In 1996, Microsoft founded what later became Expedia and spun it off in 1999. It shows that even Bill Gates couldn’t imagine that Expedia would become a $22b market cap giant in less than 20 years. And it demonstrates the power of the platform business model. Once you have a winning concept, you can scale it up massively in short amount of time.
Over the last few weeks, I have explained how Online Travel Agencies (OTAs) have applied this business model onto the $1.3 trillion travel industry. There are many different niches within this industry that platform businesses have captured. But none is as visible as Booking.com that I have shown the business model canvas for in my last article. They are the single biggest company in the travel industry.
You might think that Expedia is very similar. But actually, they are considerably different to Booking.com. And both are fascinating companies. Learn the about Expedia’s big picture and all the important details now and fuel up on important innovation knowledge.
Expedia owns many travel online platforms and related businesses operating a number of different business models. Let’s start with a brief overview of some of their most important businesses/brands:
- Expedia.com: Online Travel Agency selling accommodations as well as packages, of hotels, flights, rental cars, activities, travel insurances, etc
- Hotels.com: An OTA focusing on accommodations
- Orbitz.com, Wotif.com: Large OTAs acquired by Expedia with a strong local brand
- Trivago.com: a travel meta-search engine majority-owned by Expedia
- Egencia: a full-service corporate travel company
- HomeAway: a home accommodation travel platform (similar to Airbnb)
- And many other: Expedia operates around 200 travel websites in about 75 countries
Whenever there are overlaps with my Booking.com article, I have opted not to repeat myself in this article. I recommend also check out the Booking.com article if you haven’t read it yet (once you are finished with this one).
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Platform businesses have two or more customers that they need to provide value to. In the case of OTAs, these are the travellers (as the demand-side) and the travel service providers, hotels, etc (as the supply-side). Here is in Expedia’s own words the value proposition to both sides and the indirect network effects that bringing both sides together in a value-adding way provides. Within the demand and supply-side you can then further distinguish into various categories.
Value proposition to travellers
- Cheap(est) prices
- Amount of choice
- Reduction of risk due to the verified ratings & reviews
- Customer service (over 55m calls per year)
- Useful app
- Useful travel content
Value proposition to travel service providers (most importantly hotels)
- Incremental revenue: fill otherwise empty-staying rooms
- Ability to react: Hotels can ramp their supply to Expedia up and down *
- Global reach: helps hotels to reach global markets
- Risk reduction**: no booking, no commission
- Drive additional traffic to the hotel’s website (“billboard effect”)
Note, that Expedia also has an affiliate program whereby brick-and-mortar travel agencies can access Expedia’s inventory and tools. This is the third side of their platform business model and I am elaborating briefly on this below.
* at least under the agency business model
** Note that, unlike Booking.com, Expedia buys as a wholesaler with long lead times but – depending on the contract – can return unsold rooms back to the hotels very close to the date (often 24 hours). This is transferring risk back to the owner.
- Travel services providers:
- Hotels owners: 350k
- Other accommodation providers: >1m (esp HomeAway)
- Airlines (around 500)
- Rental car (150 car rental companies)
- Activities providers
- and more
- Offline travel agency affiliates earn commission (through their Travel Agency Affiliate Program)
- 3%-5% for Packages (flight+hotel, Flight+hotel+car rental) depending on length of stay
- 0% Flight only
- 6% Car Hires
- 9% Activities and Attractions
- 3%-11% Hotels depending on category
- Corporate travel managers: Expedia has a more ambitious approach to corporate travel management than Booking.com. They have their own business travel management portal Egencia that leverages off their supply-side partners
- Technology partners: Expedia has 5,500 in-house IT/tech staff. Partnerships still play a big role to develop new features and keep abreast of the major hotel chains and other travel platforms in removing friction from the travel planning, booking and experiencing process. See below for some of Expedia’s partnering/interface innovations
- Meta search engines: Meta search engines are becoming increasingly important. Expedia holds majority ownership on one of the biggest ones, Trivago.com. Expedia collaborates with TripAdvisor and Google Hotel Ads who are two of the other big travel meta search engines
- Other: such as tourism bodies, e.g. VisitBritain (#OMGB’ campaign), and many more
- Lobbyists: lobbyists play a big role in the tug-of-war (more under customer relationships)
Supply-side scale effects
One of the most important characteristics of network business models is that they provide more value as they grow (non-network business models can achieve lower unit costs, thus prices, as they grow but do not provide more value per se). As platform businesses grow they can leverage traditional scale effects (both on the supply as well as the demand side).
