PCLN - Priceline Group Inc.

[Ross812]

I may have to turn in my value investor’s card with this one. More of a GAARP type investment. I’ve been reading Priceline's annual report for a few years and have had 1 share to track the company since 2011. I have been impressed with their organic revenue growth of ~25% in the time I’ve held them. They get about 4% of the hotel bookings worldwide, and I see no reason why they would not continue to grow at their historical rate. They are cheap even at a sustainable 10% organic growth rate at 23x EPS and P/CF of 20. PCLN is at 14.5x forward earnings when you back out $120/share in cash. The stock on sale due to the weak Euro.

 

They have a nice moat in the worldwide hotel network they have built. Many small hotels have little to no online presence and rely on the large online travel agencies like Priceline for advertising and booking. Priceline has the presence and relationships to expand their network in Europe through Booking.com and Asia with cTrip. I can see Expedia, Priceline, Hotwire, Google, Amazon as US competitors, but I don’t see any of these companies able to catch up with PCLN's international network. Priceline is essentially a growing toll road on travel with a network that increases their partners’ revenue beyond their 15% cut of bookings.

 

Their “Name Your Own Price” option gives the customer a value proposition over every other online travel agency. It has been a huge success in the US and is expanding in Europe.

 

I bought a half sized position in Priceline this morning at $1025.   

 

[Liberty]

I looked quickly at it a few months ago (it was a natural thing to find when I was taking another closer look at MA/V) and ended up passing, but very interesting business. What stood out most is that their ROIC, using Greenblatt's method, is in the thousands of percents. Talk about asset-light and implied moat!

[Guest Schwab711]

I may have to turn in my value investor’s card with this one. More of a GAARP type investment. I’ve been reading Priceline's annual report for a few years and have had 1 share to track the company since 2011. I have been impressed with their organic revenue growth of ~25% in the time I’ve held them. They get about 4% of the hotel bookings worldwide, and I see no reason why they would not continue to grow at their historical rate. They are cheap even at a sustainable 10% organic growth rate at 23x EPS and P/CF of 20. PCLN is at 14.5x forward earnings when you back out $120/share in cash. The stock on sale due to the weak Euro.

 

They have a nice moat in the worldwide hotel network they have built. Many small hotels have little to no online presence and rely on the large online travel agencies like Priceline for advertising and booking. Priceline has the presence and relationships to expand their network in Europe through Booking.com and Asia with cTrip. I can see Expedia, Priceline, Hotwire, Google, Amazon as US competitors, but I don’t see any of these companies able to catch up with PCLN's international network. Priceline is essentially a growing toll road on travel with a network that increases their partners’ revenue beyond their 15% cut of bookings.

 

Their “Name Your Own Price” option gives the customer a value proposition over every other online travel agency. It has been a huge success in the US and is expanding in Europe.

 

I bought a half sized position in Priceline this morning at $1025. 

 

What is their moat? It seems there are many companies with a similar network. I could see this industry becoming an oligopoly but just because internal returns are high doesn't mean there is a moat, just market share grabbing. What is ROIC if market share were flat for a year? PCLN (and GOOG) are certainly interesting but I can't find a competitive advantage for PCLN.

[berkshire101]

I tried finding their annual report, but only came up with the 10-k filing.  Does management write any letters to shareholder or have presentations on their site?  I can't seem to find them.

 

The numbers do look quite impressive.  I don't travel much so PCLN never popped up on my radar until now.

[Liberty]

What is their moat?

 

I didn't go super deep in my analysis, but here's some of what I found...

 

Classic two-sided market network effect. Kind of like Visa and Mastercard. I think it'll stay an oligopoly with a small number of players.

