After starting out as an online air travel agent, Priceline (NASDAQ:PCLN) today gets most of its business from facilitating hotel reservations rather than helping customers buy airline tickets. The agency business of online air travel service alone could not have been a long-term, viable pursuit for Priceline, and the company has added other travel-related services over time, including car rentals and most recently restaurant reservations from OpenTable (NASDAQ:OPEN). However, air travel was the logical place to get in for an aspiring online travel service company back in 1997 when using the Internet for many things, commercial and social, was just kicking into gear.
Diminishing flight booking service
In the old days, airlines relied on physical travel agents to distribute and issue tickets. Seeing the potential ease of online transactions, airlines initially sought to use specialized online flight booking sites to help with their ticket sales, such as that of Priceline. While similar third-party online ticket selling services remain ubiquitous today, airline companies now all have their own sophisticated online booking systems that prospective passengers can access directly. This makes the flight booking operations of Priceline and its peers no longer must-haves for people looking to purchase airline tickets online.
Unlike the numerous brand-name hotels and other lodging places that travelers may not know about that thus need reputable intermediaries for better marketing, airlines are very identifiable as customers can easily call out the name of an airline and then book a flight directly through the company's own online operation. Without having to pay a fee to an agent like Priceline when a ticket sale doesn't come through the agent's website, airlines can display better pricing on their own sites, further diminishing the usefulness of third-party flight-booking information from Priceline and the like. While Priceline probably won't abandon its flight-booking service all together, this part of its business may become more fringe for its growth and revenue generation.
Growth-lacking car rental service
The business narrative seems the same for Priceline's car rental service. In the U.S., for example, only several brand-name rental-car companies exist, and all of them heavily advertise online themselves. Thus, customers can easily check out each rental-car company's own online reservation site. Besides, it's unlikely that a company would not post better rental rates on its own site than what appears on, say, Priceline's rentalcars.com.
Online travel-services companies like Priceline try to build their businesses on the idea of one-stop shopping for travelers, and thus they bundle rental-car deals with flight and hotel reservations. But when the need for a rental car is only a stand-alone travel arrangement, customers may not make their car reservations through Priceline or another agency. Priceline's rental-car business may have a future similar to that of its flight-booking service and probably won't be the mainstay for the company over the long run.
Sustainable hotel reservation service
It's really the hotel part of its operations that has helped sustain Priceline's continued growth. Customers need someone to aggregate the vast available lodging information for them, as they can not possibly dig all of it out themselves. If Priceline has a reputation for providing good lodging deals, customers will look on its site to book a place to stay. However, when someone already knows where to stay, say, at Hilton or Crown Plaza of IHG, the person would likely book a room directly on that hotel's website. The better known a hotel is to customers, the less likely the hotel will depend on the kind of service offered by Priceline. This means that Priceline may have to work harder with lesser-known lodging outlets and this could result in narrower profit margins.
Challenging restaurant reservation service
Adding OpenTable's restaurant reservation service to the lineup of its current services does indicate that Priceline is continuing to look for new lines of business to ensure its long-term growth. The restaurant reservation service may play out favorably for Priceline, similar to what the hotel reservation service has done for the company. The number of eating establishments of one particular cuisine within a single geographic area can be simply unimaginable and thus, potential diners need the ease of going to one site such as OpenTable and being able to browse through the list of restaurants for information on menus, charges, reviews, etc.
Unlike well-known hotels with large operations that can run efficient in-house reservation systems, even top-notch restaurants may outsource reservations to focus on serving food. This of course bodes well for OpenTable, but it may end up a reservation destination for the expensive-dining crowd if average restaurants are reluctant to pay fees to OpenTable. These restaurants may instead rely on free online restaurant-search tools to gain customers, which compete with OpenTable.
Expanding into other lines of business may do only so much for Priceline. Dedicated search tools such as those of Google that allow customers to access wide sets of travel information on the Web present a constant challenge for Priceline. The company seems to have tried to address this issue once through its acquisition of Kayak, a travel search service. Alternatively, Priceline could try to vertically integrate additional offers into each of its existing services: buying a ticket, booking a room, renting a car, or reserving a table. Any perceived uniqueness of Priceline's services could give it the ultimate competitive advantage over rivals in both the travel agency and online search businesses.
Jay Wei has no position in any stocks mentioned. The Motley Fool recommends Google (C shares) and Priceline Group. 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.