suited to building platform companies, but these same principles apply offline as well. Marriott, for instance, uses its loyalty program and ad campaigns to attract a customer base, which in turn helps the hotel brand recruit franchisees. These franchisees provide customers with a wider range of geographic and pricing options, making it easier for Marriott to build its customer base further.

The lesson is not limited merely to large multinational corporations. An independently branded and managed hotel can create positive momentum for itself, for instance, through its food and beverage program or by partnering with local retailers and attractions.

Regardless of the size or scope of the business, the lesson is to build momentum and let it do as much of your work as possible. Minimize transactions where the customer must be reacquired from scratch each time, aim to build infrastructure that creates scale advantages, and keep an eye out for partnerships that create value for customers.

2. Obsess About your Customer not your Competition

Ruthlessly eliminate customer pain points throughout the entire shopping experience

Amazon is notorious for its customer focus. In Jeff Bezos’ very first letter to shareholders in 1997, he emphasized the need to obsess over customers. At a recent public event, Bezos said, “it’s OK to be afraid, but don’t be afraid of our competitors, because they’re never going to send us any money. Be afraid of our customers. And if we just stay focused on them, instead of obsessing over this big competitor, … we’ll be fine.”

For Amazon, this obsession has meant eliminating pain points at each step of the customer journey.

A classic example is the “1-click” button that encourages impulse buys by immediately charging the customer and shipping the item, skipping the shopping-cart and checkout stages in the process. Amazon went as far as to patent this technology in 1999 — it only just expired in September 2017. The company has recently expanded this concept to its new(ish) dash buttons.

Perhaps the greatest source of friction in traditional e-commerce is shipping and delivery. Unsurprisingly, Amazon has devoted massive resources to this problem, spending upwards of $23 billion, or 17% of retail sales, in the last year to improve the process. It has successfully minimized its delivery time with free two-day shipping for Amazon Prime members and, increasingly, same-day delivery through Prime Now. Picking up packages in Amazon lockers, and now, at Whole Foods physical stores are other parts of this effort.

A commitment to low prices and a system of verified reviews gives customers confidence that there is no need to “click around.” This, along with a generous return policy, encourages further purchases, including of high-ticket/low-volume purchase, where reviews are especially influential.

The fruits of these efforts show up in the numbers. For instance, the American Customer Satisfaction Index (ACSI), ranked Amazon as the top business in America. The ASCI scores customer satisfaction along a 0–100 scale based on customer expectations, perceived quality, and perceived value. It is comparable across brands and industries.

While a select few brands stand out, the hard truth is that many travel companies struggle with customer satisfaction. Hotels and internet travel companies, in aggregate, fall roughly in line with other U.S. businesses. Airlines have seen a striking improvement in the past several years, but still lag compared to most other companies. That same ASCI study found that one-third of business customers — travel’s most lucrative segment — had complaints about their airlines and a quarter complained to their hotel.

Of course, travel faces unique challenges. Customers have fewer chances to interact with travel brands and there is a confusing web of distribution, transportation, and in-destination providers. That makes it easy to pass the buck when one part of the system — one which you are not responsible for — fails. The travel industry should not hide behind those excuses.

It can feel reassuring to be in the middle of the pack, or marginally ahead, when you are focusing on your competitors. But the obsession needs to be about the holistic customer experience on an absolute, not a relative, basis.

That means analyzing and anticipating pain points. Then being ruthless about eliminating those sources of customer friction. Hospitality and user experience are the table stakes. This also means not hiding behind a technology platform or distribution network that cause negative guest experiences, just because it is the industry standard.

It also means working hard to give customers the best possible holistic travel experience from booking and transportation, through hospitality stays and in-destination activities. This is difficult to do, but we see room to better partner with suppliers and agencies across the customer journey, to the benefit of all.

 

Exhibit 2a: Amazon has been able to consistently delight customers since its launch

Exhibit 2b: Some brands do better than average, but Amazon remains the gold standard

Source: American Consumer Satisfaction Index, Skift Research

 

3. Customer Loyalty is an Emotion, not a Points Program

Strive to create true value for the customer, and don’t be afraid to ask them for something in return

We all know that “loyalty” in a travel context has a very specific connotation. It brings to mind points, miles, credit card offers, redemption charts, and more. There is a whole cottage industry of blogs that decode various loyalty programs and the rabbit hole goes even deeper on dedicated forums like FlyerTalk.

