A Deep Dive Into TripAdvisor’s Competitive Position In Travel 2016

by Luke Bujarski + Skift Team - May 2016

Skift Research Take

TripAdvisor has managed to insert itself into just about every segment of travel. Like an octopus, its tentacles reach wide from accommodations to restaurant reviews.

Report Overview

This report takes a deeper dive into the factors influencing TripAdvisor’s competitive positioning against other online travel booking sites. If travel is the industry that touches all other industries, TripAdvisor is the brand that touches all other travel brands – both consumer and enterprise facing. Despite monetization challenges, TripAdvisor’s wide footprint within the online travel ecosystem makes the company worth paying close attention to; its uncertain future could prove pivotal in the delicate balance of power playing out between online travel brands.

After much anticipation over the launch of instant booking (IB) and TripAdvisor’s potential to rise up against the established big two online travel agencies (OTAs), results have been mixed. With the global launch of IB now complete, the company needs to push for travel buyer and hotelier adoption. This will be challenging and could push TripAdvisor to fall back on existing revenue streams with its metasearch product. While anticipated, first quarter earnings results for 2016 exposed the long road toward IB adoption; adding pressure on leadership to to make instant booking work, as well as growing its non-hotel revenues including its tours and activities business.

Going forward, TripAdvisor will need to work smart and lean to make good on a multi-pronged growth agenda while meeting investor and analyst expectations. Much of it will depend on how instant booking performs in the second and third quarter of 2016. Financially, the company may need to raise money to fulfill its strategic goals.

While speculative, some are pointing to a possible acquisition of TripAdvisor. This will undoubtedly shake up the online travel industry – the degree to which will depend on the buyer. Trip’s deep connection to the traveler is what makes it an attractive buy. At the same time, the online travel landscape is changing. CEO Stephen Kaufer and team will need to keep up technologically to stay relevant and profitable across multiple product categories and booking methods.

Executive Summary

This report takes a deeper dive into the factors influencing TripAdvisor’s competitive positioning against other online travel booking sites. If travel is the industry that touches all other industries, TripAdvisor is the brand that touches all other travel brands – both consumer and enterprise facing. Despite monetization challenges, TripAdvisor’s wide footprint within the online travel ecosystem makes the company worth paying close attention to; its uncertain future could prove pivotal in the delicate balance of power playing out between online travel brands.

After much anticipation over the launch of instant booking (IB) and TripAdvisor’s potential to rise up against the established big two online travel agencies (OTAs), results have been mixed. With the global launch of IB now complete, the company needs to push for travel buyer and hotelier adoption. This will be challenging and could push TripAdvisor to fall back on existing revenue streams with its metasearch product. While anticipated, first quarter earnings results for 2016 exposed the long road toward IB adoption; adding pressure on leadership to to make instant booking work, as well as growing its non-hotel revenues including its tours and activities business.

Going forward, TripAdvisor will need to work smart and lean to make good on a multi-pronged growth agenda while meeting investor and analyst expectations. Much of it will depend on how instant booking performs in the second and third quarter of 2016. Financially, the company may need to raise money to fulfill its strategic goals.

While speculative, some are pointing to a possible acquisition of TripAdvisor. This will undoubtedly shake up the online travel industry – the degree to which will depend on the buyer. Trip’s deep connection to the traveler is what makes it an attractive buy. At the same time, the online travel landscape is changing. CEO Stephen Kaufer and team will need to keep up technologically to stay relevant and profitable across multiple product categories and booking methods.


Introduction

Pound for pound, no other online booking brand controls as much industry press attention as TripAdvisor. Analysts and pundits have scrutinized the company’s performance with a microscope, ever since user traffic began flooding away from desktop and into the mobile environment. Despite the company’s relatively small revenue base, TripAdvisor is a special case study in travel.

The company took many twists and turns to get to where it is today. First launching as a traveler review site, before moving into vacation rentals, later integrating flight and hotel metasearch, then tours and activities, then restaurant bookings, and more recently direct bookings.

