Priceline Plans To Pare Expedia’s Lead In U.S. Online Bookings

by Trefis Team
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Quick Take

  • Priceline’s share in the U.S. travel bookings was just 11% in 2012 vs. 43% for Expedia.
  • Despite slowing growth, the U.S. online travel market remains the biggest market in terms of sales and will continue to be so for years to come. U.S. online travel sales is expected to cross $180 billion by 2016.
  • We believe that by attracting more traffic to Priceline’s website, Kayak’s acquisition can increase booking transactions for the company.
  • Kayak can help build Priceline’s foothold in the U.S. travel market by adding value to its travel search and advertising platform, reducing its dependence on Google, and helping build a better mobile platform.
  • Last year Priceline launched its first offline advertising campaign to build the Booking.com brand in the U.S.

Due to its expanding international footprint, Priceline (NASDAQ:PCLN) overtook Expedia (NASDAQ:EXPE) as the world’s largest Online Travel Agency (OTA) by sales in 2010. However, with a 43% share of gross bookings, Expedia remains the most popular OTA among American users. In comparison, Priceline’s share in U.S. travel bookings was just 11% in 2012, according to research firm PhoCusWright. [1]

While domestic (U.S.) bookings accounted for 45% of Priceline’s gross bookings in 2007, the proportion has declined to just 18% in 2012. This has been a result of Priceline’s strategy to expand its presence in international markets. With the U.S. travel market nearing saturation, rising opportunities in alternate markets such as Europe and Asia-Pacific make them attractive destinations for OTAs. Nevertheless, despite slowing growth, the U.S. online travel market remains the biggest market in terms of sales and will continue to be so for years to come.

In this article we discuss why the U.S. remains a big market for online travel agencies and some recent steps taken by Priceline to close its market share gap with Expedia in the region.

See our complete analysis for Priceline

U.S. Will Remain The Biggest Online Travel Market Despite Declining Growth

The U.S. online travel market is growing at the slowest pace compared to other economies such as Europe, Latin America and Asia-Pacific. Nevertheless, with estimated revenues of $151 billion in 2012, the country remains the biggest market in terms of online travel sales. Having the highest Internet penetration in the world among major regions (78.6%), the U.S. has a higher proportion of travel booked online (51.5%) compared to other regions.

Latin America and Asia-Pacific travel markets are expanding at a robust pace, with a forecast average annual growth rate of 23% and 18% respectively compared to an average annual growth rate of 5% for the U.S. during 2013-2016. However, with expected online travel sales of over $180 billion by 2016, the U.S. is estimated to remain the largest online travel market for the next few years.

Source: eMarketer

What Steps Is Priceline Taking To Increase Its Competitiveness In The U.S.?

1. Kayak Acquisition

In November 2012, Priceline announced its acquisition of leading meta-search engine Kayak (NASDAQ:KYAK) for $1.8 billion. Though the acquisition is pending antitrust review by UK regulators, Priceline expects to close the deal by the second half of 2013. The acquisition of Kayak will mark Priceline’s entry in the meta-search space. A meta-search engine is a search tool which collates results from multiple search engines, providing a broader scope for user searches. Meta-search remains an integral part of the online travel booking supply chain.

Growing at a CAGR of 47%, Kayak’s topline has witnessed robust growth between 2007-2012. The company currently receives about 80% of its revenue from the U.S. and has over 50% share of the U.S. meta-search market. [2]

We believe that by attracting more traffic to Priceline’s website, Kayak’s acquisition can increase booking transactions for the company. Thus, we think that the acquisition better equips Priceline to close the market share gap with Expedia in the U.S. market.

- Kayak can add value to Priceline’s travel search and advertising platform: We feel that the acquisition could serve as a way for Priceline to expand its paid search or advertising offerings, an area where it does not have much exposure currently. While revenues from advertising contribute very little to Priceline’s overall earnings, for Kayak, with contribution of more than 50%, advertising is an important revenue stream. We believe that the expansion of its advertising platform can broaden and diversify Priceline’s revenue base.

- Reduce Dependence on Google: According to Travel Trends, Priceline is one of Google’s biggest customers, having spent close to $375 million in online advertisements in Q3 2012 alone. [3] However, with Kayak on board, Priceline might reduce its dependence on Google to get traffic for its website. With the launch of Google Flight Search and Google Hotel Finder, many online travel companies have accused the online search engine of placing its results upfront, which negatively impacts the visibility of other travel products. Reducing its dependence on Google, Priceline can incur significant annual savings in its advertising budget going forward.

Build a Strong Mobile Foundation: In Q3 2012, Kayak registered an 87% y-o-y increase by processing 56 million queries via its mobile applications. Kayak’s mobile applications were downloaded 3.1 million times in Q3, a 95% increase over last year, and the company believes that it has a more loyal mobile user base compared to the PC user base.

According to the 2012 Traveler study, 38% of leisure travelers and 57% of business travelers in the U.S. use mobile for getting travel information. [4] Developing a mobile platform requires significant costs in terms of design and development. We feel that by leveraging each other’s expertise in mobile, Priceline and Kayak can grow their mobile user bases even faster.

2. Increasing Offline Marketing Spend In The U.S.

Last year, Priceline launched its first offline advertising campaign to build the Booking.com brand in the U.S. With an inventory of over 280,000 hotels and 18 million reviews in 178 countries, Booking.com has been the primary product behind Priceline’s success in the European market. We believe that by increasing Booking.com’s presence in the US market, the offline campaign can help expand Priceline’s footprint in the market. (Read: Priceline Has Huge Growth Potential In The European Online Travel Market)

Our price estimate of $633 for Priceline is at a slight discount to the current market price.

Understand How a Company’s Products Impact its Stock Price at Trefis

Notes:
  1. Priceline, Travelocity take steps to increase share, Travel Weekly, February 5, 2013 []
  2. Who is so far feeling the heat from Google Flight Search? No major surprises here, tnooz,  February 17, 2012 []
  3. What does the Priceline-Kayak deal (and Google lurking in the background) mean for hotel marketing?, tnooz, December 5, 2012 []
  4. Today’s Traveler: Google’s Annual Traveler’s Road to Decision Study, Google, August 2012 []
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