These programs are important sales drivers both for the customer bookings they generate as well as for the co-branded fees paid by credit card and other marketing companies. For example, in Q1 2018, American Airlines, which has the largest airline loyalty program in the U.S., earned $570 million in marketing fees from credit card partners, and passengers redeeming points generated an additional $850 million of sales. It should be noted that while, the “marketing” revenue is largely profit, that is not the case for the passenger revenue, which has substantial costs associated with it.

These programs drive passenger traffic, but still, we believe that many loyalty programs are overly transactional and overly complex.

Miles or points are supposed to approximate the emotional loyalty that a customer feels towards a product or service. Emotional loyalty was the original goal but instead, all too often, these programs can devolve into an end unto themselves. Customers try to game the system, and managers respond by writing ever more complex regulations and/or devaluing the miles/points, which leads to customer frustration. We further discuss the challenging road to real customer loyalty in our recent report, Perspectives on Hospitality Loyalty.

According to a 2017 Colloquy report, 54% of loyalty memberships in the U.S. are inactive. The top reason consumers gave for abandoning a program was because it took too long to earn miles for rewards (57% of those who abandoned). Similarly, the ASCI survey found that out of all the aspects of a hotel or airline experience (e.g. ease of booking, courtesy of staff), loyalty programs tend to have the lowest level of customer satisfaction.

This goes back to lesson #2, above, about reducing customer friction to create as seamless an experience as possible. When a loyalty program expands, managers can forget that loyalty is first and foremost an emotion and not a series of rules or regulations.

We contrast this with Amazon’s approach to consumer loyalty which always boils down to delighting the customer in any way possible. Amazon, of course, has its own loyalty program, Amazon Prime, even if it is not always explicitly referred to as such.

We believe that Amazon Prime engenders customer loyalty by providing immediate and tangible benefits to its subscribers. The flow of funds should tell you everything you need to know about the perceived value by customers. After all, they pay $99/year (soon to be $119) to be a part of the program as opposed to most travel loyalty programs which are free to the consumer.

A recent J.P. Morgan estimate offers a more quantitative look at the value of Prime to customers. They found that the unbundled retail value of Prime services is ~$700, effectively offering Prime customers a 6x return on investment. All these services are available immediately: There is no need for delayed gratification or byzantine redemption rules.

 

Exhibit 3: The Amazon Prime bundle presents consumers with an immediate return on investment

Source: J.P. Morgan Research

 

Amazon recently disclosed that it has over one hundred million Prime customers globally. As such, at $99 per customer, we estimate that Amazon generates $9.9 billion in recurring revenue from Prime alone, and it continues to grow rapidly, up 55% from last year. In addition to paying an outright membership fee, Prime customers are estimated to spend at least twice as much non-Prime customers.

Many loyalty programs are revenue sources for airlines and hotels as well, but direct monetization for traditional hospitality loyalty usually comes through credit card and marketing partnerships rather than through the consumer, which we think speaks to the strength of the Prime offering in shoppers’ minds.

Amazon works hard to create an immediate return for customers through its loyalty program and, when it believes it creates value, it is not afraid to ask for something in return from customers in the form of a membership fee.

Importantly, the company can then turn this membership fee into a competitive advantage. Prime membership fees now make up nearly 20% of total company sales and much of its cost structure is fixed or semi-fixed in nature. For instance, once Amazon has invested in a warehouse for two-day shipping, it is incentivized to move as many packages through that center as possible. The marginal economics on digital assets are even better. Amazon may have to pay a large upfront price tag to produce a movie or television series, but it costs practically the same amount to stream it to ten or ten million viewers. That means the first few Prime cohorts are expensive but at this point in its life cycle, especially in North America, we expect that many new customers and renewals generate a substantial cash profit for the business.

The incremental cash flow from Prime can be reinvested to support a low margin on retail products. Consider that Amazon’s global retail business generated just $188 million in operating profits over the last four quarters, inclusive of Prime profits. If we could split the Prime profit pool – membership fees and costs – from that of the core retail business – product revenue and cost of goods sold – it would appear that the retail operation effectively operates at breakeven or a loss. In practice, these cash flows are commingled and some costs are impossible to disentangle, but we believe that this conceptual distinction helps understand how management views the business. Prime is accretive to their margin and the lever they pull to drive profits. No wonder Amazon offers such low prices compared to brick-and-mortar stores, the pure retail product is effectively wholly subsidized by the Prime membership loyalty program.

This then, goes back into the initial Amazon flywheel. Prime contributes to a lower cost structure versus competitors, which in turn drives the customer experience and the rest of the flywheel.

