The State of Online Travel Agencies 2018 Part I: Advertising

by Seth Borko + Skift Team - Jun 2018

Skift Research Take

Online travel agencies remain essential to the travel industry as consolidators of and clearinghouses for advertising dollars throughout the space. We do not see OTAs being removed from this position easily, but challenges are growing by the day.

Report Overview

Skift is dedicated to following the nuances of the online travel agency (OTA) market. With more happening online than ever, this year we are breaking our online travel agency coverage into a multi-part series exploring different aspects of the business model in depth. The first part of our series looks at advertising spend by online travel agencies in North America and Europe. Upcoming parts of the series will include a look at OTA-supplier dynamics and emerging market OTAs.

In this report, we survey the state of online travel agency (OTA) ad spending in North America and Europe, specifically Booking Holdings and Expedia. These OTAs are well-oiled machines that are some of the largest marketers in the world.

However, they face growing challenges. Hotels and airlines have launched major campaigns encouraging consumers to book direct and search ad auctions are crowded. We analyze the state of OTA ad dollars and find that despite the large dollar figure, efficiency is declining. New ad dollars do not appear to generate as many bookings as they once did.

Ultimately the online travel agencies remain essential to the travel industry. They act as consolidators of and clearinghouses for advertising dollars throughout the space. We do not see OTAs being removed from this position easily, but they must remain nimble — upping their brand advertising, while tailoring their substantial ad spend for maximum booking potential — to keep pace.

What You'll Learn From This Report

  • Size of ad budgets at major online travel agencies
  • Comparison of travel ad spending to other industries
  • Analysis of ad efficiency at OTAs
  • A look at the shifting landscape between brand and performance ad spending
  • Margin analysis of OTAs

Executive Summary

Skift is dedicated to following the nuances of the online travel agency (OTA) market. With more happening online than ever, this year we are breaking our online travel agency coverage into a multi-part series exploring different aspects of the business model in depth. The first part of our series looks at advertising spend by online travel agencies in North America and Europe. Upcoming parts of the series will include a look at OTA-supplier dynamics and emerging market OTAs.

Online travel agencies (OTAs) are some of the largest advertisers in the world. Expedia and Booking Holdings spend nearly $8 billion annually in advertising. Each company individually spends the same in advertising as General Motors or Pepsi and more than double Citigroup or Colgate. These budgets collectively drive upwards of $170 billion in gross bookings.

In this report we analyze the advertising and marketing spend of Booking Holdings and Expedia. We picked these two companies as they are the two major online travel agencies in the U.S. and Europe and both have publicly available filings.

Ultimately, we conclude that the online travel agencies remain essential to the travel industry. They act as consolidators of and clearinghouses for advertising dollars throughout the space. By bringing these budgets together, they create a scale advantage that few other travel advertisers can compete with. This is especially true in online performance advertising markets where the OTAs’ ecommerce platforms and position at the bottom of the purchase funnel grant them maximum leverage. We do not see OTAs being removed from this position easily. We also note that travel suppliers can benefit from online travel agency ad spending both directly and indirectly, through the “billboard effect.”

However, there is trouble in paradise. Hotels and airlines have launched major campaigns encouraging consumers to book direct, and their impact has been felt. Plus, now having consolidated, the OTAs are finding diminishing returns from search keyword bidding in mature markets.

We analyze the state of OTA ad dollars and find that despite the large dollar figure, efficiency is declining, down by 15% or more. New ad dollars do not appear to generate as many bookings as they used to, likely a result of increased competition and crowded ad auctions. The result is that sales and marketing expenses are eating up an ever-greater piece of margins.

A new focus on brand advertising could help and initial forays into branded campaigns have already measurably increased audience reach for the OTAs. A nimble approach to existing performance online strategies could also be beneficial. This includes experimenting with new ways running brand campaign, such as on YouTube instead of TV, and looking at multi-touch platforms, such as Facebook. We also believe OTAs need to capitalize on their scale advantage, not just in ad dollars but also in supplier relationships to build differentiated business models.

OTA Advertising Landscape

Booking Holdings and Expedia: The Largest Travel Advertisers

This report focuses on Expedia and Booking Holdings as they are the two major online travel agencies in the U.S. and Europe and they both have publicly available filings. We recognize that there are other public OTAs in Asia, notably Ctrip in China and MakeMyTrip in India. Those OTAs have dynamics that are unique to their local markets that we intend to cover more in depth in future reports.

