Is TripAdvisor Becoming A Big Threat To OTAs?

| About: TripAdvisor Inc. (TRIP)

Summary

Priceline and Expedia have refused to make their hotel inventory available to TripAdvisor’s new direct booking feature, Instant Booking.

Instant Booking is a mix between a metasearch website and an OTA.

Instant Booking is experiencing slow adoption by hotels and it will be many years before it can begin to become a threat to the leading OTAs.

Leading online travel agencies (OTAs) Priceline (NASDAQ:PCLN) and Expedia (NASDAQ:EXPE) have refused to make TripAdvisor's (NASDAQ:TRIP) hotel inventory available for in-app booking through TripAdvisor's Instant Booking feature. Never mind the fact that both OTAs get a lot of their traffic from TripAdvisor. What does the move mean for TripAdvisor and the two OTAs?

Symbiotic Relationship

The relationship between TripAdvisor and the two OTAs is largely symbiotic. TripAdvisor is the largest travel review site and has managed to accumulate a staggering 200 million reviews on more than 4 million hotels and other resorts on its site. To underscore the massive popularity of the site, consider that more than 1.25 billion people visited the site to read reviews on their favorite hotels during the first half of 2014. TripAdvisor is reputed to control a market share north of 60%, dwarfing the operations of competitors Zoover, VibeAgent, Google Places and TravelPost.

But don't let TripAdvisor's business model fool you - the company really is an ad company, deriving about 80% of its revenue from ads (70% click-based + 10% display-based). With so much traffic, OTAs like Priceline and Expedia have quite naturally noticed and use the site to place ads. Once people finish reading reviews on TripAdvisor, many click through to the OTAs where they do their booking. About 10% of TripAdvisor's traffic is directed to the OTAs, meaning somewhere in the region of 250 million visits every year. TripAdvisor gets about 47% of its ad revenue from the two OTAs. The relationship between TripAdvisor and the two OTAs is, therefore, very symbiotic.

But that's only part of the story. TripAdvisor uses metasearch to drive traffic to the two OTAs. The company's click-based ad revenue via its metasearch platform clocked in at $247 million, or 31% year-over-year growth. The two OTAs are not the only ones that benefit from TripAdvisor's metasearch platform. Other rival sites benefit as well, and contribute almost as much revenue to TripAdvisor's top line as Priceline and Expedia combined. The company's metasearch offers travelers an alternative booking platform that lets travelers book direct to hotels without going through an OTA. Metasearch is particularly popular with millenials.

According to digital researchers L2 Think Tank, 39% of millenials and 25% of baby boomers use metasearch to book hotels instead of doing it through traditional OTAs and other branded sites. It's not hard to see why Priceline and Expedia are not too keen to lend a helping hand to an already formidable rival. TripAdvisor chief executive Steve Kaufer described Instant Booking as a cross between a metasearch website and an OTA, which must have spooked OTAs even more.

TripAdvisor is not the only travel company that employs a metasearch platform. Google (NASDAQ:GOOG) (NASDAQ:GOOGL) owns HotelFinder and FlightSearch, which allow people to book hotels or flights directly from the platforms without using OTAs.

What Does It Mean For TripAdvisor?

TripAdvisor has been having a slog trying to get hotels to sign up with Instant Booking. According to Skift, hotels are not sure whether to treat the economics of Instant Booking as they would with traditional OTAs or as direct bookings. Another big reason is that integrating Instant Booking into their websites requires some tech work by both the hotels and TripAdvisor.

But this does not in any way mean that Instant Booking won't eventually gain some traction. The fact that 10% of TripAdvisor's traffic clicks through to OTAs to do their booking tells you that a large percentage of the site's traffic is highly relevant. The potential for the product is definitely there, only that it might take long, perhaps much longer than TripAdvisor would like, before it can really get moving.

What Does It Mean For OTAs

As things stand, Instant Booking will probably take many years to get enough traction to become a real threat to the leading OTAs. Take Google for instance. Despite having a large metasearch platform, Google has not done much to slow down the growth of the leading OTAs. This could be because of the ease and convenience of booking through OTAs. And, of course, good old human behavior, which tends to resist change. It's hard to see Instant Booking growing to a level where it will start disrupting the business models of the leading OTAs, at least not anytime soon.

Bottom Line

Priceline and Expedia are not likely to feel any heat due to the entry of TripAdvisor into the OTA space. However, depending on the effort TripAdvisor puts into trying to make the platform easier to use by hotels, it could end up gaining meaningful traction.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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.

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