 

Exhibit 4: Amazon Prime continues to grow, now upwards of 100 million members

Source: Amazon Company Filings, Skift Research

 

We do not intend to suggest that hotel or airline managers simply throw up their hands in defeat or rebuild their loyalty programs from scratch in the model of Prime. But, we do think it is an interesting thought exercise to ask oneself, “How much, if anything, would my customers be willing to pay to be a member of my loyalty program?” And if the answer is nothing, what would you have to offer to make your customers willing to pay to be member? In our view, these questions are a unique yardstick to measure how much value customers perceive from a loyalty program.

In addition to a laser-like focus on delighting customers and adding value, lessons for loyalty that come from Amazon include prioritizing ease of use and a preference for immediate gratification (i.e. speed of redemption in the context of a mileage program).

Another potential lesson is the build-out of an ecosystem linked to the program that can keep the customer engaged even when they are not in a shopping frame of mind. We admit that this is substantially harder for a specialized hospitality brand to accomplish and somewhat easier for online platform companies like Expedia or TripAdvisor, but it is still worth exploring.

Airbnb recently hired the former head of Amazon Prime to run its Homes business. Airbnb has already redefined what it means to stay in a hotel or vacation rental. We will be watching closely to see if they can do the same thing to hospitality loyalty.

4. Invest in the “Unsexy” Parts of your Business

Don’t neglect back-end infrastructure and supplier relationships

One final part of the Amazon flywheel is focus on the back-end of the business — both infrastructure and supplier relationships. These investments have helped to drive a below-market cost structure and a broad selection of inventory.

When it comes to infrastructure, Amazon invested $68 billion of capital over the last year, 35% of worldwide sales. It has more than 75 fulfillment centers in the United States with more than 125,000 full-time employees, in addition to international sites. Its warehouses have advanced technology built into them, such as robots and digital scanners.

We don’t mean to draw a direct parallel that would suggest staffing a hotel with robots (though some may be trying), but it is an open secret that back-end hospitality tech has lagged the times, sometimes by decades. A few years ago, enterprise applications drew twice as many complaints on average as consumer applications did, according to a study by research firm MeasuringU.

“Business buyers are demanding the same type of experience that they enjoy as consumers using sites like Amazon,” said Ellen Keszler, a technology consultant who sits on the board of many travel companies.

This is not simply a headache for front desk staff, but it also affects the top line when it creates a poor customer experience. Further, outdated systems without proper connectivity can prevent businesses from integrating modern tech, such as dynamic revenue management systems.

A further lesson from Amazon is to pay attention to your supplier ecosystem. Amazon allows third-party sellers to operate stores on its platform. Not only can they sell through the Amazon.com storefront, but many times these third-party sellers keep their inventory in Amazon warehouses (fulfillment by Amazon, or FBA) which then becomes eligible for Amazon Prime shipping.

Allowing sellers to leverage Amazon’s infrastructure offsets upfront capital costs and provides an incentive for third parties to participate on the platform. More sellers bring further selection to customers — and more products offered with two-day shipping — improving the shopping experience.

If Amazon had neglected the “unsexy” back-end of its business, it would have missed out on an additional driver of its flywheel. Third-party sellers exceeded 50% of all units shipped by Amazon in early 2017 and currently generate $35 billion in sales for Amazon.

 

Exhibit 5: Third-party sellers now exceed 50% of all units shipped by Amazon

Source: Amazon Company Filings

 

What can the travel industry learn from this?

For internet platform companies like Expedia, Booking and TripAdvisor, whose entire business revolves around suppliers, investment in attracting new partners and helping them to succeed is key to revenue growth. This explains Expedia’s ongoing push to add hotel suppliers. It also explains why, as the OTAs expand into new markets, they increasingly lead with B2B software offerings. One example is the HomeAway software platform for vacation rental portfolio managers that was acquired by Expedia; another is Booking’s acquisition of tours and activities software provider Fareharbor.

But it’s not just internet companies that can learn from this lesson. The same is also true of hospitality companies. One of the key advantages that brands like Marriott, Hilton, or Accor can offer hotel owners is a strong tech and supplier platform, in addition to marketing know-how. Airlines as well have complex supply chains which can become competitive moats when used correctly.

The bottom line is that you can’t neglect the back-end just because the end-customer doesn’t see it. Tech infrastructure and supplier partnerships are crucial to running the core business smoothly, but also present an opportunity to drive new businesses opportunities. This is especially true for platform companies.

How Could Amazon’s Entrance into Travel Change the Competitive Landscape?