We analyzed Expedia and Booking Holdings on a consolidated basis, but we believe the trends that surfaced broadly represent dynamics in the core OTA markets of these corporations. True, Expedia owns metasearch company, Trivago, but this is only ~7% of consolidated revenue, not enough to substantially change the broad advertising trends we observe. Further, it should be noted that 80% of Trivago’s revenues are ad dollars from either Expedia or Booking themselves, further reducing the impact of using consolidated financials. At Booking Holdings, the “Advertising and Other” segment of its revenues, which includes Kayak and OpenTable, similarly represent under 7% of the total.

Over the last 12 months, Booking Holdings and Expedia spent $4.5 and $3.3 billion on advertising, respectively. As the two largest advertisers in travel, they compete fiercely against each other. It is interesting to note that the two company’s budgets have moved upward dramatically over the last 10 years. Booking Holdings has grown its ad budget at a 36% compound annual growth rate (CAGR) over the last 10 years. Expedia has grown ad dollars at a more modest, but still aggressive, 20% 10-year CAGR, resulting in a six-fold increase since 2008.

Expedia, it should be noted, spends more money on non-advertising marketing spend than does Booking. As a result, Expedia actually spends slightly more than Booking in overall selling and marketing expenses, with $5.3 and $5.1 billion respectively. There appears to be somewhat of an equilibrium at present and the ad expenses of each grew at similar rates of about 20% in 2017.

 

Exhibit 1: Booking Holdings advertising expenses

Source: Skift Research, Company Filings. LHS = Left-hand axis, RHS = right-hand axis.

 

 

Exhibit 2: Expedia advertising expenses

Source: Skift Research, Company Filings.

 

Online Travel Compared to Other Industries

Such high ad spending has made the online travel companies into some of the largest advertisers in the world, regardless of industry.

Skift Research analyzed members of the S&P 500, a stock index that represents the largest corporations in the United States1, and found 180 that specifically disclosed an advertising spending figure. Booking Holdings and Expedia had the fifth- and tenth-highest level of ad spending, respectively, out of all these companies that disclose such a line item in the S&P 500. Booking’s $4.5 billion advertising spend is nearly equivalent to the $4.3 billion spent by General Motors or the $4.1 billion by Pepsi. Expedia’s $3.3 Billion ad budget is more than double Citigroup’s and Colgate’s $1.6 billion spends.

 

Exhibit 3: Online travel’s ad budgets are comparable to stalwarts like GM, Pfizer and Coca-Cola

Source: Skift Research, Capital IQ, Company Filings.

 

These absolute ad spend figures place online travel on the same footing as blue-chip marketing industries such as consumer goods, pharmaceuticals, automobiles, food & beverage, or cable. But what really puts online travel in a league of its own is how much it spends on advertising relative to its total revenues.

Advertising expenses represented 37% of revenues for Booking Holdings and 33% for Expedia. This is a far greater relative share of revenue than any other industry. Household product companies spend 9% of their revenues on ads while auto companies spend just 3%.

 

Exhibit 4: Online travel agencies spend a greater share of revenue on ads than any other industry


Source: Skift Research, Capital IQ, Company Filings.

 

However, there are other marketing and selling expenses outside of advertising. Plus, not every company will disclose a stand-alone ad spending number. To ensure our analysis did not exclude any relevant comparisons, Skift Research ran a similar analysis using a more expansive measure of costs.

For this supplementary analysis, Skift compared selling, general, and administrative (“SG&A”) expenses across all companies in the S&P 500. This metric captures not just advertising expenses, but also includes other areas of marketing budgets, salesforce costs, and corporate overhead. This is a far broader metric than strictly looking at advertising, but has the advantage of being widely reported and comparable across different companies and industries. It is widely used by financial analysts seeking to understand the operating cost structure of a business. To allow comparisons across businesses of various sizes, we normalized SG&A expense as a percent of revenue.

In the chart below, we rank all S&P 500 by SG&A spending as a share of revenue, which we then plotted in descending order. The blue line represents where every company in the S&P 500 sits relative to one another.

Online travel agencies have some of the highest relative levels of SG&A expenses out of any industry in the S&P 500. In fact, all three public travel websites fall within the top 10 for relative SG&A spend within the S&P 500.

