Amazon (AMZN +0.55%) could eventually challenge Booking (BKNG 3.17%) and Expedia (EXPE 9.02%) in the online travel market according to Morgan Stanley analyst Brian Nowak. In a note to investors, Nowak claimed that Amazon's "focus on selection/service, pricing, and frictionless payment that drive conversion and stronger user economics also translate directly to travel."
Nowak estimates that over 300 million of Amazon's customers would likely spend money on a potential travel offering. He notes that online travel companies like Booking and Expedia spend about $620 million annually to acquire their global hotel inventories, which would be a tiny investment compared to Amazon's projected revenues of $233.4 billion this year.
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Nowak believes that if Amazon builds an online hotel business roughly half the size of Expedia's, it could generate $600 million in profits per year -- which would be equivalent to 20% of Amazon's $3 billion in net profits in 2017. Those numbers sound great, but Nowak also glosses over some important facts.
Amazon's been down this road before
Amazon added hotel listings to its daily deals platform, Amazon Local, in early 2015. In April of that year, Amazon launched a dedicated hotel booking platform called Destinations. The platform also helped customers find nearby "getaway destinations" for weekend trips.
Amazon expanded Destinations to 35 cities, but it abruptly discontinued the service and pulled its hotel deals from Amazon Local in October. At the end of 2015, Amazon also pulled the plug on Amazon Local, effectively surrendering the daily deals market to Groupon.
Amazon's abrupt exit was surprising, since many analysts had expected the retailer to disrupt the OTA (online travel agency) market and cause big headaches for Booking and Expedia. Amazon never explained its exit, merely stating that it "learned a lot" from the experience.
The competition is too fierce
However, the most obvious reason for Amazon's exit was the competition. The OTA market in the US is essentially a duopoly between Booking and Expedia.
Expedia and its subsidiaries (Hotels.com, Hotwire, Travelocity, Orbitz, and CheapTickets) accounted for 65% of all OTA bookings last year, according to Hitwise. Booking and its main subsidiary Priceline accounted for 33% of all bookings.
Amazon's strongest e-commerce market is the US. That's why it uses it as a launchpad for ecosystem-building services like Alexa, Amazon Prime, Amazon Video, and AmazonFresh. If Amazon can't get a foothold in the US OTA market -- as Amazon Local Travel and Destinations failed to do -- it's unlikely to expand the service elsewhere.
Alphabet's (GOOG +0.41%) (GOOGL +0.66%) Google also tried to disrupt the OTA market by adding flight, hotel, and vacation planning features over the past few years. Those orders are directly booked through airlines and hotels, which cuts OTAs out of the loop.
But despite that "disruptive" competition, the two main OTAs kept growing their revenues.
Source: YCharts
The reason was simple: just as consumers start product searches on Amazon and online searches on Google, they start travel searches on one of the main OTA sites. Those old habits are tough to break.
But old habits can still be broken...
Nowak admits that "online travel has proven to be immune to Amazon disruption so far," but "that doesn't mean Amazon won't try again, and they should." Perhaps Nowak has a point.
Amazon's Prime member base in the US grew from 54 million in 2015 to 90 million last year according to research firm CIRP. The average Prime member spends about $1,300 annually on the site, compared to $700 for non-members. Amazon repeatedly added products like Echo and services like Amazon Video and AmazonFresh to that ecosystem, which locked in its users more tightly than ever.
As that expansion continues, the notion of introducing Prime discounts for airline tickets and hotels could gain steam. If Amazon rolls with the idea, consumers could soon be booking travel plans on their Alexa-powered devices -- and gradually forgetting about traditional OTAs like Booking and Expedia.