In April 2015, Amazon launched a new Amazon Destinations page, as reported by Skift. The offering was mostly focused on local getaways and allowed hotels to push published and discounted rates. The move got plenty of attention from competitors and media sources.

Many hotel partners were excited about the opportunity when only a few months later, in an abrupt about face, Amazon shut down the business. An Amazon spokesperson at the time said that “we have learned a lot and have decided to discontinue Amazon Destinations.”

 

Exhibit 6: The Amazon Destinations site as it looked in 2015

Source: Company website, Skift

 

Was it all just a bad dream for Expedia and Booking, or will Amazon be back with a vengeance? It’s a million dollar (or more!) question with no definitive answer, but Skift believes it highly likely that Amazon will play some role in the future of travel.

To examine this, Skift Research broke down aggregate consumer expenditures in the U.S. What we found was that Amazon participates in categories that collectively represent 25% of total U.S. consumer spending, and that figure is growing.

Housing, vehicle purchases, utilities, fuel, and retirement savings account for 53% of consumer expenditures and Amazon does not participate seriously in any of these categories. These are all large non-discretionary and/or financial products. In almost every other major consumer category, Amazon has an offering, even if it’s a small one.

The most notable exceptions to this rule are healthcare, education, and travel. Yet Amazon has long been rumored to be exploring a healthcare offering and recently announced an exploratory partnership with J.P. Morgan and Berkshire Hathaway. The company does have limited resources in education, such as in textbooks, but a large share of consumers’ education spend is tuition which (presumably?) Amazon cannot compete for.

That leaves the travel category as a strange outlier, representing $215 billion of annual U.S. consumer spending, 3% of the overall total, with effectively no competition from Amazon. That opportunity is nearly 14x larger than the spend on books, Amazon’s original raison d’etre.

 

Exhibit 7: Travel is a rare exception – Amazon has built a presence in many other areas of consumer discretionary spending

Source: Skift Research, Bureau of Labor Statistics, Company Filings

 

Did Amazon try, decide it couldn’t hack it, and give up for good? This also seems unlikely to us. Consider the case study of groceries. Amazon launched its very first grocery offering, selling dry goods only, in 2006. Two years later, in 2008, it began testing fresh grocery delivery in Seattle, which expanded to L.A. in 2013 and a handful of other metropolitan areas in 2015. Finally, the businesses began to rapidly expand in 2016.

The $13.7 billion acquisition of Whole Foods may have felt like it came out of nowhere when it shook up the entire grocery space in 2017, but its roots go back over a decade.

 

Exhibit 8: Amazon often takes a long-term approach to entering new markets

Source: Skift Research, Company Filings

 

We cannot know Amazon’s strategy for certain, but we would caution against assuming its unsuccessful 2015 Destinations test means the end of its travel ambitions.

Online Travel Agencies: First Party Competition Poses the Greatest Threat

Amazon has a Customer Acquisition Advantage, but Faces Initial Consumer Skepticism

If Amazon enters the travel market directly, it would pose the greatest threat to metasearch companies and online travel agencies. These online platforms serve important roles as aggregators in the travel ecosystem. The web portals create value by aggregating consumer demand and hotel/airline supply in one location. Could Amazon unseat incumbents like Expedia, Booking, and TripAdvisor from these lucrative positions?

We believe that it is possible Amazon could build a substantial consumer presence in travel. According to SimilarWeb, Amazon.com received 2.6 billion unique visits in March 2018, of which 79% were either direct traffic or organic (non-paid) search referrals. Contrast that with the major online travel agencies which in aggregate saw 760 million visits with 65% direct or organic search, and the metasearch engines with 560 million visits with 89% direct or organic search.

 

Exhibit 9: Amazon has a significant advantage in driving customer traffic

Source: SimilarWeb global data for March 2018. Categories represent aggregates of a selection of the most popular travel URLs in each bucket.

 

Unsurprisingly, Amazon is able to generate low-cost web traffic on a scale that few other web properties can match. While Amazon has an advantage from its built-in audience, it may still face substantial headwinds in developing shopper trust. For many, travel is an expensive and low-frequency purchase. We have all experienced the occasional delivery mix up, and while that may be fine for delivering home goods, a similar slip up poses a greater risk on the annual family vacation.

Skift Research polled a representative U.S. audience and found that Amazon still faces many challenges in developing trust as a consumer travel brand. 42% of US adults considered themselves “very unlikely” to purchase future travel on Amazon if it were offered and just 11% were “very likely” to consider the idea.

