Watch Out OTAs, Here Comes Instant Booking

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Includes: EXPE, GOOG, PCLN, YELP
by: Joseph Mwangi

Summary

TripAdvisor completed the global rollout of Instant Booking during the first quarter.

Surveys by a Wall Street analysts have shown that Instant Booking already has very good penetration in top markets.

It's time for OTAs to sit up and take note.

When TripAdvisor (NASDAQ:TRIP) launched Instant Booking about two years ago, there was a lot of hue and cry from OTA investors, including those by Priceline (NASDAQ: PCLN) and Expedia (NASDAQ: EXPE), who recognized the underlying threat. Instant Booking is a platform that acts both as a metasearch tool and a traditional OTA. Hotel suppliers can load their inventory into TripAdvisor's hotel metasearch. Hotel chains, independent hotels, B&Bs and even OTAs use an auction bidding tool to compete for top spots in metasearch results. TripAdvisor partners who wish to participate in Instant Booking propose commission percentages they are willing to pay. Partners pay TripAdvisor a certain percentage of the booking value for successful transactions. Viewed from a different angle, Instant Booking allows TripAdvisor users to book hotels directly on its website and apps by completely bypassing OTAs. People traditionally navigate from TripAdvisor to OTAs to do their booking. But with Instant Booking the booking process is made easier for the user. In this regard Instant Booking certainly is a big threat to OTAs.

TripAdvisor completed the global rollout of Instant Booking during the first quarter of 2016. The company is yet to divulge the actual number of partners it has managed to sign up to the new platform. The company however did score a big one when Priceline agreed to become a partner in October last year after a lot of initial resistance. TripAdvisor is on record saying that once it completes bringing Priceline.com, Booking.com and Agoda properties under Instant Booking, users will be able to book at least 56% of hotels displayed on TripAdvisor through platform. Now that's a huge reach for a relatively new platform. Piper Jaffray's Michael Olson expects Expedia to become a partner later this year. With these two giants on its palm, it's perhaps safe to say that Instant Booking is set to become almost as pervasive as the two OTAs in online travel just a few years down the line.

But perhaps what's even more impressive is that Instant Booking has been pretty successful going after the big fish. Piper Jaffray has analyzed the top five hotels in 100 markets that can be booked via Instant Booking and found an impressive penetration rate as follows:

TripAdvisor Instant Booking Coverage By Region September Vs. December 2015

Region

September 2015

December 2015

Asia-Pacific

78%

90%

Europe

72%

92%

North America

85%

96%

Middle East

74%

86%

Latin America/Caribbean

75%

99%

Africa

91%

99%

Click to enlarge

Source: Skift.com

By the end of 2015, Instant Booking could be booked by at least 90% of all top hotels in all markets except Middle East. Also notable is the fact that Instant Booking has managed to reach a penetration rate of more than 90% even in highly fragmented markets such as Europe and Asia/Pacific. TripAdvisor CEO Steve Kaufer reckons the rollout of Instant Booking is currently in the third phase which involves optimizing the booking experience for its users.

But that's only part of the reason why Instant Booking appears poised to become a formidable challenger for OTAs. Instant Booking is undercutting OTAs in pricing. The same Piper survey found that Instant Booking had lower pricing than alternative metasearch options at least 20% of the time.

Instant Booking is not an Automatic Home Run

But the early success of Instant Booking is not something you can easily discern by looking at the results of TripAdvisor. The company badly missed on Wall Street earnings estimate during its Q1 2016 earnings call after posting EPS of $0.32 vs. $0.46 consensus. Revenue declined 3% Y/Y to $352M while net income plunged 57% to $27M. The contracting earnings could be linked to Instant Booking costs.

More worryingly TripAdvisor revenue per hotel shopper declined 24% Y/Y mainly due to a dilution in monetization as a result of the Instant Booking rollout. The decline was 12% during the fourth quarter so the negative effect by Instant Booking is getting worse as the quarters roll on.

Ultimately whether Instant Booking becomes a success or not will depend on whether everyday TripAdvisor users will gradually stop navigating to OTA websites to do their hotel booking and instead do it directly from TripAdvisor apps via Instant Booking. Yelp (NYSE: YELP) is a good case analogy. More than half of the people who visit Yelp now access the platform directly from its mobile app rather than through Google search. This has breathed new life into Yelp by helping it to avoid competing directly with Google (NASDAQ: GOOG) (NASDAQ:GOOGL). If TripAdvisor is able to pull off something similar then the sky will be the limit.

Not everybody is so sanguine about Instant Booking, however. Former Priceline CEO Darren Houston has in the past said that Instant Booking is unlikely to become a big threat to OTAs citing the fact that Kayak, which Priceline acquired for $1.8B in 2012, pioneered the metasearch booking model yet it did not exactly become earth-shattering. Kayak co-founder and CEO Steve Hafner has is convinced that Instant Booking will become a failure and TripAdvisor will be forced to reverse course.

But of course the fact that Kayak never got real traction does not automatically spell doom for Instant Booking. After all TripAdvisor is arguably a bigger brand than Kayak and already enjoys very close ties with both Priceline and Expedia. More than 45% of TripAdvisor's revenue comes from the two leading travel agencies via ads. Meanwhile more than 10% of the traffic that the two OTAs receive comes from TripAdvisor apps. So there is already an inextricable link between these companies that is likely to work in TripAdvisor's favor.

Instant Booking is not a big threat to OTAs at the moment, but this could change sooner rather than later.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.