 

http://www.gurufocus.com/news/155261/twosided-markets-and-mastercards-moat-ma

 

The network with the most hotels will get the most travellers, the one with the most travellers will sign up the most hotels and be able to get more concessions out of them (better prices and other incentives, which further attracts more customers, etc), and the biggest network can spend more than others on customer acquisition, which further drives the flywheel. A new entrant has to build a huge network of relationship and a complex technology platform before they can even hope to offer something half attractive to customer #1, and they won't make money for a long time because all the costs are upfront and fixed, which explains the operating leverage with scale of PCLN (in the past 10 years, op. margins went from something like 1% to 35%). I like these types of businesses where scale improves the economics tremendously (like with most of the Malone businesses; CHTR, SIRI, LYV, QVC, etc)

 

Priceline is especially strong in Europe because hotels are very very fragmented there, which gives more value to their platform. In other places, like the US, where big hotel chains have more of the market, the network is less valuable. IIRC, Asia is fragmented too and so the model could work well there.

[Ross812]

I may have to turn in my value investor’s card with this one. More of a GAARP type investment. I’ve been reading Priceline's annual report for a few years and have had 1 share to track the company since 2011. I have been impressed with their organic revenue growth of ~25% in the time I’ve held them. They get about 4% of the hotel bookings worldwide, and I see no reason why they would not continue to grow at their historical rate. They are cheap even at a sustainable 10% organic growth rate at 23x EPS and P/CF of 20. PCLN is at 14.5x forward earnings when you back out $120/share in cash. The stock on sale due to the weak Euro.

 

They have a nice moat in the worldwide hotel network they have built. Many small hotels have little to no online presence and rely on the large online travel agencies like Priceline for advertising and booking. Priceline has the presence and relationships to expand their network in Europe through Booking.com and Asia with cTrip. I can see Expedia, Priceline, Hotwire, Google, Amazon as US competitors, but I don’t see any of these companies able to catch up with PCLN's international network. Priceline is essentially a growing toll road on travel with a network that increases their partners’ revenue beyond their 15% cut of bookings.

 

Their “Name Your Own Price” option gives the customer a value proposition over every other online travel agency. It has been a huge success in the US and is expanding in Europe.

 

I bought a half sized position in Priceline this morning at $1025. 

 

What is their moat? It seems there are many companies with a similar network. I could see this industry becoming an oligopoly but just because internal returns are high doesn't mean there is a moat, just market share grabbing. What is ROIC if market share were flat for a year? PCLN (and GOOG) are certainly interesting but I can't find a competitive advantage for PCLN.

 

Size is their competitive advantage. They have 2.5x as many hotels in their network as their next competitor Expedia. If you are searching for an online hotel booking it makes sense to use the company with the largest presence (10 hotel choices instead of 3). If you are a small hotel and want to list with an online travel agency, who do you list with? You can look at Google as a parallel; why do you buy advertising on Google instead of Yahoo? Given resources to advertise with one, which one will you choose? The same applies to Priceline. The "Name Your Own Price" option also has some moat like effects because it allows hotels to capture value conscious customers while not having to advertise their bottom price.         

[frommi]

What is their moat? It seems there are many companies with a similar network. I could see this industry becoming an oligopoly but just because internal returns are high doesn't mean there is a moat, just market share grabbing. What is ROIC if market share were flat for a year? PCLN (and GOOG) are certainly interesting but I can't find a competitive advantage for PCLN.

 

I think the customer relation is sticky. I used Expedia once and now look & book mainly there. I think for PCLN its the same. And since these are all price-search engines the prices are equal on each site, so there is no incentive to switch. I think Google or Apple could attack them when they were able to ban the apps, but i don`t think they are allowed to do that. In Asia Alibaba has started a travelservice last year which could attack them and grab marketshare or lower their growth in new customers.

I doubt that they can grow like they did in the past and because of that i am not willing to pay for growth here. I look at it again below 800$.

 

[Ross812]

I tried finding their annual report, but only came up with the 10-k filing.  Does management write any letters to shareholder or have presentations on their site?  I can't seem to find them.

 

The numbers do look quite impressive.  I don't travel much so PCLN never popped up on my radar until now.

 

http://ir.pricelinegroup.com/events.cfm

[berkshire101]

I tried finding their annual report, but only came up with the 10-k filing.  Does management write any letters to shareholder or have presentations on their site?  I can't seem to find them.