 

Exhibit 10a: Amazon faces challenges in building trust for travel

Source: Skift Research

 

There was a notable skew by age with those aged 25-34 and 35-44 most likely to book on Amazon and favorability afterwards steadily declining by age. We believe that favorability amongst 18-24 year olds is an outlier, reflecting their lower sample size in the survey as well as that age group’s lower travel purchasing power.

 

Exhibit 10b: Younger demographics significantly more likely to consider Amazon for Travel

Source: Skift Research

 

At Booking Holdings, CEO Glenn Fogel believes that its customer service is a differentiator. He has said that his business is focused on recreating “that old-time human travel agent, who knew everything about you.” Expedia CEO Mark Okerstrom has made a similar argument, citing customer service as a differentiator of the dedicated travel OTAs compared to horizontal tech businesses like Amazon and Google. Based on recent comments at a the ITB Conference, we believe Expedia has ~13,000 customer service agents while CTrip employs 10,000.

This commitment to travel specific customer service is certainly impressive, and paired with consumer trepidations regarding Amazon Travel, the OTAs and Metas do have some competitive protection. But we are not convinced that this represents an impenetrable defense against Amazon. Amazon is already well known for its customer service in other product categories and operates 130 call centers, some of which employ upwards of 500 representatives, in 40 countries. Further, we should not forget about Amazon’s massive scale and ambitions, adding 10,000 reps would increase its total headcount by less than 2% — for context, Amazon has grown its staff by at least 40% year-on-year for the past six quarters.

Potential Revenue Loss for the Online Travel Agencies

The cost to online travel agencies could be severe. The big two OTAs, Expedia and Booking Holdings process an annual total of $177 billion in travel bookings. They generate a blended take rate of 12% on these bookings, a mix of low-margin airline tickets, mid-range branded hotel contracts, high-margin independent hotel commission, and other products.

What kind of market share could Amazon generate? As discussed above, 11% of U.S. respondents polled said they would be very likely to book travel on Amazon. This is a useful starting point but this demographic skews younger, implying both lower purchasing power and a mix towards lower value leisure travel. Additionally, this only considers a U.S. Audience and a large amount of bookings are generated overseas. Plus, not everyone who is likely to purchase will immediately transfer over to Amazon. Given all of this, a significant market share loss to Amazon seems unlikely in the near-term, but is possible in the long-run.

The real damage to the OTAs could come in the form of pricing. We already know that Amazon is fiercely competitive on price and is willing to run new businesses at a loss to gain share. As discussed above, Amazon tried to compete on commission prices off the back when it experimented with destinations in 2015. Consider that just a 0.5% change in effective take rates would cost the OTAs one billion in revenues.

Supplier Networks may be the Key Competitive Moat for OTAs

This suggests that for the OTAs, their supplier relationships are a crucial competitive advantage against new entrants, such as Amazon. Expedia has supplier contracts with 490,000 traditional hotel properties worldwide, up 37% year-on-year, for Booking Holdings those figures are 415,000 and +18%, respectively. Factoring in alternative accommodations boosts both the absolute number and the growth rate. This is certainly the hardest part of the business for Amazon to replicate. It could generate an audience of 400,000 plus customers quickly, but the same number of hotel properties would take years.

 

Exhibit 11: Supplier inventory builds an important barrier to entry for online travel

Source: Skift Research, Company Filings

 

This head start is no reason to be complacent, though. Amazon need not gain massive market share, but only exert a small influence on commissions to have a large negative impact on incumbents. This means the OTAs need to focus on making their commissions ‘stickier’ to suppliers. That will require adding value to suppliers beyond simply being another consumer acquisition channel amongst others. We think the B2B software approach that Expedia, Booking, and even Airbnb are pioneering is a smart approach here that deserves more focus. By providing suppliers with technical expertise and the ability better manage their businesses, the OTAs further enmesh them in their ecosystem.

This approach goes back to our earlier, rule #4 to focus on the “unsexy” parts of the business. This is easier said than done. Becoming software providers will require the OTAs to expand their core competency and deal with thorny issues such as conflicts of interest and data ownership.

Alternative Forms of Competition for OTAs and Metasearch

In the above scenario, we imagine Amazon begins selling travel products in a way that mimics the traditional online travel agency. But considering, they already tried this approach once, the company might experiment with a variety of other models. What other formats could Amazon pursue?