One of the most important outcomes of large supply-side scale are higher conversion rates (due to – among other things – a larger amount of choice). Higher conversion rates in return allow Expedia to bid higher on general search engines on the paid ads slots. They can in particular rank higher than hotels. This leads to higher click-through rates (CTR). All up, it improves Expedia’s return on investment on their advertisement spending and this is , as you will see in their cost structure, their single biggest cost element.
The virtuous cycle closes with all of the above – i.e. higher conversion rates – making Expedia more attractive to other supply-side actors (from the same and complementary categories).
- Business model TripAdvisor (ebook + canvas)
- Business model Booking.com (ebook + canvas)
- Business model Expedia (ebook + canvas)
- Business model Airbnb (ebook + canvas)
The biggest difference between traditional business model and the platform business model are indirect network effects. Key activities have to aim to enhance these.
- Enhance positive indirect network effects and customer experience by increasing:
- the number of bookable accommodations at an increasing amount of locations
- the types of bookable properties (variety)
- useful content, such as user reviews, pictures, etc
- and by enhancing customer experience
- Increase the value of the platform through technological innovation (few recent examples):
- Observe industry landscape for new entrants and adjacent industries for new/potentially disruptive approaches (e.g. meta search engines)
- Observe the moves of the known direct competitors
- Stimulate demand through promotions/notifications to subscribers
- Provide great customer support
- Improve the websites and the app based on the captured data and evolving technology, trends and feedback
- Improve conversion rates
- Accompany the micro moments on the traveller’s customer journey
- Search engine visibility: Maintain top rankings on paid advertising channels and improve on organic search rankings
- Observe the moves of hotel chains who want to increase direct bookings
- Grow loyalty programs to counter the hotel chains’ loyalty programs and to obtain valuable customer data
- Develop new travel-related services to grow partner and customer base
- Observe regulatory landscape and moves of lodging lobbying groups
Key Resources / Assets
The master resource of platform businesses are its network effects. All key resources contribute to them.
- Number of hotels and other accommodation partners available for booking
- Number of locations covered
- The various subsidiaries & brands which contribute to scale effects but operate independently of (and partly in competition to) each other
- Engaging content: high-quality, professional photos, good hotel descriptions incl all amenities&facilities
- Fresh user-generated content: reviews, ratings
- The captured user data and proprietary algorithms
- User experience (UX) of the website and app
- The global network of Expedia-owned platforms
- Skilled technology staff (>5500 technology staff)
- The loyalty program and its members (more under customer relationships)
- Affiliate program members (more under key partners)
- Trained customer services staff
- The website and app infrastructure and all the interfaces to the various hotel/flight/rental car/etc distribution systems (GDS)
- Intellectual property, brands, registered trademarks, trade secrets, domains, etc
I have provided a detailed overview of a traditional macro customer segments last time. Today, let’s look at something more exciting.
Customer micro segmentation
Data driven approaches allow micro segmentation. Here is an excerpt from an interview with Expedia’s head of brand marketing, Vic Walia that gives us some inspiring real-life examples:
“Expedia is sitting on a treasure trove of data, with 7 billion flights searched via the site last year and 40 million unique visitors per month globally.
“The users coming here are telling us a lot of information,” Walia said. “They’re telling us who they are, where they live, where they want to go, whether or not they have kids, what activities they like to do when they go to visit different cities – we get all this information from them. “
“What we do at Expedia is we have appended our entire database with the segmentation flags. And we’ve build microsegments, so we can go out into the world, finding cookies that match these segments and deliver the right customised ad to the right people.”
As an example, Walia explained Expedia knows people in Los Angeles like to book vacations to Las Vegas, San Diego and Palm Springs. The company then does an incrementality test, where a customised ‘test ad’ is placed in front of potential customers, and then a’ control test’ is run with no direct ad from Expedia.
