Search Engines’ Gains Are OTAs’ Loss
Google (NASDAQ:GOOG) has recently launched a new commission-based advertising program for hotels, which might place it as a direct rival for the OTAs (Online Travel Agencies) such as Priceline (NASDAQ: PCLN) and Expedia (NASDAQ:EXPE). Why should OTAs be concerned? Well, because it is Google! Isn’t that reason enough to feel jittery?
The new Google Hotel Ads will charge the commission rates prevalent in the market, instead of charging by the cost per click method through AdWords. This move, though a predictable evolution for Google, would nonetheless act as a blow for online travel market players. Google has allegedly announced that its Hotel Ads Commission program will be available worldwide.
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A few days back, the Chinese OTA, Qunar strengthened its partnership with Baidu, China’s largest search engine. One of the reasons why this is seen as a threat for China’s OTA leader, Ctrip (NASDAQ:CTRP), is because Baidu’s search results will give preference to Qunar’s products and services.
In a similar vein, Google’s search results might give preference to its own travel bookings, rather than the search results for the other OTAs. One of the ways in which users reach the OTA website is through Google search results. This might be one of the primary levels of concern for the OTAs right now.
What Will The OTAs Do Now?
In its Q2 2015 earnings call, Expedia’s management stated that it won’t feature on TripAdvisor’s Instant Booking platform presumably because Instant Booking undermines the functionalities of the OTA. With Instant Booking, all the steps of the booking process get completed on TripAdvisor‘s (NASDAQ:TRIP) website. Additionally, Instant Booking, unlike TripAdvisor’s metasearch option, wouldn’t give a scope to OTAs like Expedia to attract customers to its own websites, and subsequently convert them to direct bookers. On the other hand, Expedia’s management mentioned that it had no qualms in displaying product on Google’s travel platform because Google doesn’t act as a merchant and directs the booking traffic to the OTAs.  The current step by Google might make OTAs rethink their future display options through Google, which charges billions of dollars from the OTAs for advertising options.
But, Do OTAs Really Have An Option?
However, it is virtually impossible for OTAs to boycott Google. There are approximately 3.5 billion searches made on Google per day.  Also, OTAs have already discovered that Google search is indeed the most profitable option to generate business for them.
Google had been testing the hotel booking waters since March by giving small and independent hotel booking options in partnership with tech providers such as DerbySoft, Fastbooking, Sabre Hospitality Solutions, Seekda, TravelClick, and Trust International.  A few months ago, Google tied up with Sabre for 20,000 properties, that will enable customers to book accommodations through Google search, Google maps, or Google+. 
According to Google, the commission-based program tends to generate higher revenue than the pay-per-click model. This might have been the motivation for TripAdvisor, as well, to evolve from its meta-search and travel review platform into an Instant Booking platform.
Google Is Boosting Its Advertising And Hotel Booking Features
Google had announced a number of developments to boost its hotel booking and advertising functionalities.
Additionally, Google recently abandoned its Hotel Finder website, that was launched in 2011. Instead, it started offering hotels from the suppliers and OTA websites directly in its search results. Websites such as Booking.com and Expedia, pay Google to feature advertisements on the top and to the right of its search results. Along with that, Google is also offering hotel booking options in the Google search results through its Hotel Ads program. The Hotel Ads program features the OTAs and also gives independent hotel websites a chance to feature directly on Google’s hotel search results.
Good News For Independent Hotels?
We had previously discussed how hotels have started bypassing OTA bookings by luring customers with loyalty points and benefits for direct bookings. Hotel owners lose a part of their profit margin by paying commissions to OTAs. Hence, this direct booking method through Google might be a welcome change for many small and independent hotels. Additionally, the hotels need to pay a commission to Google after a booking confirmation as against Google’s previous cost-per-click structure, which didn’t ensure confirmed booking of the hotel.
Google has extended its Book on Google option from mobiles to desktop and tablets in the U.S. This might be the beginning of a worldwide expansion in the future. The Book on Google option allows consumers to book hotels directly through Google search and Google takes care of the payment through Google Wallet. This model bears a resemblance to TripAdvisor’s Instant Booking model, where the hotel or OTA takes care of the confirmation and customer service post the payments are done. 
However, one question still remains. Even if Google acts as an OTA, it will still be a middleman for the hotels. The commission-based payment that hotel owners are unhappy about, will remain nevertheless. The only solace for hotel owners might be that with the increasing number of influential players in the OTA field, the commission rates might remain competitive in the future. We’d mentioned previously, how some hotels are preferring TipAdvisor’s Instant Booking due to its lower-commission strategy. Hence, with the addition of more rivals in the OTA domain, the rates they charge to hoteliers are bound to remain competitive.
Google Gears Up Competition On the Metasearch Space, As Well
Google’s search results for American hotels will also include the details of amenities such as the availability of Wi-Fi, paid parking, laundry services, etc. This feature will be extended to 23 other countries in 2016. The upgraded search results might provide further competition to players such as TripAdvisor’s metasearch. 
We feel that adding competition to the OTA space should be a welcome move for both hotel owners as well as consumers. The consolidation fear post the Expedia-Orbitz merger might be alleviated to a great extent by the emergence of new players and the evolution of existing metasearch engines as full-service OTAs. This will help the hotel commission rates to remain competitive, which, in turn, will benefit travelers by keeping down hotel booking rates. Hence, this move by Google is good news for all the market participants, except, perhaps, the existing OTAs, themselves.
View Interactive Institutional Research (Powered by Trefis):Notes:
- Expedia’s Q2 2015 Earnings Call Transcript, July 30, 2015 [↩]
- Google Just Upended Hotel Distribution, Hospitality Net, September 25, 2015 [↩]
- Google Takes on OTAs With Commission Model, Travel Trends, September 24, 2015 [↩]
- Amazon Travel Doubles Hotel Coverage and Appoints Former Expedia Exec as GM, Skift, July 30, 2015 [↩]
- Google Accelerates Moves to Become Leading Hotel-Booking Player, Skift, September 24, 2015 [↩]
- For hotels, Google expands direct commission-based bookings, tnooz, September 23, 2015 [↩]