Fierce Rivalry in the Online Travel Industry Is Playing Into Google's Hands

As online travel agencies such as Priceline and Expedia continue to spend massive amounts of money on online ads,Google is the biggest beneficiary. Although Google has its own vertical online search product, it also benefits when its rivals are doing well and spending large sums of money on online ads.

Mar 27, 2014 at 11:50PM

According to FairSearch, more than half of the world's travel sales are consummated online. For online search giant Google (NASDAQ:GOOGL), travel ads by online travel agencies, or OTAs, are a good source of revenue. Google accounts for approximately 67% of all U.S. online searches. 

Online travel companies such as Priceline (NASDAQ:PCLN), Expedia (NASDAQ:EXPE), and TripAdvisor (NASDAQ:TRIP) have been competing fiercely to establish themselves as the travel agencies of choice for customers. To catch the eyes of prospective customers, these companies have been spending massively on sales and marketing, particularly on online ads. Priceline spent $1.8 billion on online ads in fiscal 2013, while Expedia spent $1.2 billion. TripAdvisor spent $236.5 million on ads last year. Their top lines have also continued to grow impressively.

Online ad spending for the three companies has been growing at an even faster clip than their revenues. Priceline has more than tripled its online ad spending in the last three years. About 90% of that money ends up in Google's coffers. 

Expedia spent 46% of its revenue on sales and marketing expenses (of which online advertising takes the lion's share) in fiscal 2013, up from 42.8% in the previous year. TripAdvisor spent 39% of its fiscal 2013 revenue on sales and marketing compared to 32.8% the year before.

Google has been the biggest beneficiary of the cutthroat competition in the industry. Although it's rather difficult to get the actual figures for the share of online ad spending by Expedia and TripAdvisor that Google gobbles up, they are probably in the neighborhood of Priceline's -- about 90%. Quite likely, the trend pervades the entire industry. Little wonder that Google's revenue has been expanding exponentially over the last few years.

Google still wins without having to dominate the online travel business
Google acquired ITA Software, the most dynamic online airfare system in the world, back in 2010. Many online flight searches are channeled through ITA Software. Following the acquisition, there was a lot of hue and cry by OTAs, who feared that Google would use its overwhelming dominance in online searches unfairly to its advantage. Many OTAs such as Orbitz and TripAdvisor, among other travel companies, use ITA Software's proprietary QPX system, an airfare search and pricing system.

The Department of Justice allowed Google to acquire ITA Software on several conditions, including allowing competitors to continue using the software, using a firewall that prevents it from knowing how licensed companies are using the software, and investing adequate amounts of funds in R&D to keep the software updated. Google agreed to extend the existing ITA contracts up to 2016.

Google, however, got one major leeway: It is allowed to show its own results up front when users search for travel deals. This way, it's able to compete head-to-head with other popular travel sites such as Kayak, Bing Travel, and other popular sites. But Google does not need to directly dominate the air travel business to be a winner in the industry. The huge reliance on its popular search engine by customers doing online travel and hotel reservations ensures that the company continues to win through increased ad revenue as the stiff competition in the space forces companies to jack up their ad budgets.

Hotel reservations more lucrative than air travel reservations
Online travel companies do not make nearly as much money from air travel commissions, as they do from commissions earned through hotel reservations. The gross margins for air travel also tend to be much lower than for hotel reservations. For instance, Priceline gets roughly 97% of its revenue from hotel reservations and enjoys 23% gross margin from the segment. Airlines, on the other hand, contribute only 1.7% of the company's revenue despite accounting for 15% of its gross bookings. This is due to the very low gross margin for the segment at just 3%.

It is, therefore, quite likely that most of OTAs' online ad dollars are directed toward the highly lucrative hotel reservation segment. Priceline does not offer its own meta-search product and does not use Google's ITA software. Not surprisingly, the company has revealed that it is willing to pay Google more if it can leverage its ITA software to provide it with better-qualified leads. If the other travel companies that do not own meta-search products feel the same way, then Google's revenue from ads directed at the travel industry might see significant growth in the future.

Foolish bottom line
The rapidly expanding online travel industry is playing directly into Google's hands. Although the company has a significant presence in the vertical online travel search market, its rivals' success benefits it as well.

The biggest thing to come out of Silicon Valley in years
If you thought the iPod, the iPhone, and the iPad were amazing, just wait until you see this. One hundred of Apple's top engineers are busy building one in a secret lab. And an ABI Research report predicts 485 million of them could be sold over the next decade. But you can invest in it right now... for just a fraction of the price of AAPL stock. Click here to get the full story in this eye-opening new report.

Joseph Gacinga has no position in any stocks mentioned. The Motley Fool recommends and owns shares of Google and It also recommends TripAdvisor. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.

Compare Brokers