  • Could Amazon build a review platform à la Amazon Vehicles?
    One potential option is to follow the blueprint it has been using for automobiles. We noted earlier that Amazon does not sell cars, but in August 2016 it launched Amazon Vehicles, as a “research destination.” The site features research tools, such as prices, specifications and images, for thousands of new and classic car models. It also offers the ability for car owners to leave reviews and for prospective buyers to ask questions. Amazon does not sell any vehicles directly, but uses the platform to drive sales of accessories and car parts that are listed on the main e-commerce site. Vehicles has also served as a jumping-off point for industry partnerships, such as the recently announced in-car delivery service. Similar to travel, cars are a high-ticket, low-volume purchase that involve extensive consumer research. Perhaps Amazon could simply sub out vehicle models for travel destinations? This would effectively create a metasearch competitor similar to TripAdvisor. It would allow Amazon to sell ancillary products such as luggage or guidebooks and open up the chance for advertising partnerships (ads are discussed in greater depth below).

    Exhibit 12: Amazon Vehicles is a review platform that sells ancillary products and services

    Source: Company Website

     

  • Taking on business travel à la Amazon Web Service
    Another potential option is for Amazon to offer a business travel service, rather than target consumers. At first pass, this would forgo Amazon’s substantial edge in acquiring customers, but it may not be as crazy as it sounds initially. Many of the company’s successful products have come from solving its own in-house problems, and later commercializing those solutions for other businesses.The classic example is Amazon Web Services. The company had the need to create a flexible and scalable development platform. Amazon designed its cloud server products for its own needs first, but soon discovered they could sell this on-demand capacity to others. The success of this initiative created the commercial cloud computing we now know it.Amazon’s warehouse and shipping infrastructure was developed for its own internal delivery needs, but has since been commercialized through its third-party “Fulfillment By Amazon” service (discussed above). A recent example is the healthcare partnership Amazon announced that is intended to reduce the company’s massive and growing employee benefit costs.Following this design logic, Amazon might try to build its own in-house business travel portal as a first step toward entering the space.

Implications for Travel Suppliers More Benign: Hotels and Airlines Could Benefit, but Must Remain Aware of Risks

At the other end of the spectrum, suppliers of travel could potentially benefit, in our view. That’s because Amazon would likely attempt to compete with the established OTAs on their commission rates. The 2015 Amazon Destinations hotel contract charged a 15% “marketing fee” to partner hotels. That is especially favorable for independent hotels which typically pay commissions between 15% and 25% or more to the OTAs.

 

Exhibit 13: Existing commission structures for hotel suppliers

Source: Skift’s 2017 Outlook on Hotel Direct Booking

 

For suppliers, the opportunity to play the OTAs against each other has shrunk as Booking Holdings and Expedia Inc. led an $11.5 billion wave of M&A in the online travel agency space from 2013 through 2015. This includes Expedia’s acquisition of HomeAway, Orbitz, and Trivago, and Booking Holdings’ (then Priceline Group’s) purchases of OpenTable and Kayak. The result is that the online travel agencies now have a much wider product offering — hotels, airlines, alternative accommodations, car rentals, and restaurants — than ever before. The entrance of Amazon could potentially crack open the de facto OTA duopoly that exists in most of the world, besides China, and drive commissions lower industry-wide.

 

Exhibit 14: Online travel has consolidated over the last decade

Source: Skift Research, Company Filings

 

The main way that suppliers have responded to this consolidation is by encouraging direct bookings. These campaigns have been successful and are a point of pride for many hotels. The risk for hotels and airlines is that the entrance of a prominent and large-scale aggregator threatens to undo those gains.

The brand Nike resisted selling on Amazon for many years, preferring to run the equivalent of a “direct booking” campaign. Ultimately, Nike decided to sell on Amazon. The downside for companies like Nike is that sellers on Amazon lose their individual branding and direct relationship with the customer. The suppliers become commoditized as their products are forced to fit within the broader look and feel of the Amazon marketplace. For instance, the below search for men’s running shoes presents competitors Asics and Nike next to one another with little distinction, which are not the ideal terms for either of these brands.

This should feel like a well-worn dilemma that any hospitality operator encounters on OTAs and metasearch sites.

 

Exhibit 15: An example of retail listings on Amazon that leave little room for branding

Source: Company Website

 

For hotels, airlines, and other suppliers, Amazon entering the travel industry presents a positive opportunity to gain leverage over commissions and build a new source of bookings. The price to be paid is potentially further disintermediation. Travel’s many years of experience dealing with complex distribution arguably makes the space more resilient to supplier commoditization than other industries. For that reason, we ultimately conclude that Amazon could net out as a net benefit to suppliers.