In the process, TripAdvisor has managed to insert itself into just about every segment of travel. Like an octopus, its tentacles reach wide from accommodations to restaurant reviews.

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At the heart of TripAdvisor sits its strong user base and deep connection with travelers. Average monthly unique visitors reached 340 million, according to the company’s first quarter 2016 results. People largely come to TripAdvisor for its free content and traveler generated reviews of restaurants, hotels, and things to do in-destination. No other travel site or stand-alone customer review site (Yelp, for example) has the breadth and depth of travel content that TripAdvisor has.

Yet, the company has struggled to scale revenues, despite its sound positioning with travel industry partners and travelers. The business challenges are multi-fold but mostly stem from user traffic migration away from desktop to the mobile environment; it’s a monetization leak that poses some issues for Kaufer and TRIP investors. The solution was the launch of instant booking, a bold (and necessary) solution to securing lasting revenue streams.

While anticipated, a lackluster 2016 first quarter earnings statement will put pressure on leadership to make some big decisions on future investments and partnerships. Revenue was down 3% in the first quarter compared to Q1 of 2015, as instant booking cannibalized revenue from its metasearch product. The company is now entering into the third and pivotal phase of their Instant Booking roll out.

Here, TRIP needs to redefine itself as a hotel booking site to drive repeat user adoption of Instant Booking. There are also numerous suitors that might be interested in acquiring TRIP. Priceline already powers much of Instant Booking inventory. Expedia’s recent acquisition of HomeAway makes it a less likely candidate. Google and Yahoo could also be interested – and probably others. A TripAdvisor acquisition by Priceline would squeeze an already consolidated marketplace. It could also become a backdoor into travel for a new non-traditional player.

Second and third quarter performance will reveal much about Trip’s fate as well as the future direction of online travel.


Instant Booking is in the water, but will it float?

The TripAdvisor team has set forth a bold and multi-pronged growth strategy for the company. The question is whether they will have the revenues and working capital to make good on all of its various products. Competing directly on multiple battlegrounds – i.e. hotel bookings, vacation rentals, restaurant reservations, and tours & activities – has become a costly uphill battle. First and foremost, TRIP needs to make Instant Booking work.

For this to happen, the company will need to win over the consumer as well as the supplier. The Priceline partnership was a big win on the supply front, but a temporary fix as Trip moves to strengthen its direct relationships with hotel partners. Most of the big hotel chains have signed on, but it will take time to build momentum with the independent brands, particularly in Europe where the hotel market remains much more fragmented than in the U.S.

As TRIP sets out to integrate its hotel partners directly, it will compete with the OTAs, but also from Trivago and Google – not to mention the hotels directly. Both Trivago and Google have their own direct booking platforms. They too will be fighting for the attention of hotel revenue and channel managers; hoteliers may not have the appetite to experiment with all three platforms, on top of their existing sales and distribution channels.

Instant Booking will dominate TripAdvisor’s strategy for the rest of H1 2016. During the first quarter investor call CEO Steve Kaufer pointed out that Trip’s metasearch product won’t go away, stating that TripAdvisor users sometimes prefer a direct relationship with their partner brands. Some may interpret statements like this as a hedge in the event that instant booking performance fails to meet performance objectives. The downside here (opinion of author) is on the user experience side. Both instant booking and metasearch results display side-by-side on the TripAdvisor site (desktop and mobile). One or the other would be preferable to streamline the accommodations shopping experience.

Overall, the team will need to pick its battles wisely and work lean to make good on its objectives. The rest of 2016 will be a year of execution, but also lower revenues and profits as TRIP pushes forward with a strong yet expansive portfolio of travel products.


Funding future growth

TripAdvisor took on a multi-front battle with its Flipkey, LaFourchette, and Viator acquisitions and the launch of Instant Booking. These assets positioned TRIP on key competitive battlegrounds – i.e. alternative accommodations, hotel bookings, restaurant reservations, and in-destination activities.

