Déjà Vu: Online Travel Agents Face Up To Challenge Of Airbnb

I wrote recently on how M&A within the travel industry has not only been the inevitable response of large incumbents to technological disruption in the sector; it has also provided a clear indicator of which new technologies are most likely to change how we take vacations in the future, such as the ability to create complex, tailored, multi-day tours on digital platforms.

However, it would be remiss to think of the acquisitions made by large online travel agents (or “OTAs”) just in terms of a defensive move to stave off the challenge of the Internet giants. Consolidation in the metasearch market since 2010 also provides a valuable insight into how we can expect another new frontier of the travel sector, namely ‘alternative accommodation’, to develop.

Certainly Booking Holdings (previously Priceline) and Expedia fit the former narrative. The early days of online travel, from the late 1990s through to 2010, saw the development of these large OTAs, who were able to leverage the sheer scale of demand that they brought to airlines and hoteliers to drive better pricing for consumers and therefore attract more customers. This created a virtuous circle of growth in the markets for both flights (though this quickly became a cut-throat, low-margin sector for OTAs) and hotels, where Priceline established a dominant position globally.

An early sign that the OTA model would face challenges came in July 2010. Google, which had been a crucial contributor to the OTAs’ growth by providing them with both free and paid traffic in huge volumes, announced the $700m acquisition of ITA Software, a leading provider of software and data on flight prices and availability.

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The deal represented the first warning shot that Google had its own ambitions to grow in online travel and was acquiring the capability to build its own specialist travel search offering. The company’s subsequent progress was somewhat constrained initially: OTA incumbents successfully sought short-term anti-monopoly protections from the US Department of Justice, while Google had to maintain a careful balance between its own longer-term objectives and the importance of Priceline and Expedia’s multi-billion-dollar online advertising budgets to its shorter-term financial performance. Nonetheless, over time, ITA came to power the highly successfully Google Flights proposition.

The first sizable response to the Google-ITA shockwave came in November 2012, when Priceline inked a merger with leading US travel metasearch platform Kayak for $1.5 billion. The very next month, Expedia acquired a 62% stake in leading European metasearch platform Trivago, in a deal valuing the company at c.$1 billion.

Recognising the importance of these shifting sands in the market, Chinese OTA Ctrip paid over $3 billion to acquire 45% of China’s homegrown travel metasearch platform Qunar in a stock-swap transaction with Baidu in October 2015. Ctrip further consolidated its position in online travel search the following year with the acquisition of Europe’s star performer, Skyscanner, for $1.8 billion. Priceline responded with the $550 million acquisition of cutting-edge European metasearch challenger Momondo in February 2017.

In short, the $700m pebble dropped by Google into the online travel pond when it bought ITA Software rippled into an $8 billion wave of M&A deals.

This tells us a number of things. Firstly, irrespective of the range of exciting technological developments that we can see coming down the pipeline, search generally remains the starting point for any consumer’s travel plans. The strategic importance of controlling consumer eyeballs at the ‘top of the funnel’ is enormous and will continue to drive high-value M&A deals in the metasearch space.

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Secondly, it provides us with an insight into how we can expect competition to play out within the hot new battleground of ‘alternative accommodation’.

For decades, travellers’ accommodation options were limited to hotel stays.  Only the most ambitious and resourceful travellers could find anywhere else. Finding an apartment, house or villa was difficult in a landscape where the properties were hard to identify, owners hard to deal with and standards variable.

Airbnb’s dramatic entry into and rapid growth within the online travel sector is expected to kick-start an arms race in the ‘alternative accommodation’ space.Getty

Enter, of course, Airbnb. By creating a global venue where private owners of local properties could access millions of potential travellers around the world, the company created from its early financing rounds in 2010 an unrivalled travel marketplace that is redefining how, and where, we all travel.  The revolution of the ‘alternative accommodation’ sector (apartments, villas, houses) drove Airbnb’s valuation to $31bn as of its last investment round in March 2017.  With a potential IPO anticipated in 2019, Airbnb will emerge as one of the most valuable venture-capital-backed companies of all time.

If Google’s acquisition of ITA Software was a pebble dropped into a pond, then Airbnb is a brick falling into the lake of the online travel sector, whose full ripple effect is yet to be felt.

What we can be sure of, however, based on the history of the metasearch sector, is that M&A will feature prominently. This is particularly true where ‘content’ – i.e. the all-important properties in which travellers wish to stay – can be acquired and aggregated. A recent example would be the $1.3 billion acquisition of Wyndham’s European alternative accommodation businesses by Platinum Equity.

Nobody will feel the change in traveller habits in favour of ‘alternative accommodation’ more keenly than the largest travel groups needing to reweight their listings portfolios towards homes, villas and houses. You can expect the OTAs will be returning to the M&A page of their playbooks before long.


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