Simplicity can be a beautiful thing, especially when you're talking about the high-margin splendor of something as basic as Travelzoo's (Nasdaq: TZOO ) "Top 20" email that goes out every week to more then 10 million eager recipients.
Unfortunately, simplicity can also be an Achilles' heel. If your business plan can be spelled out in a sentence or two, it won't be long before a rival crashes the party. Imitation may be the sincerest form of flattery, but things can get dicey when imitation is also the best form of obliterating a shallow moat.
I have often wondered when Travelzoo would have a legitimate predator on its turf. The premise always seemed too easy. Airlines, hotels, rental-car agencies, cruise lines, and packaged-vacation providers have excess inventory to sell. They discount this stuff and pay Travelzoo to include the sponsored bargains as part of the "Top 20" weekly offers that get sent out to the folks who have signed up for free subscriptions.
Yes, it's one of those "why didn't I think of that?" models, but the major online portals and travel-booking specialists seemed to let the once lowly travel publishing upstart get away with it for too long. Even after the stock was one of the biggest winners of 2004 -- soaring from $8.70 to $95.43 in those 12 months -- the leading players ignored the inspiring 10-bagger. Travelzoo's stock collapsed in 2005 -- it gave back nearly all of those gains -- but the competition still should have been paying closer attention. Travelzoo continued to grow in 2005, tacking nearly 2 million more names to its growing mailing list.
Oh, there have been imitators out there. "Sherman's Travel Top 25" is a popular one. Travelzoo was vulnerable all along to slumbering giants who would wake up and smell the coffin.
It may have finally happened last month, with Priceline.com (Nasdaq: PCLN ) cracking open its eyelids.
PriceBreakers, back breakers
It was with little fanfare that Priceline rolled out PriceBreakers last month. It came six paragraphs deep in a rather nondescript press release. The wording:
Priceline.com also offers a new service, called PriceBreakers, which features hand-picked, short-notice travel deals, including many offers exclusive to priceline.com.
A pair of subsequent press releases simply reveal the link at the end of a laundry list of Priceline.com website URLs.
It all seems harmless at first. Even a quick visit to the PriceBreakers landing page shows a collection of travel deals, but nothing that should strike fear into Travelzoo. However, the moment you click away from the PriceBreakers page, you get this tantalizing pop-up:
Join the PriceBreakers Club!
- Weekly PriceBreakers email updates.
- Exclusive email-only offers.
- Advance notice on our best deals
- Join today FREE!
Weekly updates by email? Exclusive offers? Free? That's the Travelzoo model, my friends.
Sure, you can argue that it's not entirely identical. Priceline's quiet rollout makes it unlikely to challenge the millions who count on Travelzoo's weekly email. However, it now serves as a bullet pointed at Travelzoo's noggin should Priceline ever decide to actively promote it.
What's that? Priceline is already promoting it? Really?
Yes, really. ValueClick's (Nasdaq: VCLK ) Commission Junction runs Priceline's affiliate program. It's a way for webmasters to refer traffic over to Priceline. Publishers of all sizes can typically earn at least 2% in commissions. As it so happens, Priceline is providing its affiliates with banner ads, text links, and content pages to spread the word.
Making the moat remote
Some models are more vulnerable than others. I have always thought that Audible's (Nasdaq: ADBL ) digital audiobook offering could be copied. There are lots of music-subscription sites out there, so why is Audible the primary voice when it comes to spoken-word content?
Well, Audible is smart. It has partnered with Amazon.com (Nasdaq: AMZN ) and Apple (Nasdaq: AAPL ) , the two companies that would seem to pose the biggest threat to launching their own audiobook marketplace.
Travelzoo doesn't have that silver bullet handy. It has diversified its travel-publishing offerings -- rightfully planning for the eventual rainy day -- but it probably wouldn't make sense for the top sites to team up with Travelzoo. It would be a conflict of interest for conventional portals such as Expedia (Nasdaq: EXPE ) and Travelocity -- which try to move airfare, lodging, and vacation packages at retail -- to undersell their own providers with "Top 20" deals. That's probably what kept them from competing by promoting a limited number of off-price deals in the first place. However, eclectic discounters like Priceline and Hotwire aren't bound by those parameters.
Travelzoo's profitability has been insane. The company generated 46% in pre-tax net profit margins last year. A chunky tax bite drove that amount to 24% in net profit margins, but you still won't find too many companies that can beat that. A more competitive future will test those margins -- or, at the very least, gnaw away at the top line.
It was great while it lasted, Travelzoo. Now it's time to prove your worth.
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Longtime Fool contributor Rick Munarriz has been inspired by a deal or two on the Travelzoo "Top 20" list, but he does not own shares in any of the companies mentioned in this story. He is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early. The Fool has a disclosure policy.