But competition against the likes of the OTAs, Airbnb, HomeAway, and OpenTable will put pressure on strained budgets. Marketing costs in the travel segment are already high and rising as competition heats up. Expedia for example spent USD 2.8 billion on marketing in 2014 – more than twice the total revenue generated by TripAdvisor.

Expedia also has the impetus and cash for a heavy 2016 marketing campaign for its recently acquired vacation rentals brand HomeAway. Expedia will also likely step up efforts on in-destination activities to compete with Viator. These pressures will add to the weight of competing for direct bookings against Google, Trivago, but also in-direct competition including Airbnb.

TRIP might seek financing to fuel growth in light of its relative size and limited working capital (see Figure 1). Borrowing on the future with an outstanding debt balance of around USD 300 million could prove challenging, especially for a publicly traded company. 2016 has also been a volatile year for startups and stock markets. TRIP stock performance through 2016 will likely swing in line performance updates on progress with IB. The full financial impact of IB on revenue generation and profits will become clearer with the release of their second quarter 2016 results statement.

Data Source: Annual and quarterly reports

Data Source: Annual and quarterly reports


Market sizing

TripAdvisor’s global market share of hotel bookings – either via Instant Booking or conversions through its metasearch functionality – is uncertain. The commission-based model does make it possible to estimate IB’s potential impact on the market and ability to generate revenue, relative to Priceline and Expedia.

Online travel agencies often report on ‘gross bookings’ as a key performing metric and relative market share measuring stick. It represents the total value of travel products sold including taxes and fees. TripAdvisor has yet to report on gross bookings (probably never will given its unique conversion model) but its new positioning as a direct booking platform allows for a closer comparison.

Here’s the formula we used to estimate approximate and potential gross bookings generated by TRIP Instant Booking:

Instant Booking share of total TripAdvisor revenues / (13.5 average commission rate) *100 = TripAdvisor gross bookings

TripAdvisor’s leadership expressed that Instant Booking could account for as much as 60% of total company revenues by the end of 2016. This offers a baseline for market sizing on estimated gross bookings (total value of travel booked).

Assuming that Instant Booking hits the 60% target, our highest estimate on 2016 gross bookings for IB is USD 10.6 billion in total transaction value.

chart3

Notes: All values expressed in USD millions; 2015 and 2016 revenues projected; 60% expressed goal by year’s end 2016; 13.5% midpoint between 12% and 15%; IB – Instant Booking.

Here are three more scenarios based on Instant Booking and its relative share of total revenues by year’s end 2016. This offers a range of IB TRIP’s minimum and maximum potential generated in gross bookings, based on relative IB adoption:

 

Chart 7 TripAdvisor

Percentages are scenarios and represent share of total TripAdvisor revenues generated by Instant booking. For example: If Instant Booking were 20% of TripAdivsor total revenues, IB gross bookings would equal USD 3.5 billion.

A side-by-side comparison with Expedia and Priceline shows that IB will need broader adoption if it is to catch up to Priceline and Expedia – at least in terms of gross bookings directly attributable to IB. (see Figure 4).

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Gross bookings for Priceline and Expedia are projections based on past performance.

Note: Estimate assumes Instant Booking reaches 60% of TripAdvisor revenue share by 2016. Expedia figure includes flights but excludes bookings from HomeAway. By 2016, a portion of Priceline bookings will have been captured through the TRIP Instant Booking sales channel (see Priceline Partnership section in this report). Best estimate here (given the share of Booking branded properties listed on Instant Booking) is that approximately half of TRIP’s bookings will be factored into the Priceline number.


Arguably, TripAdvisor’s impact on the global travel economy is more significant than what can be inferred from income statements. A recent report (commissioned by TripAdvisor and conducted by Oxford Economics) suggests that TripAdvisor’s footprint in the travel industry, both in terms of its user base and influence over traveler behavior,  helped generate USD 64 billion in tourism spend in 2014. These report findings paint the company in a more favorable light for potential investors. Trip leadership will ultimately need to translate these impact indicators into hard revenues and profits.