The median U.S. corporation spends 16% of its revenue on selling, general, or administrative expenses. Expedia and Booking both spend 59% of their topline. This only further reinforces the similar results we saw when comparing stand-alone ad budgets.

 

Exhibit 5: Travel websites spend a large share of their revenue on SG&A

Source: Skift Research, Capital IQ, Company Filings.

 

Why do Online Travel Agencies Spend Such an Outsized Amount on Advertising?

Online travel agencies have such outsized ad spends, because they run unique business models in which they effectively act as consolidators of and clearinghouses for advertising dollars throughout the travel space. By bringing these budgets together, they create a scale advantage that few other travel advertisers can compete with. This is especially true in online performance advertising markets where the OTAs’ ecommerce platforms and position at the bottom of the purchase funnel grant them maximum leverage.

It should be noted though, that because of this business model, OTAs only record as revenue the commission they charge to suppliers, although their web platforms process a far larger value of travel bookings. In contrast, General Motors’ revenue, as an example, is the value of all of the cars it sells. That means the GMs’ revenue figure is in practice more comparable to an OTA’s Gross Bookings. Expedia facilitated $88 billion of gross bookings in 2017, while Booking Holdings did $81 billion.

If we look at the OTAs’ ad spend relative to gross bookings, advertising spending would fall to 6% of gross bookings at Booking Holdings and to 4% at Expedia. These rates are far more reasonable, and in-line with what other large advertisers spend as a percent of revenue. Even so, the pace of ad spending at travel websites remains in the top tier of global businesses. For instance, the pharmaceutical industry spends 4% of revenue on ads and auto companies spend 3%. The median S&P 500 company spends just 2% of revenue on advertising, less than half of what online travel agencies do.

 

Exhibit 6: Even adjusted for gross bookings, travel still a notable ad player

Source: Skift Research, Capital IQ, Company Filings.

 

Strong Use Case for Performance Advertising in Online Travel

Online travel is notable for being a pioneer of online advertising, and the channel still represents an outsized portion of its budgets.

Online travel agencies have a unique position in Google search auctions. Searches are strong indicators of consumer intent. With ecommerce platforms sitting at the bottom of the purchase funnel, OTAs readily convert searches to bookings faster than a traditional consumer packaged goods company could. Additionally, because the OTAs aggregate ad dollars for the entire industry, they have massive scale that can compete for and win AdWords auctions for generic search terms like “hotels,” “flights,” “rental cars,” and “cheap tickets.” These terms are consistently top five referring keywords for the OTAs. In comparison, the top five referring keywords for Marriott.com and Delta.com are almost entirely variations of their respective brand names. However, these generic search terms are typically three times as expensive as branded terms.

Mike Ford, the co-founder and managing director of SiteMinder, a cloud platform for hotels and a leading channel manager, previously told Skift that, “it is tough to say I’m going to get these bookings much cheaper than the OTAs. You’ve got to outbid Booking.com and Expedia. They have multi-language, so if you want guests from different countries, you’ve got to make sure you’re translating all of the content on your booking engine, otherwise you can only do it from English speaking countries. You’re then paying your technology provider to handle the payments to Google and the technology provider has to click the monies and remit the commission back to you. It’s a complex environment and depending on how well the booking engine converts, that’s the key.”

The vast majority of ad budgets at Booking Holdings go to performance advertising, 91% as of the first quarter of 2018. We believe that the mix is similar at Expedia. At both booking.com and expedia.com, referrals from metasearch and other channels make up 9% of overall traffic. The share of paid search varies from 19% of traffic at booking.com to 11% at expedia.com.

Yet, Advertising Efficiency is on the Decline

Expedia and Booking are competing as fiercely as ever and, in addition, as consumer behavior continues to shift, more brands are moving online. This means more crowded search ad auctions, with bigger ad budgets behind them. A resulting increase in cost-per-click prices and a decrease in ad efficiency is not surprising.

Gross bookings / New Bookings Per Ad Dollar On The Decline

One way that Skift Research has attempted to understand advertising efficiency at the online travel agencies is to measure gross bookings per marketing dollar spent. It’s a crude metric as many factors drive the ultimate level of OTA bookings in addition to ad spending. But, we believe this metric captures an overall sense of marketing campaign performance.

