Priceline And Expedia Should Be Fearful Of Google's Travel Plans

| About: Alphabet Inc. (GOOG)

It may be old news, but Google's (NASDAQ:GOOG) renewed focus on improving the travel search experience on could disrupt the business models of Expedia (NASDAQ:EXPE), (NASDAQ:PCLN) and the other online travel agencies (OTAs).

Over the past several months, Google has made more meaningful changes to the way it shows travel-related information than it has made in its existence. We have seen an increase in the pace of Google’s innovations in the travel search space and we expect it only to accelerate in the near-to-intermediate term (due in part to its acquisition of ITA), and there is still uncertainty about how the OTAs will be impacted. It appears that Google will continue to license the ITA data to other websites for 5 years.

Search engines, and Google in particular, have always been important components of the online travel ecosystem and key sources of traffic for Expedia, and other OTAs. Although Expedia and do not disclose what percentage of its traffic comes from Google (either organic or paid), we believe, as for most consumer brands on the Internet, it’s a substantial number.

Google is looking to improve the travel search experience for users of by including richer and more structured travel data in its search results for travel-related queries. We expect Google to eventually increase its focus on hotels as well, and note Google’s recently launched Hotel Finder “experiment” is a signal of Google’s intent in the hotel space.

How far down can Google go before it starts competing with travel bookings remains to be seen. But early indications from Google are that the company is focused on providing better travel search tools and that it does not intend to actually process travel bookings. The long term strategy seems to be integration with the Google maps destinations system – so you can use Google maps to find car routes, public transportation or flights based on one search query.

We generally believe that Google is unlikely, at least in the near-to-intermediate term, to add transactional capability for travel. But the company’s increased involvement in the travel search and comparison shopping process does pose a variety of potential risks to, Expedia and other OTAs.

Potential Issues

  1. This is an issue of online “real estate.” If Google favors/prioritizes its own travel listings on its search engine results pages (SERPs), free organic listings for the OTAs will be less prominently displayed. In order to remain visible, OTAs may be required to bid more aggressively to ensure prominent placement in Google’s paid listings.

  2. If Google is able to improve the travel search experience on meaningfully enough so that it offers a viable alternative to the utility of the OTAs/meta-search engines, over time, more and more travel shoppers may begin their shopping experience at Google instead of an OTA website. Google wants to preserve its share of commerce-related queries (which are more monetizable), and travel is clearly a key eCommerce category.

A key question in our view is whether Google will remain a high-volume source of qualified leads for OTAs or whether it will dis-intermediate them. Asked another way, will Google look to connect/integrate more directly with travel suppliers (particularly hotels) in order to improve its search results/ads and, more importantly, “close the loop” on a given travel transaction?

By moving more transactions directly to travel suppliers, Google would disintermediate middle-men like the OTAs. On one hand, building out/integrating a global network of travel suppliers would take time (particularly in the fragmented International hotel space) and would not be popular with either regulators or Google’s travel advertisers.

On the other hand, Google is one of the few companies with the resources and will to tackle large projects such as this. The first iteration of Google’s Flights service excluded OTAs from participating, not a good sign if you have money in one of those. Google pursuing a similar strategy in hotel search would be a much more significant negative for the OTAs.

If Google did incorporate transactional capability within its search results pages, it would be a significant negative for the OTAs.

We expect Google to incorporate travel-related information/functionality into a variety of its products beyond desktop web search, posing risks to other online travel companies/business models. We also expect Google to integrate these offerings with its Maps (as evidenced by its new Hotel Finder and Flights products), mobile, local and other products. This will impact Expedia's TripAdvisor which brought in ~$500m TTM to the company. We expect Google's foray into travel to have a significant impact on this web property.

We are still long but we might reconsider this based on the success of Google's new travel search features.

Source: " - Near-Term Macro Concerns, but Long-Term Optimally Positioned" by Tom White - Macquarie (USA) Equities Research, 21 Sep 11

Disclosure: I am long PCLN, GOOG.