Will Google stay off the OTAs patch?
As Google’s meta-model becomes increasingly monopolistic, Pamela Whitby takes a look at how travel distribution is evolving
If Google is a travel company, Marriott and Airbnb are morphing into online travel agents (OTAs) and Amazon is, hypothetically, about to become one, could Expedia Group, Booking Holdings or Ctrip be out of business in five to ten years time?
Anything is possible but Abhijit Pal, Expedia’s head of research, thinks that this is highly unlikely. “The travel industry is worth an estimated $1.4 trillion and although we are the largest online travel agency by gross bookings our share of the pie is still rather small,” he says.
Although Expedia’s gross bookings continue to rise – by 11% to $2.5 billion year-over-year, according to third-quarter earnings published last week - Booking Holdings remains the biggest revenue spinner, and has the strongest operating margins (36.7% vs just 5,69% at Expedia). Meanwhile, China’s Ctrip remains the fastest growing, according to a recent report from EyeforTravel.
But Pal is optimistic and, if anything, he believes there is plenty of room for growth, and there may even be space in the market for as many as five global OTAs. “We are still growing phenomenally well with double-digit growth,” he says.
In an earnings call last week Expedia’s new group president and CEO Mark Okerstrom echoed this optimism: “You hear, ‘Is the industry fully penetrated?’ The answer is not even close”.
The platform evolution
Recently, Okerstrom has described Expedia’s new strategic vision as “putting the ‘A’ back into OTA” - in other words, delivering an old school style travel agency service. In this, Expedia is not alone. In fact, the strategic shift and race to become a two-sided, vertically integrated travel market place, a la Amazon and Netflix, is aggressively underway at both Expedia and its main rival Booking Holdings. Their goal: to offer a one-stop-shop to everybody from Joe Traveller to hotel chains, big and small, independent hotels, airlines, car hire companies, tours and activities and more.
This evolution of OTA strategy has come in response to fierce competition, not least from the likes of Google and Facebook, growing regulatory pressure, which has led commissions to fall, and shifting consumer behaviour.
There is lot more scale that you can achieve both on the consumer side and from an industry point of view when you think of it as a ‘platform’ business.
Abhijit Pal, Head of Research, Expedia
Collaborating more through partnerships, rethinking technology development to build scalable, flexible architectures that can be used by multiple brands, and across the industry is the way travel is moving.
In Pal's view: “There is lot more scale that you can achieve both on the consumer side and from an industry point of view when you think of it as a ‘platform’ business. Fundamentally, it is less about our brands competing with each other, and rather squeezing out best practices and best win-wins for all.”
The big OTAs with their billion-dollar development budgets and technical nous may be positioned for growth, but the threats to their business are real, and the subject of intense and often heated speculation. Most headline grabbing is Google’s dominance, and the Facebook factor isn’t too far behind!
In a recent interview with CNBC, Barry Diller, chairman and senior executive of Expedia Group, called for stronger regulation of both Facebook and Google, which, he says, “own, basically, advertising business worldwide.”
In 2017 Google alone raked in $95.4 billion in advertising revenues, a rise of 20% on the previous year, and a big chunk of this likely came from the travel industry. Expedia, for one, spent $5.2 billion on marketing investments (almost half its revenue!) and $3.5 billion, according to Diller, went on Google advertising. Booking’s Google spend is a bit hazier. It gives a marketing budget number every quarter, a cocktail with a variety of costs wrapped up. With no detail, Booking says in its latest interims that in the six months to the end of June, it spent $2.25 billion as opposed to $2.13 billion for the same period last year on performance marketing, and $225 million as opposed to $211 million on brand marketing.
However, in 2016, Booking, then the Priceline Group, spent $3.5 billion on advertising, which according to reports was mostly directed towards Google Hotel Ads. [Google’s investment in Flight Search and Hotel Ads means it now has a captive audience here too!]
Milking the cow
Go to any corner in the travel industry, and you will be hard pressed to find anybody who will dispute that Google is a dominant force. Pal certainly believes this is the case, but does he see Google as a major threat to its new service-led business model?
He puts it like this: “Google runs primarily an auction business for advertising real estate so they certainly have an incentive to maintain an open and fair marketplace with multiple bidders. At the same time, they want to make sure they are answering customer questions and solving their problems quickly and efficiently, so it’s a balance. I don’t see them investing as heavily in operations and customer service because it’s not as scalable as their primary business model. But will they continue to be a dominant force in the travel industry? For sure.”