An Optimist’s View: Could Amazon Create New Advertising Opportunities at Lower Cost?

Amazon currently has three core “pillars” that support its business. They are first-party retail, third-party retail (both buttressed by Amazon Prime), and its Amazon Web Services (AWS) cloud infrastructure business. A question frequently asked by analysts nowadays is what will Amazon’s fourth pillar be? A potential contender is its advertising business.

Some may not be aware, but Amazon has quietly grown into quite a large digital advertiser. The company does not explicitly report advertising revenue and instead unceremoniously reports an “other” sales line-item that, a footnote discloses, “primarily includes sales of advertising services, as well as sales related to our other service offerings.”

Other revenues topped $5.8 billion in the last four quarters. J.P. Morgan believes that advertising makes up 60% of that total. Skift believes that this could prove to be a conservative assumption, but even so, that implies Amazon Advertising revenues in excess of a $3.5 billion annual run-rate. The business grew at a 92% rate compared to last year, and appears to be accelerating, potentially putting it on track for $6 billion or more in sales next year.

Further, Digiday reports that Amazon has opened an advertising office in Manhattan with 2,000 jobs in addition to having a presence in Tokyo and Paris.

 

Exhibit 16: Amazon’s advertising business may not be well-know, but it is rapidly growing

Source: Skift Research, Company Filings

 

Amazon’s advertising bread-and-butter is selling sponsored product listings on its site, but it is increasingly promoting display banner ads, video ads for Kindle and Prime Video, as well as other formats. Amazon is also building third-party display advertising inventory, such as on IMDb, as part of what it calls its Amazon Advertising Platform (AAP). According the Bloomberg, the company is also testing retargeting tools to show product display ads across the web.

Amazon can target customers and look-alike audiences based on its in-house shopping data. This is a unique dataset that is tied directly to actual purchases, rather than assumed intent as is the case on Google or Facebook.

The advertising division was first focused on consumer product brands that already sell on the Amazon marketplace. But the company is increasingly trying to land what it calls, “non-endemic” advertisers who are interested in reaching Amazon’s large audience. One of Amazon’s challenges will be to prove that it can target relevant customers and build look-alike audiences based on product shopping data that will appeal to off-platform and brand advertisers. Amazon is working hard at this task and that puts it increasingly into direct competition with Google and Facebook. A sign of the emerging rivalry seems to have sprung to life just recently as ad tech firm Merkle found Amazon had suddenly stopped bidding on Google’s Product Listing Ads (PLA) in April 2018 after participating for a year and a half.

 

Exhibit 17: Is Amazon dropping Google product ads a result of growing rivalries?

Source: Merkle

 

This is welcome news for the travel industry, which has long been beholden to the Google and Facebook online advertising duopoly.

Amazon is still a small ad player compared to these giants, but don’t underestimate it; it is one of the few web properties with an audience that can rival the big two and it’s already a larger player than many well-known companies such as Snapchat, Twitter, and Criteo.

There are clear positive implications for travel if Amazon can crack this market and turn online advertising into a triumvirate. The addition of advertising supply and increased competition for ad buyers could drive down prices and provide relief to a major travel cost-center. This benefit applies across the board — to OTAs, metas, hotels, airlines, and others.

 

Exhibit 18: Amazon advertising revenues already surpass Criteo, Twitter, and Snap

Source: Skift Research, Company Filings

 

Travel brands and other non-endemic advertisers have yet to fully embrace Amazon, but in the view of Skift Research, it is an avenue worth exploring. While ad buys should start small and ROIs need to be closely measured, the potential return from breaking away from Google/Facebook cannot be ignored.

The Role of Smart Devices in the Future of Travel

Alexa, are there any other ways that Amazon could upend traditional advertising models? The rise of voice search and assistants could further bring Amazon into the advertising mix.

Voice Search

Google introduced an early form of voice search almost 15 years ago, but the technology struggled. Even as recently as 2013, Google suffered a 23% word-error rate, meaning it transcribed one out of every four spoken words incorrectly. But recent improvements in machine learning have led to dramatic gains in voice recognition. This year, Google dropped its word-error rate below 5%, the threshold for human accuracy. While we have data available for Google and use it in this example, the trend is emblematic of the broader technology, including Amazon’s Alexa.

 

Exhibit 19: Voice recognition tech has reached a key inflection point

Source: Google

 

The newfound ability to understand natural human speech, at Amazon and the other tech giants, has created an explosion of voice searches.