The results show a steady decline in marketing efficiency, just like we would expect to see due to the challenges mentioned above. In 2008, Expedia and Booking Holdings were both able to book $19 of travel sales for every $1 they spent marketing (and ad budgets were almost entirely online). Today, every dollar spent marketing earns closer to $16 in bookings, a 15% decline in efficiency.

 

Exhibit 7: Each marketing dollar spent by the OTAs commands 15% fewer bookings today than 10 years ago

Source: Skift Research, Company Filings.

 

An alternative way to illustrate marketing efficiency is to only look at incremental dollars. In other words, how many new bookings can each additional dollar spent on selling and marketing above last year’s budget generate?

In 2010, each incremental dollar that Expedia devoted to marketing could pull in $23 in new bookings; at Booking Holdings, that figure was $20. But as the market has become saturated, additional dollars have become less effective. Expedia now only adds $8 in bookings for each new marketing dollar, a 67% decline. Booking Holdings has held in better, but still saw a 24% decline in efficiency, and now generates $15 in new bookings per new marketing dollar.

 

Exhibit 8: Each incremental marketing dollar spent generates fewer bookings than before

Source: Research, Company Filings.

 

Competition Between Rivals and Partners Eats Up Efficiency

During the company’s third quarter 2017 earnings call, Glenn Fogel, the CEO of Booking Holdings, said that, “in performance-based channels, competition for top placement has reduced ROIs over the years and been a source of margin pressure, with an increasing share of the unit economics accruing to the benefit of our advertising partners. This has been a concern to us since some of these partners use our advertising dollars to compete with us in the advertising funnel and represent themselves as places to not only research travel, but also book it.”

Fogel was effectively taking aim at metasearch platforms such as Trivago and TripAdvisor which take ad dollars from Booking Holdings, but also bid against them in generic keyword search auctions, decreasing ROI. In response, Fogel has decreased Booking Holdings spend on these sites. As an example, Booking Holdings represented 43% of Trivago’s platform in 2016, but is down to just 38% today.

 

Exhibit 9: Booking Holdings has cut back its ad spend on competing platforms

Source: Skift Research, Company Filings.

 

Expedia faces similar challenges. CEO Mark Okerstrom has spoken of, “multiple layers of competition where, if you take ourselves [Expedia] versus Booking.com, … they’ve got Kayak and we’ve got Trivago. We’re bidding in Kayak versus them. They’re bidding in Trivago versus them. And then Trivago is bidding in Google versus both of us. And TripAdvisor — we’re all in TripAdvisor, they’re bidding [against all of us as well]. It’s everyone bidding against everyone [emphasis ours].”

This explains the signals from the metasearch world where, for instance, Trivago measures its return on advertising spend. This is defined as the ratio of referral revenue, generated by sending shoppers onward to supplier/OTA sites, to advertising spend. Trivago’s return on ad spend has clearly been trending downward for the past year. Even with the uptick that Trivago saw in early 2017, return on advertising spend sits at 109% today, down from 120% in early 2017.

This is just one company, and there are idiosyncratic dynamics underlying its marketplace. But it should be noted that Expedia and Booking Holdings consistently make up a collective 80% of ad dollars on the platform and so in some sense, Trivago’s lower efficiency is a loss for the OTAs as well. It’s not a perfect analog, but we introduce it as an example of the long-term trend toward less efficient performance ad campaigns.

 

Exhibit 10: Trivago another example of lower performance ad efficiency

Source: Skift Research, Company Filings.

 

This dynamic where all the major travel brands bid in search auctions against all comers, and sometimes even against their own parent corporation’s best interest is apparent when analyzing cost-per-clicks (CPC). Companies will rarely bid on searches that inquire directly about a competitor’s brand name. Expedia typically does not find it efficient to bid on searches for “priceline,” as it’s unlikely to change that specific customer’s intent. Instead this war of all against all takes place on generic travel search terms such as “flights” or “hotels.” According to SimilarWeb, a leading provider of web analytics, generic travel search keywords command a CPC of $1.87 on average, more than three times as much as branded searches.

 

Exhibit 11: Generic keywords are more than 3x as costly as branded ones; perhaps prohibitively expensive for smaller players

Source: SimilarWeb, Skift Research.

 

What Is the Outlook for Advertising Spend?

