According to Bloomberg, Google (NASDAQ:GOOG) (NASDAQ:GOOGL) has now licensed Room 77's hotel booking software. Room 77 is a start-up backed by Expedia (NASDAQ:EXPE), one of the leading online travel agencies, or OTAs. This is not the first time Google has tried to compete directly with OTAs such as Priceline (NASDAQ:PCLN), Expedia, Orbitz Worldwide, and TripAdvisor (NASDAQ:TRIP) for a piece of the highly lucrative online travel business.
The online search giant has several high-profile online travel deals and acquisitions to its name. These include the introduction of Hotel Price Ads in 2010, the acquisition of ITA Software in 2011, and the launch of Hotel Finder, also in 2011. Now, that list includes the Room 77 Software licensing deal. But, does Google really pose a big threat to highly dominant OTAs such as Priceline and Expedia? Just how potentially disruptive is the company's latest move in the online travel industry? Let's try to get some perspective into what Google's online travel efforts mean for OTAs.
How the three platforms work
Hotel Price Ads, or HPA, is perhaps Google's most prominent hotel booking platform. HPA are sponsored price listings that usually appear on Google Maps, Google+, and Google Hotel Finder. HPA is the hotel equivalent of ITA, a proprietary airline booking software.
The platform is aimed at hotel marketers who use it to leverage the opaque hotel pricing and reservation model. Opaque pricing refers to selling unsold hotel or airline inventory at discounted prices, but without revealing the identity of the supplier (hotel or airline) to avoid cannibalizing full-price retail sales. This is the pricing system for which Priceline is famous.
For example, whenever a prospective customer enters a search query about hotels, Google sifts through a list of hotel rates that have been submitted by hotel marketers using a real-time pricing feed. Google then produces hotel results with standard site ad copy, plus a drop-down menu listing available rooms within the hotel. Prices are submitted by OTAs as well as the hotels.
From a client perspective, HPA helps hotels cut out the middlemen (OTAs), and also provides a better return on investment than typical core paid search campaigns, although adoption rates are still low. From Google's viewpoint, the platform has achieved less-than-ringing success, with lower-than-expected traffic volumes.
Room 77's hotel booking software also uses the opaque pricing model. It is, therefore, aimed at competing with Priceline more than any other OTA. ITA is an airfare search and pricing software that uses the proprietary QPX system. Many online travel companies such as TripAdvisor and Orbitz use the software in their airline bookings.
The Department of Justice allowed Google to acquire ITA Software on several conditions, namely: the company must allow licensed competitors to continue using the software, a firewall must exist to prevent snooping, and the company must continue investing adequate amounts of money in R&D to ensure the software remains up to date.
But, Google also got a major leeway from the DoD. The company can display results immediately whenever customers enter their search queries. This way, Google got a head start over leading travel sites such as Bing Travel, Kayak, and many others.
ITA Software is rated the leading airline booking software. We can, therefore, presume that Google makes a fair amount of money from the platform. But, from the OTAs' viewpoint, ITA Software does little damage to their businesses.
Commissions earned by OTAs from airline booking tend to be much lower than those generated from hotel reservations, implying that the airline segment is far less important. For instance, Priceline, the world's largest OTA, derives 15% of its gross bookings, and a mere 1.7% of its revenue, from air travel commissions. Expedia, the second-largest OTA, gets only 8% of its revenue from airline bookings.
OTAs boost online ad spending
To counter the threat of increased competition, online travel companies have been spending massively on online ads. Priceline's online spending has more than tripled during the last three years. Last year, the company spent $1.8 billion on ads. Ironically, about 90% of that money went directly to Google's coffers.
Expedia spent $1.2 billion, or 46% of its overall revenue, on sales and marketing in fiscal 2013, up from 42.8% in the previous year. Online ads took the lion's share of that budget. Similarly, TripAdvisor spent 39% of its fiscal 2013 revenue on sales and marketing, compared to 32.8% a year earlier. It's not surprising that Google's top line has been expanding exponentially.
There is little evidence that Google's presence in the online travel business and vertical searches is in any way impinging on the top lines of Priceline, Expedia, and TripAdvisor. The three have seen revenues continue to grow admirably, even in the face of increasing competition.
Foolish bottom line
It appears as if Google is still experimenting with its online travel ventures, and the Room 77 software might be just another of its experiments. The company does not give a clear insight into how these platforms are performing. But, judging from the rapid growth being witnessed by the leading online travel companies, it would be fair to say that Google does not pose much threat to their core businesses.
Joseph Gacinga has no position in any stocks mentioned. The Motley Fool recommends Google (C shares), Priceline Group, and TripAdvisor. The Motley Fool owns shares of Google (C shares) and Priceline Group. 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.