Banking on mobile traffic

Instant booking was a monetization play to help Trip capitalize on a growing share of its mobile traffic. Over 50% of visitors to the TripAdvisor site now come from mobile channels. This is a huge user experience success story, but also a challenge for an ad-revenue business built around desktop traffic.

The shrinking return on ad revenue in the mobile environment is widespread. Quick consumer adoption has left content platforms in travel (and other industries) scrambling to find workarounds to traditional display formats. The move into metasearch, and now IB was TripAdvisor’s solution to this issue.

Overall TRIP has enjoyed steady quarterly revenue growth since 2011 (see Figure). Whether IB helps to accelerate historic year-over-year growth is uncertain. First quarter results of 2016 show that revenues took a hit, likely as a result of the introduction of IB and the dilution of pay-per-click revenues coming from the metasearch product. Clicks on hotel search results populated by Instant Booking only generate revenues when booking is made. Metasearch listings generate revenue on a cost-per-click basis. This “cannibalization” effect was clearly a calculated risk on the part of the strategy team.

Source: TripAdvisor Inc. investor relations

Source: TripAdvisor Inc. investor relations

The cost of consumer education

The TripAdvisor brand will be challenged on the marketing front as it moves deeper into travel bookings. Its core competitive advantage – i.e. the branded traveler review – has positioned TRIP as “the place to go” for information and opinions on places and things to do. A significant chunk of its internet traffic likely comes from its pre-booking or in-destination user base – i.e. travelers in the research phase or those that have already booked accommodations.

TRIP will need to reeducate and incentivize visitors to “jump on” earlier (or later) in the trip planning process when booking their accommodations. The company has a significant customer base, 350 million average unique monthly visitors. TRIP’s focus on the leisure spectrum of travel could also prove to be a mismatch with the business traveler. This brand stickiness toward leisure will, at the very least, add to the challenge and marketing costs involved with positioning the company from an informational to an ecommerce brand aimed at a broad spectrum of travel consumer.


Limits to the direct-connect model

Instant Booking’s direct-connect platform poses limitations on what TRIP can do with its inventory. Both Expedia and Priceline have gained traction in powering private label hotel search engines. Their affiliate programs and robust content allow them to operate as retailers, but also as wholesalers. Expedia’s affiliate network (EAN) is a prime example and while EAN’s top line contribution to Expedia Inc. goes unreported, the opportunity is significant, particularly as new breeds of consumer brands move into the travel space.

Better connectivity and APIs are making it easier for airlines, car rental brands, and non-traditional travel brands to capitalize on their traffic as a point-of-sale for room bookings. This trend will likely grow as non-traditional players such as Facebook, Apple, Uber, and other unforeseen competitors look to capitalize on travel product bookings through their various consumer touch points. Both Priceline (through Booking.com) and Expedia are in a good position to supply them with the inventory.

Without a private label solution and the inventory to back it, TRIP’s primary role could remain that of a sales, rather than wholesale/distribution channel. TRIP’s inventory will grow as more accommodations providers connect directly to Instant Booking (through TripConnect) but this process will take a while, particularly in markets with high concentrations of independent brands.

On the other hand, TRIP offers traveler reviews through its affiliate program. The company’s vacation rental brand Flipkey integrates TRIP traveler reviews into its platform. The possibility of Priceline integrating TRIP reviews to power its storefront is an intriguing one. Partnering with Facebook, Apple, Uber, Google or other non-traditional travel players could be something TRIP is actively scouting.

Figure 6: Is this a likely connectivity scenario?


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The Priceline partnership

The inventory share agreement with Priceline was a big win for TRIP. It connected Instant Booking to Booking.com inventory, giving it the critical mass on the supply side to become a marketable product. Having launched in 2014, TRIP likely stalled major marketing efforts until it felt comfortable enough with the size and quality of its supply. Booking.com inventory gave it that. Most recently the company launched an advertising campaign with the Wall Street Journal to (presumably) win over the business traveler.