An Increase in Brand Advertising

In addition to the challenges mentioned above contributing to declining ad efficiencies, hotels and airlines have also been fighting back with a series of direct booking campaigns. Hilton launched a major ad campaign encouraging customers to stop clicking around while Marriott told travelers that it pays to book direct. Many hotel chains also introduced special loyalty rates or perks that allowed them to break rate parity. Recent research from Kalibri Labs indicates that book-direct campaigns really did make a difference. They found that there was in fact a shift in bookings from third-party bookings to direct channels across a sample of 25,000 hotels. “The OTA channel still grew, but in most cases, Brand.com grew more.”

This increased competition for consumer attention has caused the online travel agencies to reconsider their approach to brand advertising. Online travel executives hope that television ads can improve consumer reach at an earlier stage of the purchase funnel and build brand awareness. It may also help offset ongoing challenges with performance ad spending by driving greater direct web traffic.

Fogel of Booking Holdings has been explicit: “increasing direct traffic and customer loyalty is a key strategic priority for us,” he said. “We believe that brand marketing will also be an important part of driving direct traffic to our websites over time. We hope to make further progress executing our brand strategy, implementing new measurement technologies and tools and testing in various geographies.”

The shift is noticeably, but still slowly, coming. Booking Holdings, for instance, spends 91% of its ad budget on “performance” advertising, down from a 97% share five years ago.

 

Exhibit 12: Performance still the lion’s share of advertising at Booking Holdings, but on the decline

Source: Skift Research, Company Filings.

 

The online database of U.S. television advertising, iSpot.tv, estimates that travel websites spent $693 million on U.S. television ad spots in 2017, more than double that of the major hotel or airline groups. That’s a 68% year-on-year increase. In comparison, U.S. TV ad budgets for hotels grew 24%, while airlines declined 19%.

 

Exhibit 13: Travel websites have increased their U.S. TV ad spending dramatically

Source: iSpot.tv, Skift Research.

 

These brand campaigns have been successful at increasing audience reach in a fairly dramatic way. iSpot.tv estimates that online travel television ads generated 36 billion U.S. impressions in 2016, compared to 23 billion for the combined hotel groups. With the massive increase in TV budgets that we saw in 2017, travel websites grew their U.S. impressions by 19 billion, for a total of 55 billion. In comparison, while hotel ad spending increased, their ad impressions remained essentially flat.

 

Exhibit 14: Travel websites’ U.S. TV ad impressions increased by 19 billion in 2017

Source: iSpot.tv, Skift Research.

 

That said, individual televisions campaigns can vary widely in cost and scope. Here Kayak and Priceline, both Booking Holding subsidiaries, have a clear CPM advantage. But it should be noted that these brands have a far smaller reach than Expedia’s family of brands. Trivago has by far the greatest branded audience reach, followed by TripAdvisor.

 

Exhibit 15: Travel branded TV campaigns vary widely in both cost and reach

Source: iSpot.tv, Skift Research.

 

These TV campaigns also appear to have been successful in their secondary goal of increasing direct web traffic as well. According to SimilarWeb data, at Expedia, direct and organic search traffic, which are unpaid sources of web traffic, increased from 61% of overall U.S. site visits in April 2016, to 66% today. Similarly, at Booking.com, direct and organic search traffic is up from 50% of all visits in April 2016 to 60% today.

 

Exhibit 16: Expedia.com and Booking.com have both managed to boost direct and organic search traffic while overall site visit volumes remain mostly constant

Source: SimilarWeb, Skift Research.

 

Travel websites paid $9.78 to reach 1,000 U.S. television viewers last month, according to iSpot.tv. This CPM (or cost per thousand impressions) compares very favorably with other industries which can often pay upward of $12 or $14 for a television CPM. But these travel brands also received relatively fewer overall impressions than many other industries. If online travel agencies hope to increase their reach, it could drive up CPM costs as well.

 

Exhibit 17: Overall travel CPM is favorable compared to other industries, but reach more limited

Source: iSpot.tv, Skift Research. Data for the Month of May 2018.

 

Further, as Fogel points out, brand marketing can increase the efficiency of pay advertising channels as well. As the industry moves away from a last-click attribution model and focuses more on multi-attribution advertising, brand campaigns can have a larger role to play.

Lastly, we note that what is considered brand advertising is changing. Television viewership is on the decline and is being replaced with digital platforms. But this disruption of an old market can actually spell opportunity for sophisticated marketers. For instance, YouTube is a rapidly growing space for brand advertising. And being a digital platform, it makes certain return on investment measurements faster and more accurate to calculate for a brand campaign than has been the case with traditional TV channels. It appears that Trivago’s data science teams take advantage of this aspect of the platform to rapidly prototype creative brand content on YouTube to decide which campaigns perform best before launching those spots more broadly on television.

