Google (NASDAQ:GOOG), which competes with Microsoft (NASDAQ:MSFT), Yahoo (NASDAQ:YHOO) and AOL (NYSE:AOL) in the search advertising market, recently paid $700 million to acquire ITA Software, a flight information company. ITA provides travel-related data to other online travel sites like Expedia, Kayak and Travelport, along with search engines such as Microsoft’s Bing.
We believe this acquisition will help Google compete better against Bing in the travel search market. Our analysis follows below.
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We estimate that search advertising constitutes 67% of the $725 Trefis price estimate for Google’s stock. Google leads the search advertising market with a 65% share. We believe its share will increase to around 73% by the end of Trefis forecast period.
Google has had limited presence in the online travel search market to date, but stands to benefit from the ITA acquisition. If Google gains 1% market share by 2016, it could mean an upside of 1% to the $725 Trefis price estimate for Google’s stock. A 1% market share gain would increase Google’s market cap by around $2 billion.
Here’s how Google stands to benefit from the ITA acquisition:
1. Google trails Bing in travel search market
Microsoft’s Bing search engine offers a much better travel experience than Google’s. Travel-related search queries on Google point air travelers to other travel sites, while Bing provides its own travel search interface with a comparison of prices for the same flight from different travel engines. The ITA acquisition will help Google compete with Bing by offering search tools that help customers find such information easily on the Web.
2. ITA acquisition creates revenue opportunity for Google
Bing gets most of its flight information from ITA, as do travel sites like Expedia and Kayak. By acquiring ITA, Google can now license flight data to these players while negotiating for higher payment rates.
3. Online travel search market growing fast
Online travel bookings are an $80 billion market within the $132 billion air travel industry. According to a report from SITA, a provider of communications and IT solutions to the air transport industry, 560 million passengers used the Internet to make their bookings in 2006, out of of two billion total passengers.
Using SITA’s numbers, we estimate that online bookings have grown from around 28% of total bookings in 2006 to 60% presently. The total number o U.S. commercial airline passengers is expected to grow at a rate of 2.4% from 2009 to 2025, according to a recent FAA Aerospace report. This suggests that online travel bookings will increase much more rapidly than the overall travel booking market will grow slowly over the next few years.