Although there are numerous and varied online travel agencies, two sit atop the industry like a pair of giants -- Expedia (NASDAQ:EXPE) and Priceline Group (NASDAQ:BKNG). Of this duopoly, Expedia is by far the smaller in terms of several important metrics. Here's a look at whether it can bulk up to match its towering rival.
A tale of two OTAs
Expedia is clearly the junior player in the duopoly when we look at market capitalization, long-term share price appreciation, and overall profitability. Witness:
Stock price and market cap are, naturally, tied closely together. The comparatively steep rise in those two figures for Priceline is due in no small part to the third; Priceline's most recent trailing-12-month net profit margin was just over 20%, much loftier than Expedia's 3% and change.
Why the huge (and fairly long-running) disparity in those numbers? The core reason is rather straightforward -- Priceline leans much more heavily on a lower-cost, middle-man business model.
Online travel agencies (OTAs) like Priceline and Expedia essentially make their money in one of two ways, either via the "agency" or the "merchant" model. In the former, it serves only as an intermediary between customers and travel service providers like airlines and hotels, taking a commission on each booking.
In the merchant model, the OTA itself purchases the service. It's the entity unloading said service to the customer, and pocketing the booking price when a purchase is made.
There are advantages and disadvantages to both, which we won't dive into here. Suffice it to say that since the agency model doesn't require direct spending on the provided services, at the end of the day, it's a less costly, more high-margin activity.
Priceline very much favors the agency way of doing business. In its fiscal 2017 first quarter, 88% of the company's gross bookings derived from the agency model. The mix was much more even with Expedia in the same quarter; 54% was from agency bookings.
Turning our attention to total assets and revenue, Expedia and Priceline are not far away from each other. So, it's clear that Priceline doesn't derive its relatively beefy margins from a much fatter portfolio of assets or an excessive revenue figure; rather, it's the way it makes its money.
Other factors affect this, too, of course. A major one is geographic concentration -- Priceline is by far the more global company, deriving 88% of its gross profit in fiscal 2016 from non-U.S. business. Expedia is very much an Ameri-centric company; in terms of revenue, 45% of the company's take came from international sources.
The American OTA market is much more mature and developed; foreign markets have had greater scope for growth -- although it must be said that our persistently strong currency continues to reduce overall U.S. dollar revenue for global businesses like Priceline.
It's also worth mentioning that the travel business outside the U.S. generally works on the agency model, a key reason why Priceline leans on it. The merchant model is the norm in the U.S.
I don't believe it's impossible for Expedia to bulk up to Priceline's size and profitability, but it's unlikely. It would necessitate a major shift in its agency/merchant model mix, which would either require it to single-handedly change the structure of the U.S. travel industry, or plunge much more deeply into foreign markets that favor the agency model. I doubt either is going happen.
None of this is to say that Expedia is a poorly run company, or employs a weak business strategy. It's just that its No. 1 rival has effectively positioned itself to be the larger and more profitable enterprise, and it won't be easy to top.