Online travel agencies pump more resources into advertising

March 25, 2008

By Dan Luzadder

Online travel agencies have spent more than a decade bidding to become the travel agents of the future. In the process of aggregating millions of transactions every day, they've grown into multinational corporations that take in billions of dollars in revenue each year and set the pace for Internet bookings, new online marketing tools, rich inventory content and innovative online services for travelers.

But just as the growing strength of the OTAs has often portended gloom and doom for brick-and-mortar agencies, giving rise to speculation that OTAs would kill off traditional travel agents, the profitable walk in the park for these online behemoths could be turning into a walk in the dark, insiders say.

Increasingly the online giants seem to be looking over their shoulders as if they were being pursued, and not by each other. In many cases, the footsteps these companies are hearing are coming from airline and hotel company Web sites as well as from the small but growing business of metasearch providers such as Kayak-Sidestep and Mobissimo.

Each of these growing sources of competition is making the OTAs take a harder look at their transaction-based business models and consider potential revenue streams they have been missing, or ignoring, for a long time. Chief among these is advertising, though it is an opportunity that entails shifting their business models from pure retail to a mix of retail and media.

While actual transactions remain strong today, the big four -- Expedia, Orbitz, Travelocity and, to a lesser degree, Priceline -- are probing the idea of pegging their future growth on becoming media companies, sellers of advertising and marketing opportunities to travel partners and even to nontravel-related businesses.

Suppliers, especially airlines and hotels, make no secret of the fact that they are making an ever bigger push to persuade consumers to come directly to their own sites, not to OTA intermediaries. For some, it's a matter of cutting out the cost of the middle man. 

And as metasearch firms offer consumers a peek at best available air fares from hundreds of sites instantaneously -- services that metasearch firms claim are objective searches not influenced by deals with suppliers -- they are moving highly motivated, ready-to-buy consumers to supplier Web sites in ever greater numbers. That, industry observers say, is pushing the online travel giants to find things to sell besides low prices.

Tighter inventories

In addition, airline seats and hotel inventory have become tighter, reducing capacity and setting the stage for higher room rates and fewer incentives to offer discounted fares. Those inventory changes have left suppliers looking for ways to stop sharing a significant piece of the distribution pie with online travel agencies, or at least to find less expensive ways to do so.

Across the online travel spectrum, among both online players and financial observers who track them, there is a growing feeling that these ominous footfalls may bring more than uneasiness. They may change the OTA landscape itself.

Falling segment fees -- booking fees like those abandoned recently by Priceline -- are also driving change, said Bob Offutt, an industry analyst with PhoCusWright.

"The airlines are somewhat concerned about the power of metasearch," Offutt said. "They are being careful about how they are opening their kimono to them. I think they are afraid the metasearch players will develop so much power as a new intermediary that they will command fees that will exceed the segment fees of the GDSs."

The suppliers' thinking, he said, is that if booking fees go to zero, the OTAs will have to become media companies, but "the truth is somewhere in between."

The supplier Web sites of airlines, hotels and car rental agencies are clearly gaining prominence among travel shoppers, especially as the metasearch firms grow in both revenues and reputation. The metasearch business model, directing travelers to supplier sites on a pay-per-click basis, seems to be flourishing.

Online travel agencies generally deny that they see the metasearch firms as the wolf at the door, but there is little argument that they are investing resources in new revenue streams. Expedia acknowledges that it is hiring more sales representatives for media and marketing work, and they, like their competitors, are pushing sales of pay-for-placement search models and pay-per-click links that in some cases direct potential travelers away from their Web sites.

Continued strong earnings

The future for the OTAs looks generally rosy, at least from the perspective of investors who pore over the financial reports of the big three publicly traded OTAs: Expedia, Priceline and Orbitz. (Travelocity, now a part of Sabre Holdings, ceased to trade publicly after Sabre was taken private.) While Orbitz has seen some financial struggles of late, Expedia and Priceline have continued to post enviable earnings.

But the future is never easy to read, and that may be especially true at a time like the present, when, as noted late last year by Forrester Research airline and technology analyst Henry Harteveldt, growth in online bookings across the travel spectrum is falling.

Cree Lawson, founder and CEO of Travel Ad Network, a New York-based company that provides online advertising services to travel companies on the 50 or so Web sites it represents, said that the rise of the media model among OTAs might herald some fundamental changes in their perceptions of themselves.

"It seems like the OTAs are only beginning to realize that their sites see conversion of just 3% of the people who visit them," Lawson said. "So the other 97% become a viable medium to sell media to. They are trying to milk the most revenue they can out of the 3%, but the rest are a massive media opportunity for them."