Taking a longer view, performance advertising was not always as dominant as it is today. Priceline, now Booking Holdings, once relied on brand advertising for a majority of its campaigns, and William Shatner just celebrated his 20th anniversary as the Priceline Negotiator. So perhaps this is just the pendulum swinging back towards equilibrium on the performance vs. branding debate.

 

Exhibit 18: Putting the branded vs. performance debate in context – Booking Holdings once spent a majority of ad dollars on branded campaigns


Source: Skift Research, Company Filings.

 

Expedia’s Okerstrom doesn’t see branding vs performance advertising as an either/or choice to make. He says that Expedia, “looks at brand marketing spend largely as a discrete decision. And so I wouldn’t assume that we take out from one [performance marketing] and directly put into another.” The jury is still out on whether the online travel agencies will become major television advertisers, but it is clear that the segment is rapidly evolving and that brand advertising is here to stay for travel.

Early Signs of Ad-Spend Stability

We discussed earlier that gross bookings per marketing dollar have been on the decline for the past few years. That it means sales and marketing expenses are growing in absolute and relative size for both Expedia and Booking Holdings. The effect is most dramatic at Expedia, but is clearly felt at Booking Holdings as well. For now, online travel continues to pay for growth with margin, but this is not sustainable, and executives are anxious for a way out of this dilemma.

 

Exhibit 19: Sales and marketing expense have ballooned as a share of topline

Source: Skift Research, Company Filings. Note: Priceline brand offers Name Your Own Price services which were previously recorded in revenue on a “gross” basis with the amount remitted to the travel service providers reported as cost of revenues. Therefore, we use gross profit as the topline figure for Booking Holdings to ensure that it is comparable to Expedia, which records all revenues on a “net” basis.

 

There are early signs that we may be reaching some ad-spend stability. Fogel has said that, ”we’re definitely leaning in, and we will continue to lean in with those platforms that we believe are helping us build our business for our long-term strategy. And we lean out against those platforms that are not doing that, those that we believe, in the long run, are actually going to be detrimental to achieving our long-term strategies.”

In Q1 2018, Booking Holdings saw gross profit grow faster than advertising spending for the first time in at least five years. It is still too early to tell if this is a quarterly blip or part of a broader trend, but it could be a positive sign for margins at the company.

 

Exhibit 20: Booking Holdings growth of revenue vs. sales and marketing expense

Source: Skift Research, Company Filings.

 

Expedia, on the other hand, continues to grow selling and marketing expenses faster than it can increase its topline. However, CEO Mark Okerstrom explained that, “the declines in sales and marketing and efficiency from an optical perspective have generally been driven by mix shift for us, which is spending more in international markets, which are generally less efficient, and then building up more efficiency over time. And, he said on a recent earnings call that, “maybe we’ve hit a new equilibrium [in the advertising market].”

 

Exhibit 21: Expedia growth of revenue vs. sales and marketing expense

Source: Skift Research, Company Filings

 

Perhaps the latest brand campaigns will be successful in driving greater sales at a reasonable selling and marketing cost. But if Expedia and Booking Holdings cannot find a new equilibrium, how else to solve the problem of growing marketing expenses relative to topline? One solution could simply be to look to make up the lost margin elsewhere. For instance, by pursuing growth in new markets with margin opportunity — such as alternative accommodations or tours and activities — where both Expedia and Bookings are making large investments. Another approach is to find cost savings elsewhere. An example could be the tech budgets, as in Expedia’s transition to cloud databases, which should save OpEx dollars down the line that could be used to make room for greater ad budgets.

Conclusions

1) Online travel agencies remain central to travel industry marketing efforts

The scale and sophistication of online travel agency ad campaigns, at $8 billion a year globally, dwarves anything else that the industry can bring to market. As such, OTAs remain essential customer acquisition tools for hotels, airlines, tours and activities, and destinations.

Further, online travel’s margin structure truly drives home how central advertising is to the OTA business model. The OTAs spend 5% or more of gross bookings on their selling and marketing budgets. This is on the upper end of relative spending for any industry, but becomes massive when accounting for the fact that OTAs only take a commission on their bookings. After this adjustment, as much of 40% of revenues are devoted to advertising and other customer acquisition costs.