 

The numbers do look quite impressive.  I don't travel much so PCLN never popped up on my radar until now.

 

http://ir.pricelinegroup.com/events.cfm

 

Thanks, I found the letters to shareholder here:

 

http://ir.pricelinegroup.com/downloads.cfm

[rpadebet]

Can someone explain why GOOG or AMZN can't beat them internationally? Its an industry still in its infancy, lots of time to develop and mature, so with that opportunity comes the risk that other (more financially strong) market participants claim their own share.

 

Also how would this compete if something social based like Uber for hotels comes around?

[smd123]

Can someone explain why GOOG or AMZN can't beat them internationally? Its an industry still in its infancy, lots of time to develop and mature, so with that opportunity comes the risk that other (more financially strong) market participants claim their own share.

 

Also how would this compete if something social based like Uber for hotels comes around?

 

1. Most of their cash comes from fragmented markets in Europe and Asia. It is hard to develop booking relationships across such a fragmented market, and online search engines have other battles to fight with their resources and time.

2. PCLN and Expedia provide strong advertising revenues as clients of online search engines, so disrupting them will come at a huge cost, if it is possible that is.

 

The major concern I see here is not competition from Expedia or big online advertisers, but from a company like TripAdvisor (TRIP). TripAdvisor already has hotels in fragmented international markets listed on their platform, and even small hotels pay keen attention to their reviews on TripAdvisor. One could foresee TRIP gaining more market share in bookings, however it is relatively more expensive in valuation, and one could foresee a handful (2-5) of companies growing on a long runway as hotel bookings increasingly move online.

 

[Guest Schwab711]

Can someone explain why GOOG or AMZN can't beat them internationally? Its an industry still in its infancy, lots of time to develop and mature, so with that opportunity comes the risk that other (more financially strong) market participants claim their own share.

 

Also how would this compete if something social based like Uber for hotels comes around?

 

In general you can't just throw $ at problems to solve them. Understanding the airline industry intimately enough to compete with PCLN likely requires significant expertise and there is by no means a glut of experts in the logistics/travel industries. The same delivery companies have been around forever because it's pretty impractical to compete with them as an outsider.

 

Uber of hotels is probably "Hotel Tonight" or similar apps that post discounted inventory at noon each day.

[Ross812]

Can someone explain why GOOG or AMZN can't beat them internationally? Its an industry still in its infancy, lots of time to develop and mature, so with that opportunity comes the risk that other (more financially strong) market participants claim their own share.

 

Also how would this compete if something social based like Uber for hotels comes around?

 

I'd say Uber for hotels is AirBNB. There is a value proposition with AirBNB, but there is also significantly more work involved with talking to your host and more risk as a traveler.

 

Google or Amazon could try to compete with travel companies foreign and domestic, but they are fighting an uphill battle against entrenched players. How would Amazon roll out such a service? They would post it on their home page as: Dear Amazoners - We now offer this service ..... It will not be cheaper than Priceline or Expedia, and will have a smaller network of hotels.

 

I'm not sure the argument is any different than: why doesn't Google overtake Amazon in online shopping by building a network of online stores and forming shipping agreements, why can't Bing/Yahoo replace Google, how does Discover/Amex have a credit card network even though Visa/Mastercard have an oligopoly? I think you can have new entrants, but its hard to catch the top players. PCLN has twice the network of EXPE.

 

I think Tripadvisor has the potential to steal revenue, but I see them as more a tax on the online travel agents than an agent themselves. Their instant booking is good if you are traveling on vacation and looking for a luxury, but if you need a commodity- Hotel in Zone 5 for $85 and a rental car from company Z at $30/day, and I'll book the airline ticket right now too, Priceline/Expedia is the way to go.       

[ScottHall]

Can someone explain why GOOG or AMZN can't beat them internationally? Its an industry still in its infancy, lots of time to develop and mature, so with that opportunity comes the risk that other (more financially strong) market participants claim their own share.

 

Also how would this compete if something social based like Uber for hotels comes around?