“When we showed people in LA that we have Vegas on sale, we saw a 10 per cent lift in transactions, versus people who saw no ad from Expedia,” he claimed. “We then decided to optimise the test and learn method and take it one step further, changing the creative, the image, the price, the location and a few other variables.”
“As a result, we saw a 2.4 per cent uplift in bookings from those who saw the test ad mentioning the actual destination, compared to those who saw the control ad,” Walia said. “Again, it was about being relevant and personal.”
As another example, Expedia found by showing two versions of an ad, one with the price clearly stated and one without, it saw a bookings lift of 7.4 per cent from customers that saw the ad with the price.”
These kind of tests only work at scale. They inform where to put your advertising dollars and achieve better conversion rates playing an important part in the virtous cycle that I have mentioned above.
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Expedia’s sales channels to their customers:
- The Expedia webpages
- Webpages of its subsidiaries – around 200 different domains/sites (Orbitz, Wotif, Egncia, Hotels.com, etc)
- The mobile-optimised webpages
- The Expedia app
- Sales through TripAdvisor (Cost-per-acquisition model, CPA)
- General search engines, Google, Bing:
- paid advertising, CPC
- organic search ranking through useful content
- other OTAs
- TripAdvisor (Cost-per-click model, CPC)
- Meta search engines:
- Google Hotel Ads
- traditional brand advertising channels, like TV, radio, magazines, etc
Communication, content and other channels:
- iTunes App Store, Google Play Store, etc for their app
- eMails for direct communication with their customers
- Other search engines and webpages
- Expedia YouTube channel
- YouTube advertising
- other display and retargeting ads
- Social media sites, Facebook, Instagram, etc
- Blog with interesting articles & useful content
- Travel destinations (example Australia)
- And lots more
I have elaborated on the relationships between hotels and online travel agencies in depth. It is that of a love-hate relationship. This is particularly true for the major hotel chains.
Hotels promote their loyalty programs heavily. They try to use this to achieve higher levels of direct bookings avoiding to pay commissions to the OTAs. Loyalty benefits, such as free amenities (e.g. room WiFi) are often only available through the loyalty programs.
But Expedia is running its own loyalty programs which are some of the biggest programs themselves. Their subsidiaries Hotels.com and Orbitz have very popular loyalty programs in their own right.
What I have said about Booking.com’s relationships with hotels and travellers holds also true for Expedia. Beyond this, let’s have a look at what Expedia are recommending on the topic of loyalty through their Expedia Affiliate Network:
The three staples of loyalty programs:
- Currency (i.e. points)
- Exclusive offers
- Non-monetary perks
- Expedia credit cards
- Be there along the customer’s micro moments “tailoring your content strategy to provide the right content in the right format at the right moment can help you become a customer’s go-to brand”
- Content marketing: keep targeted and relevant
- Email campaigns
- Understand you Customer’s Lifetime Value (CLV) through segmentation and tailor your marketing efforts
- Reward and influence purchasing behaviour
- Loyalty apps with useful features, e.g. mobile check-in, chat bots, etc
- Interact through messaging apps (e.g. Facebook Messenger)
- Create/use digital wallet services
- Redefine value by generation, e.g. baby boomers vs millennials
- Consider gamification
- Personalisation – use data for loyalty purposes, e.g. keeping track of travel preferences
- Generally, loyalty programs are useful for repeat, cross-, upsells (e.g. Orbitz members booked >90% more hotels than non-members)
And it doesn’t end there. Expedia and Red Lion Hotel are trialling a collaboration on their loyalty proposition. Red Lion gives Expedia access to their loyalty deals and in return Expedia shares more information with Red Lion (most notably the customer’s email address). Expedia are looking into expanding this with other hotels.