Inventory was the missing ingredient TRIP needed to make a strong first impression, particularly with Europe-bound travelers, where the hotel landscape is dominated by independent brands. In the current competitive environment, going to market with a point-of-sale product without the independents on board would have been unwise. Again, Booking.com inventory gave TRIP access to this stock of hotels.

Data Source:  TripAdvisor 2015 Q3 Quarterly Earnings Report


TRIP needs to own its supplier base

Booking.com inventory was a critical stepping stone to the traveler and positioning as an accommodations booking site. Knowing this, Priceline likely negotiated an attractive commission rate with TRIP. The current commission take for hotels is 12% or 15%, depending on how much visibility the hotelier wants on the site. Priceline likely negotiated a substantially lower rate. The big consideration here is that Priceline currently populations a significant portion of listings published on IB.

A hotel search on TripAdvisor.com showed that over 60% of European listings currently available through IB are Booking.com listings (see figure). The same search produced a similar result for the U.S. market. If Priceline did indeed negotiate a preferential commission rate, then it is in TRIP’s clear interest to drive bookings directly for the hotelier.

Methodology: Search for hotel listings across Europe’s ten largest cities; also across the United States’ ten largest cities. We scanned 100 top listings in Europe and top 100 in the U.S. to calculate share of booking.com sponsored properties. We repeated the exercise three times – once in January, March, and May.

The biggest chains have embraced the new platform. But the challenge for TRIP will come with connecting to the vast global web of independent brands that have yet to integrate with TripConnect (the back-end that feeds into Instant Booking). More competition on the platform will give TRIP leverage to raise commissions. That could come from more OTAs signing on once the exclusivity term with Priceline expires. Ultimately the best-case scenario from a profitability perspective would be for TRIP to connect directly with the hotel.

The direct-connect race

TripAdvisor, Trivago, and Google have each recently rolled out with their own direct-connect sales channels. While hotels are eager to experiment with lower cost sales platforms, they also prioritize marketing budget and inventory to core channels that win them the most business – e.g. the OTAs and web direct. Independent properties are even more reliant on third-party channels than branded chain properties. This limits their ability and appetite to experiment with new channels. Introducing new sales channels also requires commitment in management. The direct-connect sales channel provider that reaches the hotelier first will likely stand in a better position to hold that limited budget and inventory. Ease of use and simplicity in connectivity will become a key competitive differentiator.

“Frenemies” to enemies?

TripAdvisor’s competitive positioning is potentially at risk by its dependence on its main competitors for both traffic and revenue. “Coopetition” and intermingling on the supply-side between big brands is a growing trend in travel. Local OTAs often source their hotel inventory from Booking.com or Expedia. Skyscanner recently launched a car rental white label offering which it sells to some of its top competitors globally. But TRIP’s dependence on Priceline and Expedia is potentially more disruptive. Over 45% of Trip’s 2014 revenues came from Priceline and Expedia alone (see figure). These relationships could be compromised over time as the market consolidates.

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TRIP, Priceline, and Expedia now have very similar and conflicting brand lines stretching across hotels, flights, homestays, and tours and activities. The exclusive nature of the partnership agreement with Priceline also likely had an adverse impact on TRIP’s relationship with Expedia.


More predictions

TripAdvisor’s decisions in 2014 and 2015 will sway heavily on its strategic direction in 2016. With the launch of Instant Booking, the company’s competitive positioning has crossed paths with its biggest clients and partners.

First half of 2016 will focus on Instant Booking

The move toward room bookings was a smart and necessary one from a monetization perspective. Most of the company’s attention and resources will likely fall on IB in the first half of 2016. TRIP’s top technical and marketing talent will need to make it work with the consumer. A global user base spread across the Americas, Europe and Asia will compound the challenge – working across multiple cultures and languages. They have to make it work from a revenue and investor confidence standpoint.