Lawson, who is known in the online community as someone well wired into trends in the advertising market, someone to whom analysts turn for insights, said he had watched the gathering interest in online advertising and marketing opportunities by OTAs and other travel providers grow rapidly in the past couple of years.

"We have seen so many companies with decreasing margins just put banner ads on their sites and try to use them as a Band-Aid on the balance sheet," he said. "That is something any e-commerce-oriented company can do. But to truly embrace advertising revenue would be a fundamental shift, I think, in the business model for these OTAs."

B2C to B2B

At its most basic, Lawson said, the shift means changing the company's orientation from business-to-consumer to business-to-business.

"That is not an easy transition for an organization," he said. "They would have to think of their company as an audience, not as a cash register, and that is also a fundamental shift. If they just put banner ads on Web sites, without any further thought of what they are stepping into, they are going to look like elephants in tutus."

Whether the move toward a media model is a trend, a goal or just a revenue enhancement hasn't shaken out yet in the online travel market, but there is no denying that internal discussions over the tens of millions of visitors to the major OTAs are not new. Expedia, Orbitz, Priceline and Travelocity have all shown inclinations of late to turn window shoppers into windows of opportunity.

"Travelocity has taken to referring to itself as a media company," Lawson said.

Greg Saks, director of the travel practice at Compete, a firm that analyzes and advises on Web services, said that even nontravel advertising was being pushed inside the executive suites.

"Someone within these companies will always be throwing out the hypothesis that there are millions of people coming to their sites, and these leisure travelers with disposable income and luxury interests are a very attractive market to have," Saks said. "So you have that voice saying, 'Let's monetize this and sell it to someone.' My thought is that the more you put up messaging for any kind of product that is not actually sold on your site, the more you are hurting the effectiveness and usability of that site. You're just directing people away."

Part of his concern lies in the trend toward nontravel advertising on OTA sites for everything from credit cards to products completely unrelated to travel, such as DirecTV or Monster.com, the job search site. Even sites not yet selling such advertising have created spots on their Web sites now for what used to be called "house ads" to promote themselves. And these spots, of course, can be quickly converted to advertising spaces for others.

 "Whether it make sense for the OTAs to try to monetize this traffic and sell to other categories," Saks said, "is, I think, the start of a slippery slope."

A toll at the back door

Though the OTAs' traditional distribution model is still the bread and butter of the business, media opportunities created by selling advertising and sending travelers to supplier Web sites, or even to nontravel advertiser sites, is without question already taking on a larger and more important role.

Yet, until now, it hasn't been seen as a sea change in revenue models, noted one prominent analyst who asked not to be identified.

"You still have people who will use the tools that an OTA provides and will then fall out the back door and buy a trip from a supplier to save a few dollars," the analyst said. "And that is where it circles back to the media angle; that is where the online travel sites are saying, 'We see what is going on. If we are losing people out the back door, let's make some money on the back end and monetize that traffic'."

But there is more to the shift than just a revenue enhancement opportunity, this analyst said. While transactional revenue -- money earned when consumers book flights, hotels, cars or vacation packages -- continues to expand, more pressure is being created to expand the media side of the business. And Expedia is leading the way in that department.

Doug Miller, vice president of Expedia's Media Solutions Group, said the company had long pursued a pure-play media model with sites such as TripAdvisor and SmarterTravel. But it is now pushing the media model in new ways at Expedia.com, Hotwire.com and Hotels.com, its transactional sites.

"Advertising media brought us $183 million in revenue, up 93%, in 2007," Miller said. "It accounted for 7% of total revenue, up from 4%. So relative to the larger business it is small, but it is growing rapidly."

Miller said the media part of Expedia's business had been growing faster than the transaction businesses in the past two years, though of course it started from a much smaller base. He said TripAdvisor, which earns its revenue from advertising, not bookings, accounts for about two-thirds of media revenue, with Expedia's transactional sites accounting for most of the other third.

"Obviously, from the transactions business perspective, we would love it if every customer who came to our sites decided to buy," Miller said. "But the fact of the matter on any site is that is not what happens."

Still, he said, page views create value and a potential for value in several ways.

"On transaction sites like Expedia.com or Hotwire.com, you have a customer who is market funneled, and they may be moving toward making a buy and are engaged at a level of specificity that can truly create a marketing opportunity for our travel partners," Miller said. "So there are a couple of different media programs for our travel partners who want to get in front of customers at the moment of truth, when they are trying to make a decision, and they want to differentiate their brand at that point of sale."