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The Online Travel Agency business is characterised by a few predominant business models and then some other ones:
- Agency business model
- Merchant business model
- Advertising business model
- Subscription business model
- Other (e.g. travel insurance fees, marketing services)
Expedia’s revenue (annual report FY16, page 49) by business model:
- Merchant: $4.85b / $8.8b = 55%
- Agency: $2.4b / $8.8b = 27%
- Advertising: $0.8b / $8.8b = 9%
- HomeAway (subscription): $0.69b / $8.8b = 8%
Over the years, Expedia’s percentage of revenues from the merchant model has decreased (though the absolute number has grown). Here is where some of these revenues come from:
- Reservation of accommodation, rental cars, etc generate commissions that fall under the
- merchant or
- agency business model
- Their meta search engine Trivago earns advertising revenues on a cost per click pricing model
- HomeAway earns subscription-based revenues on vacation rental listings
- Travel insurance fees
- Revenues generated by Expedia Media Solutions and other subsidiaries
Here is how Expedia reports in verticals their revenue (annual report 2016 pages 42 and following). Annual revenues from:
- Hotels: 61%
- Air: 9%
- HomeAway: 9%
- Media: 9%
- Other: 12%
Expedia’s merchant business model is characterised by (see their annual report, pg 6-8):
- Purchasing hotel rooms early at wholesale prices (discounts)
- Normally, customers pay at the time of booking to Expedia who pay the hotel after the customer has stayed there which makes this a cash flow positive transaction
- But under the Expedia Traveler Preference (ETP) program eligible customers can opt to pay at the hotel after the stay (Hotel Collect)
- Depending on the contract, Expedia can return unbooked rooms back to the hotel at an agreed deadline prior to the day
- Expedia packages dynamically based on the travellers requests leading to lower package price than the individual components added up
- Expedia offer third-party pre-assemebled packages through their international points of sales (POS)
- Package products are mainly marketed using the merchant model
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The best source for Expedia’s cost structure is their latest annual report (pdf) (FY16). Let’s start with the operational expenses (annual report, page 49-). You will see a familiar picture. As is the case for Booking.com, performance advertising is by far the largest expense.
- Selling and marketing $4,367m = 49.8% of revenue
- Direct costs $3,530m
- traffic generation costs from search engines and internet portals
- television, radio and print spending
- private label and affiliate program commissions
- public relations and other costs
- Indirect costs $837m
- personnel and related overhead and stock-based compensation costs
- Direct costs $3,530m
- C0sts of revenue $1.6b = 18.2% of revenue
- Customer operations $727m
- Credit card processing $508m
- Data center and other $362m
- Technology and content $1,235m = 14.1% of revenue
- Personnel and overhead $627m
- Depreciation and amortisation of technology assets $362
- Other $246m
- General and administrative $ 678 = 7.7% of revenue
Lets now have a quick look at some of their capitalised costs and relevant assets from the balance sheet. Page F-25 shows capitalised software development costs of $1.6b which is significantly higher than Priceline.
Their balance sheet too looks quite different on the technology related assets. Priceline has much higher asset values in property & equipment, similar in intangible assets and significantly higher in goodwill (probably related to HomeAway, Egencia and their other acquisitions). Here are the valuations:
- Property & equipment: $1.4b
- Intangible assets: $2.4b
- Goodwill: $7.9b
(For investors, this comes with the obvious risks of goodwill impairment – not unknown in the tech industry when acquisition bets don’t pay off. Priceline is also much stronger on the long term investments, i.e. predominantly government bonds, you can see this also reflected in their price/book, ROE, ROA metrics. Here the same stats for Expedia.)
And while we are on the topic of acquisitions, let’s have a look at Expedia’s recent acquisition history (only the largest recent acquisitions listed). It is a very valid way of growing (and of course to maintain dominance in the market).
|March 12, 2013||trivago GmbH||Hotel Metasearch Engine||$564,000,000|
|July 6, 2014||Wotif||Travel Agency||$657,000,000|
|January 23, 2015||Travelocity||Travel Agency|
|September 17, 2015||Orbitz||Travel Agency||$1,600,000,000|
|November 4, 2015||HomeAway||Holiday Rental Service||$3,900,000,000|
[Source: Wikipedia, Dec 2017]
I have more in-depth articles in this series of travel platform businesses:
- Business models compared: Booking.com, Expedia, TripAdvisor
- Customer journey comparison: TripAdvisor, Booking.com, Expedia, Google
- Micro moments: how Booking.com, Expedia, Airbnb, TripAdvisor, Google guide the customer journey
- Business model canvas Booking.com
- Business model canvas TripAdvisor
- Business model canvas Airbnb