 

In general you can't just throw $ at problems to solve them. Understanding the airline industry intimately enough to compete with PCLN likely requires significant expertise and there is by no means a glut of experts in the logistics/travel industries. The same delivery companies have been around forever because it's pretty impractical to compete with them as an outsider.

 

Uber of hotels is probably "Hotel Tonight" or similar apps that post discounted inventory at noon each day.

 

Priceline makes almost nothing from booking airline tickets. $$$$$$ comes from hotel business.

[rishig]

Disclosure: I have a position here, so my views may be biased.

 

Priceline Group grew in the international markets via Booking.com in Europe and Agoda in Asia. Booking.com has been very successful in penetrating the fragmented European market thanks to its agency model. Until then online travel agencies (OTA) used the merchant model for selling inventory. In the merchant model, OTAs would buy inventory in bulk and sell them on their platform. They would allow packaging with flights/cars. The obvious attraction to such a model is the huge margins for OTA. However, the merchant model really upset the hoteliers. Waldorf-Astoria was sold on Hotels.com like an Armani suit in Walmart. The hoteliers lost their ability to control rates, branding etc. Booking.com came in with their agency model where they would charge 10-12% commission instead of the bulk discount of 30%. They allowed hotels to sign up on Booking.com extranet, set rates and room inventory. Also, the hotels would pay Booking.com upon the customer's actual visit. Furthermore, Booking.com allowed hotels to view how bidding up the commission would raise their room visibility in the hotel sort before actually bidding. All of this, helped Booking.com capture the European market where the non branded boutique hotels are about 60% of the market. In the mean time, the US OTAs were fighting a uphill battle. The branded chains that control about 80% of the US hotel market got smarter. Now Marriot controls 75% of its booking on their own websites. So, this explains how Booking.com became successful in the first place.

 

Coming back to today, Priceline Group makes about 90-95% of its operating income from international business. Recently, they partnered with Ctrip, the leading OTA in China, that would allow Ctrip and Priceline brands to cross sell on each other's platforms. Priceline invested $500 million via a convertible bond that would allow them to buy up to 10% of Ctrip. China travel agency industry is also very fragmented with OTA only doing 15% of the business. So there is a lot of runway.

 

As someone mentioned before, there are network effects at play. What makes these network effects strong (although not as strong as MA/V) are the fact that in fragmented markets, the boutique hotels don't want to sign up on too many technology platforms. It's non trivial to manage these relationships. Recently, Tripadvisor launched its Instant Booking program. Hotels haven't been signing up left right and center on this program despite the pervasive nature of TripAdvisor's review platform. The program is very confusion to begin with. Here is TripAdvisor's explanation of the program:

 

"The program allows the hotel to own a percentage of reservation opportunities via the "Book on TripAdvisor" button, which is placed above the other booking buttons (of the OTAs). The hotel either pays 15% commission per reservation to claim 50% of the reservation made using that button or a 12% commission rate per reservation to claim 25% of the reservation made using that button. Your hotel will be competing with the OTAs with which you participate for a percentage of the reservations made via Book on TripAdvisor button. For the remaining 50% or 75% of reservations made through the Book on TripAdvisor button that are not claimed by your hotel, those will go to the participating OTAs that are also the two highest bidders through the TripConnect CostPerClick program."

 

You see this is very complicated. So question is why is it so complicated. Because TripAdvisor's goose that lays the golden egg is the revenue from the OTAs. They make about 70% of their revenue from click-based revenue (i.e. from the OTAs). Their strategy is play in the booking business but in a polite way so as to not upset their biggest customers. In the case, they do become aggressive in the future, it would be at the cost of cannibalizing their click-based revenue. I am not saying it's impossible. In fact, its quite likely outcome in the longer run given that click-based revenue is a much smaller business than the actual booking business. But its a few years out in my opinion.

 

The other reason why a silicon valley start up won't start competing in the fragmented markets is because of the huge customer acquisition costs. Priceline spends about $2 billion dollars in online and offline advertising. Rumor mill has it that Priceline is the search giant's (whose name I won't mention) largest customer. Priceline spends 33% of revenue on advertising and Expedia about 36% on advertising. This percentage has been going up increasing the barriers to entry for small entrants.