Transaction's still king, for now

Miller compares it to an aisle display in a discount retail store: "There are some products in the aisle and on the end of the aisle," he said. "The manufacturer is paying to be in front of you and to capture your attention at that moment, and that is what we are working on -- working with Hertz and Holland America and American Airlines to help them differentiate themselves at the point of sale. We are a transactional platform but also a marketing platform for our travel partners."

Orbitz, on the other hand, has included a media model in its transactional platform since the beginning, so the company insists there is not that much new in the shift toward a media model for them.

"We've been in this space for quite awhile," said Dan Roarty, group vice president and general manager of alliance marketing for Orbitz. "I would not characterize what is happening as a switching of models. The transaction piece is still very important and will always be important and the lead story in our portfolio."

But Roarty said that as Orbitz looked for new ways to work with supplier partners and with destination marketers like convention and visitors bureaus, "advertising comes into the discussions more and more. We've historically taken display advertising. We're now seeing greater interest in more integrated types of advertising."

He said the Mexico Tourism Board, for example, "is interested in adding more historical tourism content, information on visits to historical ruins, and not just content about beach vacations. They want to know how they can sponsor more content along these lines with Orbitz, and those are the types of discussions we are having, something that moves beyond the display ad to a more integrated program."

While Expedia is leveraging pay-for-placement opportunities, Roarty said that Orbitz might be more sensitive to the implications of such sponsored links.

"Orbitz has unbiased air display, and so we do not have pay-for-placement for that type of thing," he said. "We do look at ways to do that, but whatever we do, we want it to be customer-friendly."

At the end of day, he said, "Any advertising we take onto our site must create value for our customers. Secondary to that, it's got to create value for suppliers and partners, and third, we ask, 'How much value is there for us?' "

He said Orbitz had also embraced non-travel advertising and, in fact, was doing a good deal of that. Nor were the ads pitching just luggage, cameras and goods that people take with them when they travel.

"There is no more valuable audience [for advertisers] on the Web than our audience," he said.

Indeed, the demographic of leisure travelers is clearly a coveted one for both travel and nontravel businesses, with higher household income, better education and a higher willingness to spend than is the case among the general consumer population.

But positioning of advertising, both travel and nontravel, in the booking path of OTAs and at the point of sale still remains controversial in some circles.

Priceline spokesman Brian Ek said the company did not do much third-party advertising, though it does run ads from suppliers such as American Airlines on its transactional sites.

But Jeff Boyd, president and CEO of Priceline, in response to an analyst's question during a recent earnings conference call, noted that Priceline was accepting advertising on both its transactional Web sites and its advertising-based site, MyTravelGuide.com.

"We have not been as aggressive as some of our competition in trying to roll out advertising on our transactional path," he said. "And I think Priceline in particular is a little bit different, because customers, particularly hotel customers who are coming to name their own price, are very much determined to name their price and complete their transaction, and we are a little bit more reluctant to interpose something that could distract them from that task.

"Having said that, we are going to keep our eye very carefully on what's happening in the marketplace," Boyd added. "We believe we've got a lot of unmonetized customers, just as our competition does, and we'll be opportunistic about trying to turn that traffic into revenue where we can without hurting our brand and without hurting our transaction flows."

Saks of Compete said that significant controversy would continue to revolve around directing travelers away from a travel site to a nontravel site, or even to a supplier site, from which they are not likely to return.

Directing customers away

"I do think there is an important distinction between nontravel advertisers vs. having travel advertisers displaying messages," he said. "One is appropriate, but maybe the other really isn't a good fit."

On the other hand, said Travel Ad Network's Lawson, only one in 1,000 visitors to the OTAs actually makes a purchase at their Web sites, so revenue earned from directing those visitors elsewhere might justify any loss of transaction sales from shooing visitors toward some other point in cyberspace.

One anomaly in the mix is the agreement reached between Expedia and InterContinental Hotels Group last year, in which the hotel company is now paying per click to see travelers directed from Expedia to IHG's hotels and content offers. The industry seems to be taking a wait-and-see approach to what is happening in this deal, which Expedia and others describe as "unique."

Lawson suggests that as the media model debate plays out, other major trends in attracting travelers to online transactions might be where the real online pot of gold is lurking. These include providing more usable content to help travelers decide not only where they want to go but what they want to do when they get there, and services that assist them in traveling more efficiently -- many of the services, in fact, that have been the lifeblood of traditional agents.

"I think the travel industry will be much healthier when consumers are trying to find the best experience, and not just the cheapest deals," Lawson said.

To contact reporter Dan Luzadder, send e-mail to  This e-mail address is being protected from spam bots, you need JavaScript enabled to view it .