For the affected parties, it must have been like waiting for a plane that took forever to arrive. Finally, after six-plus months in the departure lounge, Expedia (NASDAQ:EXPE) was able to board -- earlier this month the Department of Justice waved through the company's acquisition of Orbitz Worldwide, a deal that was originally announced in February.
Subsequent to Justice Department's nod, Expedia closed the deal. Now that Orbitz is finally in its portfolio, what does this mean for the company, its top rival, and the broader online travel industry?
First, it means that with Orbitz, Expedia is very much first in the online travel sphere in terms of gross bookings. That makes it the senior partner in what's widely considered an online travel agency duopoly with eternal rival Priceline Group (NASDAQ:BKNG).
That one-two punch was likely the reason the DOJ took so long to review the Expedia-Orbitz deal. Adding to this was some quite lively opposition from trade group American Hotel & Lodging Association, which railed against the merger in no uncertain terms. AHLA claimed that such a concentration in the market would lead to higher prices not only for consumers but for the smaller lodging businesses under its wing.
The DOJ doesn't see it that way. In its ruling, it said that "travel service providers have alternative ways to attract customers and obtain bookings." That statement, in addition to being 100% accurate, neatly crystallizes a key reason why both have been scooping up assets lately. It also illustrates the challenges Expedia/Orbitz and Priceline will face going forward.
The plane truth
In a way, AHLA is right -- in terms of monster OTAs, there are really only two giants, the newly fattened Expedia and Priceline.
But travel is a vast, developing market, home to many hungry companies. Innovation is rife, and it's tough to be an incumbent. Look at the quick rise of rent-your-home-to-tourists powerhouse AirBnB, for instance, a provider that's usually in the conversation when travelers need accommodation. As recently as 10 years ago, AirBnB didn't exist.
At the same time, smaller players are coming up with fresh new ways to offer middleman services more effectively than the big guys. Little-site-that-could TripAdvisor (NASDAQ:TRIP), once a portal that natively featured only reviews of and basic information about lodgings, has rolled out an instant booking service that allows users to book rooms directly on its site.
It's signed up a host of hotel chains as partners, baiting them with lower commissions. According to Skift, Tripadvisor takes a cut of 12% to 15% of every booking, apparently comfortably below the charges levied by rival OTAs.
In the plane-tickets sphere, Google (NASDAQ:GOOG), for one, has ramped up its efforts to sell bookings on flights. Its Google Flights site is a slick and easy-to-use tool that produces quick results that can be quickly modified with a range of criteria. The prices it spits out are often very competitive with those of its rivals.
On top of that, travel service providers have gotten much better at funneling bookings to their own sites. After all, what respectable company wants to sacrifice potential revenue on commissions to middlemen?
That's why it's not unusual for airlines and hotel chains to offer the best stock, and the most rock-bottom prices on a proprietary basis. So it's not only rival OTAs and up-and-comers that the Expedias and Pricelines of the world have to contend with, but it's also their own suppliers.
All this is why the two big OTAs have both been active acquirers lately. They simply want and need to keep up.
Of the two, Expedia is the more conservative buyer, picking up traditional e-travel assets. Orbitz is only the most recent manifestation of this; only several weeks prior, for example, Expedia ponied up $280 million to acquire Travelocity.
Priceline has taken a more sideways route. In recent times it's acquired restaurant reservations sites AS Digital and OpenTable to its portfolio and accommodation management services provider Hotel Ninjas. Of course, like its rival, it's also muscled up with traditional services such as booking engine Kayak.
We can expect this arms race to continue, then. The global economy is relatively healthy, and people want to get out of their homes and visit the world. Attracted by this burgeoning market, new services and companies will continue to emerge, widening the industry even further.
And fueled by growing revenue from the ever-increasing popularity of travel, Expedia and Priceline are sure to keep their wallets open to buy some of these emergers. This wave of acquisition and consolidation is far from cresting.
Eric Volkman has no position in any stocks mentioned. The Motley Fool owns and recommends Google (C shares), Priceline Group, and 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.