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Priceline.com, Inc. (NASDAQ:PCLN) is an online travel company that provides reservation services to customers around the globe via 295,000 holding properties, through its Booking.com and Agoda.com brands. Additionally, Priceline.com also offers car rental services through Rental.com at 6,000 global locations.

The Success Story of Booking.com

Priceline, an Amsterdam-based online hotel reservation company, acquired Booking.com in July 2005. As a result of this, Priceline was awarded with an access to 18,000 properties in Europe. This was the beginning of the company's successful expansion journey. The company now works with over 275,000 properties in 175 countries. The international business, primarily operated through Bookings.com, embodied about 82% of its gross travel bookings (a statistical metric denoting the total dollar value, generally inclusive of all taxes and fees, of all travel services obtained by customers) in 2012.

The brand's latest partnership with NYC & Company (nycgo.com), New York City's tourism organization, in September 2013, had a positive impact on the financial and business performance of the company as a whole.

The Agency Model Vs. the Merchant Model

This brand operates using the agency model. Under this model, hotels can establish their own rates and room provisions and collect payment from patrons using the website's extranet. Benefits of the agency model can be seen in the company's remarkable growth in Europe. This model allows the guests to pay after their stay and online travel agencies (OTA) earn a commission from the payment. The merchant model was adopted by Priceline's major competitor Expedia (NASDAQ:EXPE). This model offers OTAs a higher margin as users bid for an OTA's services and the booking process is concluded on the OTA's website.

The agency model proved to be an attractive approach to the visitors in Europe as they can now pay less commission. They only pay a 15% commission as compared to the 25%-30% commission charged by other OTAs. The competitors found difficulty in adopting this model because it would result in the OTAs earning a lower percentage of commission. However, consumers favor this model since it allows them to make payments at the end of their stay.

Competitive Landscape

Click to enlarge images.

Source: Morningstar

Priceline operates in a highly competitive market and one of its biggest rivals is Expedia. Expedia tried to adopt the agency model by acquiring the Italian company Venere, in 2008, because this company operated using the agency model. However, Expedia did not gain the success it expected due to the fact that Priceline was able take benefits from keeping original competent management of the brand it acquired from Europe. Priceline supported the brand's wish to operate autonomously. The number of hotels in collaboration with the brand funded its impressive growth and victory over its competitors.

In Europe, the company has a 47% stake in the gross booking of online travel agencies, while Expedia has a 45% stake in OTA gross bookings. Early adoption of the agency model by Priceline has also created the opportunity for more innovative OTA models that offer the company a competitive edge over late comers, who are just converting to the agency model. Additionally, Expedia has been running both models till now which has created confusion among users and has made the booking process too complex for its visitors. Expedia has also experienced difficulty in applying and running the model.

Current Activities and Position in the Market

Priceline launched its leading ad campaign for the brand in the U.S. at the start of 2013. Through the ad campaign, the company was able to increase its popularity among American travelers. In May 2013, Priceline succeeded in outperforming Expedia's Hotels.com, as one of the most prominent travel sites in the U.S. In addition to this, Priceline's partnership with NYC & Company has allowed the brand to strengthen the city's official tourism website. Currently, the company provides access to nearly 65,000 of the 98,000 hotel rooms in NYC.

Priceline's bookings brand is alleged to be one of the most searched travel sites on Google. This may be attributed to the company's ability to inject more money into search engine marketing, since the conversion rates on its landing pages are better off in the competition. So, the large scale of the company's operations allows for financial freedoms such as developing the effectiveness of its website structure and landing pages. The websites are available in 41 languages to ensure that lookers become bookers. Another beneficial strategy was the acquisition of hotel search engine Kayak Software Corp., which will attach profitable search tools to the company's services and assist visitors in booking flights and hotels online.

Favorable Seasonal Factors

September to December is deemed to be the peak season for tourism and holiday spending in New York City due to favorable autumn and various holidays such as Halloween, Thanksgiving, and Christmas. The city accommodates around 50 million foreign and American tourists each year and has the highest hotel occupancy rates in the country. Despite the global economic crisis, the growth in visitors to the city has been attained through hefty discounts and value-added services.

NYC & Company and Booking.com

NYC & Company is the official visitor bureau of NYC and handles approximately one-third of all overseas travel to the U.S. International travelers contribute only 20% of the city's visitor volume and about 50% of the total spending. The main duties of the company include the maximization of traveling and tourism opportunities in order to improve economic prosperity and portray a positive image of the New York City.

Growth Potential in the Market

Source: NYC & Company

The chart above shows the predicted visitor growth for NYC. As many as 53 million tourists are expected to visit the city by the end of 2013 continuing the trend of 50 million travelers visiting the city every year. This number is expected to grow to more than 100 million visitors by 2016. This growth will lead to the sustainability of revenues and profits of the brand in the long run. Independent hotels are becoming predominantly OTA-dependent. On average, more than 42% of the rooms of independent hotels are reserved using an online booking service. Merely 24% of these rooms are booked using the hotel website whereas more than 76% are booked through OTAs.

Conclusion

The partnership with NYC & Company in September, during the peak season of tourism, was an excellent strategy. Healthy earnings will be reported by Nov. 7, 2013. There are expectations of incremental bookings, revenues and incomes generated by this partnership and the company can benefit from the marketing expertise of NYC & Company. This will allow Priceline to save on costs since it has been increasing its advertisement expense by heavily relying on advertising through Google. Also, the effective usage of the agency model has provided the company with an edge over its competitors. The U.S. market has been accommodating more consolidation in this sector and the company's strategies are in line with the market trend. So, a boost in the company's operating margins can be anticipated. This is expected to increase the company's share price as an upside potential has been predicted. Therefore, I recommend buying this stock.

Source: Priceline And NYC & Company: Ready To Create Wonders This Holiday Season