Voice search raises the stakes for advertisers. In a traditional desktop search, customers may be more inclined to click sponsored links and scroll across the first few result pages. However, with a voice search, users are more likely to go with the top result. Even if they listen to a few search results, most voice searchers will not have to patience to scroll through pages of results.

The tech companies themselves face a monetization dilemma as well. With perhaps just one shot to deliver the ‘right’ answer to the user, it could ruin Amazon or Google’s consumer trust if they deliver a sponsored, but unhelpful result. For this reason voice search monetization is still nearly non-existent. We are already seeing an industry-wide push towards more relevant, responsible advertising – Apple limiting ad tracking, Google and Kayak optimizing for more relevant results – and the shift to voice could accelerate this trend.

One way to get users to directly engage could be through dedicated apps, or in the case of Alexa, voice skills. However, our channel checks show that as of this writing few major travel brands have a consumer facing voice scale available – most notably, Expedia, Kayak, and United Airlines

In sum, it’s still not entirely clear what form voice ads will wind up taking. But if voice continues to take-off, Amazon could continue to chip away at Google’s dominance as Alexa uses Microsoft’s Bing as it’s default search engine. This is good news for advertisers as it has the potential to move more auctions off of Google and bring competitive pressures to bear on ad prices.

The Internet-of-Things

Stand-alone digital assistant devices, like the Amazon Echo or Google Home, are still mostly limited to early adopters. According to the Pew Research Center, just 8% of Americans have used one.

 

Exhibit 20: Americans increasingly familiar with voice assistants through their phones, but stand-alone devices remain rare

Source: Pew Research Center

 

However, as stand-alone voice assistants continue to grow, Amazon is well positioned to gain popularity as it dominates within this segment. According to eMarketer, Amazon’s Echo is used by 71% of those who use a voice-activated assistant device at least once a month.

 

Exhibit 21: Amazon leads in stand-alone voice assistant market share

Source: eMarketer

 

Major hotel brands have begun cautiously piloting smart devices. In 2016, Wynn Resorts rolled out the Amazon Echo to all rooms at the Wynn Las Vegas. Hilton has been beta testing a “connected room” and Marriott has built a model IoT-connected guest room at its innovation lab.

Scott Hansen, Marriott International’s director of guest technology, previously told Skift that, “the future of the guest room will be voice activation. Amazon Echo and Apple’s Siri are consumer versions of this technology … That is the future. Whether we use that existing tech, or some other voice-activated mechanism has yet to be determined. The real brick in the road is trying to get the internet of things upgraded to the net-connected appropriate part of the network. It’s very expensive to retrofit everything in a hotel.”

Moving beyond voice assistants, is the potential for a multitude of devices to be connected to the internet. Amazon has begun expanding more fully into the internet of things ecosystem with its acquisition of smart doorbell company Ring. These kind of devices could be of interest to vacation rental property managers who want to remotely monitor their homes and are adopting smart devices in growing numbers.

Even more so than with home products, security and privacy are the overriding concerns in the hospitality space. Any hotel or vacation rental connected home solution must be designed with these two considerations in mind from the ground up and they need to be prioritized over any guest experience or cost considerations. For this reason, it’s unclear, whether consumer-first products like Echo, will win the day in hospitality. Amazon, or a yet unknown competitor, may ultimately wind up launching an enterprise version of Alexa for commercial use.

This is an exciting field, but still early in its development. It may turn out that the final frontier for Amazon in hospitality is not as a competitor after all, but rather as an advertising partner and/or designer of smart devices.

Conclusion

Executives from all walks of business life have been forced to learn the lessons of how to compete with Amazon. In our view, the common lessons that any travel executive can take away from Amazon’s successes are to: 1) Find your flywheel, 2), Obsess about your customer, not your competition, 3) Remember that customer loyalty is an emotion, not a points program, and 4) Invest in the unsexy parts of your business.

It’s also important, in our view, to draw up a strategy to prepare for a direct impact from Amazon. Travel, for the most part, has been unaffected by its reach so far, but that is no reason to be complacent. Amazon takes an iterative approach to launching new markets and has toyed with the idea of launching a travel business in the past. That makes it likely that some new travel experiment could be in the works for a future date. It’s worth preparing for that possibility alone, but even if it never comes to pass, the company could well influence our industry through its growing advertising business and leading position in smart devices.

Waiting for Amazon to spell out its latest travel plans to draw up a business plan will likely be too late. Travel leaders need to prepare today, or risk being caught flat-footed tomorrow.

Endnotes and Further Reading