By Jeff Bailey
There's hardly an area of technology or digital content in which the incumbents don't fear Google (GOOG, GOOGL), which, due to its domination of Internet search, can have a big say over where on the Web curious consumers wind up.
Online travel is among the areas Google is throwing its weight around. Go ahead and Google Hong Kong hotels, and you'll see something that didn't exist a few years ago: a horizontal stripe across the top of the page of actual hotels, drawing users' eyes away from the listings of a normal Google search, the stuff that appears below, which is largely online travel agencies. Click on hotels in the stripe and you'll be led to a reservation system of sorts, one in which Google gets more income.
That has to be frustrating to online travel companies which are among Google's best customers. Priceline (NASDAQ:PCLN) spent $1.8 billion last year on online advertising. Though it doesn't break down where that money went, one surmises Google got the biggest share, either directly or indirectly (as we'll explain below). Expedia (NASDAQ:EXPE) spent $1.2 billion on all kinds of advertising (online and offline) last year, and we're guessing again that Google got more of that money than any other player. TripAdvisor (NASDAQ:TRIP) spent $236.5 million on ads last year. And there are several more huge players advertising heavily to attract eyes online.
GOOG Revenue (TTM) data by YCharts
Airlines, car rental outfits, individual hotels, hotel chains, meta-search travel outfits like Kayak (owned by Priceline) and many other travel players all get huge portions of their business via Internet searches dominated by Google. In recent years, those advertising dollars have become less efficient, as competition has increased, so Priceline and others spend a higher percentage of revenue on ads as time goes on.
From Google's point of view, that means it extracts a rising percentage of each consumer travel dollar. One more reason to do some investment research on Google.
TripAdvisor's overall sales and marketing expense, for instance (and advertising is the bulk of that category) has consumed a growing percentage of sales: 39.0% in 2013 vs. 32.8% two years earlier. Same for Expedia, where sales and marketing expense (advertising is the largest component of the category) consumed 46.0% of revenue in 2013, up from 42.8% two years earlier in 2011. The same trend is seen at Priceline.
And even ad dollars not spent with Google can end up back at Google. TripAdvisor, formerly owned by Expedia and spun off in 2011, gets 47% of its revenue - or $444 million in 2013 out of a total of $944 million - from the combination of Expedia and Priceline paying for clicks from its site. As enumerated above, TripAdvisor spends about one quarter of its revenue on advertising, and we're persuaded Google - again, directly or indirectly - gets the lion's share.
So, Google doesn't have to dominate the online travel business in any traditional sense to be the winner in this space. In fact, the across-the-board reliance on Google ads to generate traffic and customers means that, even if a huge player like Priceline falters (not likely anytime soon) Google would likely pick up business from the companies disrupting Priceline.
(As we wrote earlier this month, Priceline is an unusually well-positioned technology company with a huge head start in the most sought-after and lucrative area of travel, foreign hotels. Its acquisition of booking.com about a decade ago stands as one of the most astute corporate deals in memory. Though its ads aren't as efficient as they once were, Priceline realizes substantial economies of scale, widening gross margins and appears to operate more efficiently than the competition.)
PCLN Revenue (TTM) data by YCharts
If Google were a traditional competitor in online travel, seeing the rapid revenue growth of these companies would be discouraging. But with its unique position, their success is Google's success.