Two of Amazon's (NASDAQ:AMZN) most significant online competitors (Alibaba (NYSE:BABA) and Groupon (NASDAQ:GRPN)) have staked a claim in the online travel space and are focusing significant resources on growing that stake. Skift broke the story a few days ago that Amazon will enter the online travel space with what appears to be a de novo offering that will be initially focused on the high-margin lodging segment.
Amazon refused to comment when the article was being written, so much of the detail was based on interviews with several hotels that had been contacted to participate in the launch early next year, and access to a copy of the contract Amazon is using with the hotels. While it is clear that the company is dipping its toe into the water using its existing local deals framework, we believe the chances that Amazon will attempt to build versus buy its way into the space are near-zero, and expect that the next few quarters will see major consolidation in the online travel space as three of the biggest players in e-commerce put their cash-heavy balance sheets and highly valued acquisition currencies to work buying what it would take too long to build.
Travel is Groupon's fastest-growing segment, with total bookings in the TTM of over $900m (they're set to easily exceed $1 billion for calendar year 2014). The company's launch of its first standalone app should give a strong indication of the importance of travel in Groupon's long-term plans.
Alibaba's first purchase following its multi-billion IPO was to acquire a 15% stake in hotel technology firm Beijing Shiji Information Technology Co. for $457 million, and we note that the company acquired several other travel companies in the months leading up to its IPO.
Due to its late arrival to the online travel space and the need to reach relevancy in time to stop the advances of its competitors, we believe that Amazon will acquire assets to establish a foothold in the online travel space, and believe that the most likely candidates are Orbitz (NYSE:OWW), bookit.com and Travelzoo (NASDAQ:TZOO).
Orbitz has been a laggard among the larger OTAs in just about every metric worth measuring, but it has several characteristics that would make it an attractive option for Amazon.
1) Price - if Amazon decides to jump in with both feet and take down a full-service OTA, Orbitz is the most likely candidate, because it is an attractive asset that could likely be acquired at a significantly lower price point than the others, and there is considerable untapped value there for an owner/partner that could drive significant traffic without the necessity of additional advertising expenditures.
2) Affiliate Program - Amazon was one of the early e-commerce players to develop an affiliate program to build market share, and Orbitz's affiliate program became highly relevant earlier this year, when it acquired the long-standing Travelocity affiliate program that was once considered the pick of the litter. With a little magic Amazon dust, the company could look to take back many of the old "WorldChoiceTravel" affiliates who have found their way to the Priceline/Booking.com program or the Expedia Affiliate Network. This would be much easier than many might believe, as Amazon's willingness to forego margin to take market share could result in the company choosing to pay affiliates a much higher revenue share or what might be close to the entire commission earned per transaction for a year or two to bring the better-performing affiliates back into the fold.
Bookit.com might be the cheapest way to take down relevant market share, as it has made it clear in the recent past that the company is for sale. But Bookit.com might also be the riskiest, as the company relies heavily on third-party technology, and is perceived by some to be more of a "family shop" with quirks and risks that would not be present with a company that has been through the public company wringer.
Travelzoo appears to be the least risky candidate, and we believe it is also the most likely candidate for several reasons.
1) Strategic Fit - Travelzoo actually has several aspects that would be extremely attractive to Amazon. While its hotel booking platform and long-standing travel supplier relationships are what drives the deal, Travelzoo's metasearch Fly.com could be worth exponentially more if promoted through the Amazon or Alibaba networks. Travelzoo's "Top 20" deals newsletter and its 27 million subscribers are likely worth several times Travelzoo's current cash adjusted market cap, and provide one of the truly unique opportunities to acquire highly engaged travel consumers without paying Google on a per-click basis. Additionally, Travelzoo's local deals business folds very cleanly into Amazon Local.
2) Price - Given the current trading range, it seems likely that Travelzoo could be acquired with an outlay in the $400-$450 million range ($28-$32/share), a little more than double its current market cap and very much in the mid-range of Google's historical transactions. Amazon would have to pay nearly $1 billion to buy the private company-equivalent of Travelzoo's three businesses, but it appears that it might be able to get them all for about half that much with a Travelzoo purchase.
3) Travelzoo's mobile focus - The development of Travelzoo's hotel booking platform was done from the ground-up, with an eye towards driving mobile transactions, so it will be much more attractive than some of the other options where companies are still trying to transition their legacy booking engine technology to adapt to mobile browsers. Travelzoo's app has been downloaded by nearly 4 million consumers, and the company has seen significant increases in revenue for deals that are offered through its hotel booking platform than for "Getaways" deals that are based on the voucher approach used by Groupon and others, due largely to the ease of booking them on mobile devices.
In summary, Amazon is going to be a player in the online travel space in 2015, and there is some chatter that preliminary discussions with potential targets are already underway. We note that Amazon raised $6 billion with a debt offering last week, the largest raise in the company's history, and that this offering began soon after the company began actively seeking hotel contracts in the construction of its travel offering. With the specter of Alibaba's IPO proceeds and freshly minted acquisition currency gobbling up key players, and Groupon's increasingly aggressive move into the travel space, we expect a new sense of urgency by Amazon in these discussions, and expect to see significant consolidation over the next few quarters as Amazon acquires its way into the game.
Disclosure: The author is long TZOO, AMZN, OWW.
The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: Author may buy or sell shares of TZOO, OWW and AMZN at any time, depending on market conditions.