The two major OTAs were directly responsible for $170 billion in gross bookings in 2017, and our 2017 Outlook on Hotel Direct Bookings report suggests they are among the largest booking channels for both independent and branded hotels.

In a sense, the online travel companies are essentially outsourced ad buyers for the travel industry that act as consolidators of advertising dollars throughout the space. By bringing these budgets together, they create a scale advantage that few other travel advertisers can compete with. As the the consumer moves online, both performance and brand advertising campaigns are growing in technical complexity. This gives, the OTAs yet another scale advantage, in that they can invest in fine-tuning strategies for YouTube, Facebook and others. Overall, We do not see OTAs being removed from this position easily, but challenges are growing by the day.

 

Exhibit 22: Online travel agents remain leading distribution channels for both brands and independents


Source: Skift Research 2017 Outlook on Hotel Direct Bookings

 

2) Travel suppliers can benefit from online travel agency ad spend

The potential indirect impacts of OTAs further reinforces the idea that they are ad agencies by another name. One 2017 Cornell study estimates that 65% of hotel customers visit an online travel site prior to booking, though these are not necessarily direct referrals and include visits as part of the traveler research process.

 

Exhibit 23: Travel suppliers can benefit from OTA ad spend as 65% of consumers visit an OTA even when booking direct

Source: Anderson, C. K., & Han, S. (2017). The billboard effect: Still alive and well. Cornell Hospitality Report.Note: Sample OTAs include Expedia.com, Hotels.com, and Booking.com. Sample Hotel sites include Hilton.com, Marriott.com, and IHG.com. Searches include searches at Google, Yahoo, and Bing. Meta sites include Kayak.com, Trivago.com, and GoSeek.com

 

The Cornell researchers, Chris Anderson and Saram Han, call this the “billboard effect” and estimate it may generate anywhere between a 5.5% and 35% uplift in sales. They write that, “there is still a billboard effect on customers as they visit … non-direct sites prior to booking. Hoteliers who ensure that their online presence is easy to find, attractive, and competitive will capture more of these customers.”

A recent study by Oxford Economics for TripAdvisor seemed to come to a similar conclusion in the metasearch world. It found that TripAdvisor had a direct impact on 10% of worldwide travel spending and an indirect influence on a further 1.5% of spending.

That means that hoteliers and other travel suppliers do not need to view the online travel agencies through a strictly adversarial framework. Sure, there are challenges to working with OTAs, but there are benefits as well. We see large opportunities for savvy independent hotel operators to draft off of the size and technical expertise that OTAs ad campaigns can deliver.

3) Growing competition means OTAs need to develop differentiators

Despite the prominence of online travel agencies, they face growing challenges. Major hotel groups and other travel suppliers have launched impactful direct booking campaigns. Plus, suppliers have upped their online marketing savvy, pushing into the OTAs’ traditional area of core expertise.

The result is declining advertising efficiency and margin pressure from selling and marketing expenses. Online travel agencies can compete by remaining nimble with their online strategies, by shifting dollars to brand advertising and by exploring other performance advertising channels. But ultimately, if OTAs are simply a clearing house for travel industry marketing dollars, then their margin will be at the mercy of supply/demand dynamics in ad markets at the end of the day. In order to take their fate into their own hands, we believe, OTAs need to take their scale advantage in ad dollars and use it to build additional network effects that can add value for both customers and travel suppliers.

We think that one of the keys to creating a differentiated OTA model comes not just from the advertising side, but also from the supply side. 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 an 18% increase, respectively. Factoring in alternative accommodations boosts both the absolute number and the growth rate. This supply has taken years to build and is a crucial differentiator for the OTAs.

A wide range of supply brings clear advantages to consumers who want to understand the full market. But we also believe that OTAs need to focus on making their commissions “stickier” to suppliers. 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 to better manage their businesses, the OTAs further enmesh themselves in the supplier ecosystem and build a deeper moat should ad prices continue to pressure margins.

 

Exhibit 24: Expedia and Booking Holdings focused on growing supplier inventory

Source: Skift Research, Company Filings.

 

1. S&P 500 companies are formally incorporated in the U.S., but in practice many have substantial subsidiaries overseas. Therefore this index is not just a U.S. metric and represents some of the largest multinationals globally.

Endnotes and Further Reading