It is quite evident when doing [any travel] searches on Google that Booking.com and Expedia are among the very top contributors to Google’s marketing revenues.
Marco Corsi, Head of Third-Party Distribution, Sokos Hotels
On this hoteliers seem to agree. As Marco Corsi, who manages third-party distribution for 60 hotels including Sokos Hotels in Finland, Russia, and Estonia and the Radisson Blu chain in Finland, notes: “It is quite evident when doing [any travel] searches on Google that Booking.com and Expedia are among the very top contributors to Google’s marketing revenues. So why kill the milking cow?”
Another hotel view comes from Inderpreet Banga, senior director, e-distribution and wholesale strategy, Wyndham, who also does not believe that Google will take on the full booking and customer service model as “it's resource intensive and just not in their business model”.
He continues: “Also, Google just brought Hotel Ads within the Adwords platform for better optimisation of what distributors and suppliers spend on bidding.”
Banga, however, holds the strong belief that “Google will facilitate the booking on the platform via Book on Google (BoG).”
BoG, also known as Easy Booking, is part of the Google Hotel Ads product, and interestingly, Google recently launched its Room Booking Module (RBM), which allows hotels to not only show their prices but also room photographs, making it an even more powerful force in metasearch.
On this, it is still work in progress. “You [still] need to look hard if you really want to book on Google,” says Philippe Garnier, who recently joined IHG as VP of third-party distribution. Garnier who will be speaking at EyeforTravel San Francisco 2019 does not see Google as a travel company as such, but rather as “an amazing search engine and an amazing driver of ad revenue”.
As it stands, Google is likely to make the biggest gains in travel with its meta-model. Even Tripadvisor, a long-standing opponent of the search giant, has had to concede dependence on Google’s hotel marketing channel to help address its recent woes. At the same time, intensifying pressure on companies like Kayak and Trivago is another indication of the dominance of Google’s evolving meta strategy. So, it’s realistic to expect Google to continue to create more value with new products like RBM, virtual mobile chatbots and digital assistants and more.
But Banga argues that although Google is “clearly controlling the highest share of metasearch, the costs are high”.
This is especially true for independent hotels, where it’s becoming increasingly expensive to convert traffic.
Although Google is “clearly controlling the highest share of metasearch, the costs are high”
Inderpreet Banga, Senior Director, e-Distribution and Wholesale Strategy, Wyndham
Targeting the independent hoteliers is where the OTAs believe they have an edge. “When you think about what we do in terms of scale and what we do to efficiently digitise and convert marketing spend at higher conversion rates, and with greater cost efficiency, we can deliver a better cost-clearing house for the marketing spend of independent hotels,” says Pal.
The irony of the OTAs strategically using their marketing and resources to get more direct bookings [for independent hotels] is not lost on hoteliers.
Says Banga: “The days of overbidding by the OTAs for placement on metasearch are, as reported in early 2018, done. And just like hotels want to balance and reduce intermediary bookings, OTAs are reallocating resources from higher cost acquisition channels to direct acquisition channels.”
At EyeforTravel North America last week, Del Ross, the conference chairman and a senior advisor to McKinsey, described the past year as “weird” and the industry as dynamic and unpredictable. So weird and unpredictable that even travel suppliers are now cheering on a crowd that weren’t all that long ago labeled the ‘big bad OTAs’!
So, what will future battles to win an increasingly fickle and disloyal customer be fought on?
For Booking Holdings direct bookings seem a priority. In a recent second-quarter earnings call, the group’s chief financial officer, David Goulden, made a clear link between driving direct bookings through its loyalty programme Genius, and the dip in its marketing spend.
A lot of things have changed in travel distribution, but one thing that has not is the importance of serving the customer
Philippe Garnier, VP Third-Party Distribution, IHG
IHG’s Garnier, who will be speaking in San Francisco, says that the customer experience still rules. “A lot of things have changed in travel distribution, but one thing that has not is the importance of serving the customer. When we talk about distribution, we sometimes forget that all these efforts are about customers enjoying their experience,” he says Garnier.
Wyndham’s Banga agrees: “As bookings continue to move online, brands need to be as competitive as possible to further own the customer and customer experience.”
Meanwhile, what Expedia’s research clearly shows, according Pal, is that consumers “completely value convenience”.
Perhaps it isn’t so surprising then, that the first step for time-pressed travellers today is simply to ‘Google it’.
Part 2 in this series on travel distribution will consider how and why an Amazon OTA model could develop. Join us at EyeforTravel San Francisco 2019 to hear more about the weird, dynamic and unpredictable travel industry