Flipkey’s days could be numbered

The Flipkey brand could get absorbed into the TripAdvisor branded platform.  Consolidating its vacation rentals inventory is likely part of a bigger strategy for TRIP to create a one-stop-shop experience for the consumer, while saving money on marketing. It also makes financial sense on the technology front. Flipkey already shares its mobile app with TRIP’s vacation rental mobile app; this will not change and speaks volumes about the future direction of the brand.

Improvements to hotel booking experience could prove challenging

How TRIP balances traditional hotel inventory with alternative accommodations under one roof will become a central question for the team. With the introduction of Instant Booking, the future of its metasearch product also hangs in question. The team will likely look for ways to streamline the shopping experience which, in its current state, is somewhat cluttered. In public statements, the company confirmed that metasearch will remain an alternative to IB. Offering both booking options will help reduce risk on the revenue generation, put could dilute efforts to rebrand TripAdvisor as a booking platform. Today’s travel consumer is looking for simplicity rather than options. The situation puts TRIP in a tight spot; the team will need to resolve this.

Despite promise, non-hotel products under performing

TRIP’s positioning within the tours and activities space remains competitive with the 2014 acquisition of Viator. In May of 2015 TripAdvisor launched an open-listing platform on Viator which allows local tours and activities providers to post their own content. The move away from a curated model put Viator in line with GetYourGuide, the Berlin-based competitor which also captured a big funding round (USD 50 million) in late 2015. TRIP leadership points to the tours and activities opportunity as an underutilized and untapped revenue stream. To date, the company has reported losses in nine out of the last eleven quarters for its non-hotel reported earnings (see supplemental information in first quarter results; restaurant bookings are included in this category. We assume that Viator makes up the bulk of this reported category). The first quarter of 2016 was a particularly bad quarter for non-hotel revenues. Two big business challenges in the tours and activities category is content and volume. Most items on the Viator site are priced well under USD 100 dollars. TripAdvisor and the Viator team will need to scale content and marketing efforts to grow this segment in a real way.


Key takeaways

  • TRIP took on a full plate with its Flipkey, LaFourchette, and Viator acquisitions. These assets positioned the group on numerous competitive battlegrounds – i.e. alternative accommodations, restaurant reservations, and in-destination activities. The company will likely need more capital to wage this war effectively on all fronts.
  • The launch of Instant Booking (IB) was a bold yet necessary push into fresh revenue streams. A growing share of mobile traffic created a monetization challenge. Making IB work both on the supply and buy side will be the company’s key strategic priority in the first half of 2016.
  • The transition from content to ecommerce site will prove challenging. Educating and incentivizing visitors to look and book, and to “jump on” earlier in the trip planning process is its central challenge. Competition in this segment of the funnel is already intense. Think OTAs.
  • The Priceline partnership gave TRIP the critical mass and supply to effectively market itself as a booking platform. But it was a temporary fix leaving IB captive to third-party inventory. Connecting directly, particularly with independent properties, will become critical to maximizing profitability of its new booking functionality.
  • The direct-connect race is on between TripAdvisor, Expedia, and Google. They each have their own direct platforms and will push to capture limited discretionary hotel budget and inventory dedicated to non-core distribution channels. TRIP has a head-start, but momentum will build behind Google’s numerous consumer touch points.
  • TRIP’s direct-connect technology platform could have limitations. Expedia and Priceline are growing both the retail and wholesale side of their accommodations businesses. As a relative newcomer, TRIP will be challenged to catch up as a supplier of content and break out of its own branded environment, and into hotel distribution.
  • Viator, TRIP’s in-destination brand, is well positioned participate in a USD 80 billion annualized market opportunity (TripAdvisor annual report). Expect movement here as part of TRIP’s second-half strategy, particularly as travel suppliers – i.e. look to add value with tours and activities. The burden will be on TRIP to grow transaction volume in this low price-point business.
  • Vacation rental site Flipkey could get consolidated into the TRIP mother brand. Budget constraints on the marketing and technology front will challenge the company to wage a multi-branded war. How TRIP juggles traditional and alternative accommodations inventory will determine its success as a consumer brand.