性视界

Company Overview

The Priceline Group is the world’s largest online travel company and operates platforms connecting travel suppliers such as hotels with travel buyers.聽 Priceline’s portfolio of businesses includes Booking.com (the leading online travel agency [OTA] in Europe, Latin America, and parts of Asia), Agoda.com (the leading OTA in聽SE Asia), Kayak (the leading flight meta-search provider), and OpenTable (the leading restaurant reservations聽website) in addition to its namesake Priceline.com business.聽 In 2015, Priceline is expected to聽book聽~$57 billion of travel expenditures and will capture ~$8.5 billion, or ~15% of the spend, as gross profit.

Building a Network Effect Business

Since a near-death experience with the burst of the dot-com bubble, Priceline has become one of the world鈥檚 most important internet companies. In fact, Priceline is the 3^rd largest e-commerce company in the world (by gross merchandise value) after Alibaba and Amazon and its flagship property, Booking.com, is the 3^rd most global website in the world (based on the number of countries in which its used and user traffic in each country) after Google and Facebook.

The secret to Priceline鈥檚 revival lies in its 2005 acquisition of Booking.com for $135 million. The property now accounts for >80% of Priceline鈥檚 market value of $65 billion (per Wall Street research) and is widely acknowledged to be the most successful acquisition in internet history. Booking.com was among the first online travel companies to capitalize on indirect network effects. It realized that travel suppliers prefer to sell their inventory through channels with the most users and that users prefer to buy through channels with the greatest supply. As a result, there are meaningful demand-side benefits to scale.

To build scale, Booking.com initially focused on providing the most valuable standalone solution to both sides of its platform. Booking.com employed the following strategies to add suppliers:

• Booking.com was the first to deploy a salesforce to service the long tail of travel suppliers (i.e. independent hotels) and add them to its platform. It therefore had the 鈥渇irst-mover advantage鈥� with many suppliers.
  1. Booking.com realized that it would add greatest value to (and extract greatest value from) travel suppliers in the most fragmented markets due to simple competitive forces 鈥� greater supplier fragmentation reduces supplier power. Practically, this meant focusing on hotel suppliers instead of airlines because airlines had sufficient scale to drive traffic to their own websites / call centers. Priceline/Booking鈥檚 business today is ~87% hotel.聽 It also meant focusing on international markets instead of the US. In the US, 2/3 of hotel properties are affiliated with chains who offer them bargaining power. The comparable figure is 1/3 in Europe and an even smaller proportion in other geographies. Priceline鈥檚 mix of business today is 87% international.

• Booking.com offered hotels the most attractive payment model and payment terms. Expedia and Travelocity focused on the 鈥渕erchant鈥� model whereby they took payment from consumers at reservation and kept 25% before remitting the remainder to hoteliers at the time of stay. Booking.com used the 鈥渁gency鈥� model whereby the hotel remained the merchant of record and Booking.com simply took a 15% commission. Booking.com鈥檚 model was both cheaper and more efficient for hoteliers ().
• It was not easy for smaller, unsophisticated travel suppliers to connect to OTAs because it was challenging to manage inventory offered through multiple websites in addition to more traditional channels (i.e. phone reservations, walk-ins, etc.). Booking.com therefore offered them an efficient technology interface to help connect with its platform (). The difficulty of connecting to other platforms mitigated the threat of multi-homing among hotel suppliers.

Booking.com also deployed multiple strategies to maximize users:

• It offered high-touch customer service to ensure user satisfaction.
• It spent liberally on online advertising to drive consumer traffic to its website in the hope that it could not only convert them for the first transaction, but that it could convince users to visit Booking.com directly for future transactions. In fact, today, the Priceline Group is among the world鈥檚 largest purchasers of online advertising and is Google鈥檚 single biggest customer ().
• Booking.com and Priceline more generally developed a competency in data analytics. It optimized its websites to provide the most relevant results from search queries and to maximize conversion with the most seamless user experience. This increased Priceline鈥檚 鈥渜uality score鈥� within Google鈥檚 search algorithm and improved placement of Priceline鈥檚 sites in response to search queries. This creates a direct network effect 鈥� the more users that Priceline can attract, the more data it has to optimize its website to improve its quality / maximize conversion; the more it can improve quality/conversion, the higher its sites will be rated and the easier it will be to attract users (). 聽In some ways, this is similar to the network effect that Google itself experiences whereby scale improves the quality of its search results. This 鈥渄irect鈥� network effect has the effect of increasing user traffic/conversion, which in turn drives and protects the aforementioned 鈥渋ndirect鈥� network effect between users and travel suppliers.

The Impact of a Network Effect

Priceline / Booking.com鈥檚 strategy to develop strong network effects succeeded and the results are stunning. Priceline鈥檚 room-nights booked are larger and faster-growing than Expedia and are much larger than the upstart Airbnb:

Source: comScore, Wall Street analyst research

Priceline accounts for ~40% of all online leisure travel bookings vs. 26% for Expedia, its closest competitor (the share figures are even higher when viewed just as a % of OTA booking rather than all online). Priceline鈥檚 share gains have healthily outpaced Expedia鈥檚:

Source: Morgan Stanley Research

The market share figures are even more amazing in Priceline鈥檚 strongest market, Europe, where Priceline processes 60% of all online leisure travel bookings:

Source: Phocuswright, Morgan Stanley research

Not only has Priceline achieved greater scale and faster growth vs. Expedia, but it has done so with far lower customer acquisition costs and far higher profitability:

Source: Barclays Research

Protect the Network Effect

Given how successful Priceline has been, it has attracted meaningful competition that is attempting to weaken its network effects and take some of its profit pie. Below is a sampling of competitive threats:

• Software vendors like Sabre and TravelClick have developed SaaS technology for independent hotels to more easily manage their properties and reservations. This has enabled them hotels to more easily connect with multiple bookings websites. The increased ease of 鈥渕ulti-homing鈥� has weakened Priceline鈥檚 indirect network effects.
• Players further up the 鈥渢ravel funnel鈥� are attempting to break Priceline鈥檚 network effect by changing consumer behavior. For instance, many travelers look at hotel reviews on TripAdvisor prior to booking their stay on Priceline. TripAdvisor has launched an initiative called Instant Booking whereby it is adding hotel inventory so that consumers can more easily book their stay after looking at reviews rather than going to another site like Priceline.
• Independent hotels are taking advantage of website building tools to develop their own online presence. As such, these hotels are trying to drive more traffic directly to their sites so that they don鈥檛 have to pay a commission to Priceline or another OTA. Consumers are increasingly comfortable booking directly due to the availability of online reviews.
• New-age players like AirBnB are trying to disrupt the entire model of accommodations. Insofar as AirBnB succeeds in driving travelers away from traditional hotels, this could make Priceline鈥檚 vast hotel supplier network less relevant.

It remains to be seen whether Priceline can stave off these threats, but between the increased ease of multi-homing and more direct competition from complementers (like TripAdvisor) and suppliers (the hotels themselves), it seems clear that Priceline鈥檚 network effects going forward will not be as strong as they were in prior years.