 

Lastly, why can't a internet giant in a parallel business (FB, Amazon, G...) get into this business. Getting traction in this business is very difficult. Look at the downloads of the hotel apps by one such search giant. It is barely 500K vs. Booking.com has over 50 million downloads. The internet giants have problems of their own and upsetting their largest ad customers is not in their priority in my opinion.

 

So what does Priceline's numbers say today? I assume in the base case, Priceline Group can compound EPS at 15% for the next 5 years. You get EPS of $100. Using a multiple of 15-20x, you get $1500 - $2000. Current cash per share is $120. Add in $380 of cash per share generated in free cash flow over next 5 years. Buying at $1000, one compounds at 10-15% + whatever value you want to put on cash.

 

 

 

[rishig]

Disclosure: I have a position here, so my views may be biased.

 

Priceline Group grew in the international markets via Booking.com in Europe and Agoda in Asia. Booking.com has been very successful in penetrating the fragmented European market thanks to its agency model. Until then online travel agencies (OTA) used the merchant model for selling inventory. In the merchant model, OTAs would buy inventory in bulk and sell them on their platform. They would allow packaging with flights/cars. The obvious attraction to such a model is the huge margins for OTA. However, the merchant model really upset the hoteliers. Waldorf-Astoria was sold on Hotels.com like an Armani suit in Walmart. The hoteliers lost their ability to control rates, branding etc. Booking.com came in with their agency model where they would charge 10-12% commission instead of the bulk discount of 30%. They allowed hotels to sign up on Booking.com extranet, set rates and room inventory. Also, the hotels would pay Booking.com upon the customer's actual visit. Furthermore, Booking.com allowed hotels to view how bidding up the commission would raise their room visibility in the hotel sort before actually bidding. All of this, helped Booking.com capture the European market where the non branded boutique hotels are about 60% of the market. In the mean time, the US OTAs were fighting a uphill battle. The branded chains that control about 80% of the US hotel market got smarter. Now Marriot controls 75% of its booking on their own websites. So, this explains how Booking.com became successful in the first place.

 

Coming back to today, Priceline Group makes about 90-95% of its operating income from international business. Recently, they partnered with Ctrip, the leading OTA in China, that would allow Ctrip and Priceline brands to cross sell on each other's platforms. Priceline invested $500 million via a convertible bond that would allow them to buy up to 10% of Ctrip. China travel agency industry is also very fragmented with OTA only doing 15% of the business. So there is a lot of runway.

 

As someone mentioned before, there are network effects at play. What makes these network effects strong (although not as strong as MA/V) are the fact that in fragmented markets, the boutique hotels don't want to sign up on too many technology platforms. It's non trivial to manage these relationships. Recently, Tripadvisor launched its Instant Booking program. Hotels haven't been signing up left right and center on this program despite the pervasive nature of TripAdvisor's review platform. The program is very confusion to begin with. Here is TripAdvisor's explanation of the program:

 

"The program allows the hotel to own a percentage of reservation opportunities via the "Book on TripAdvisor" button, which is placed above the other booking buttons (of the OTAs). The hotel either pays 15% commission per reservation to claim 50% of the reservation made using that button or a 12% commission rate per reservation to claim 25% of the reservation made using that button. Your hotel will be competing with the OTAs with which you participate for a percentage of the reservations made via Book on TripAdvisor button. For the remaining 50% or 75% of reservations made through the Book on TripAdvisor button that are not claimed by your hotel, those will go to the participating OTAs that are also the two highest bidders through the TripConnect CostPerClick program."

 

You see this is very complicated. So question is why is it so complicated. Because TripAdvisor's goose that lays the golden egg is the revenue from the OTAs. They make about 70% of their revenue from click-based revenue (i.e. from the OTAs). Their strategy is play in the booking business but in a polite way so as to not upset their biggest customers. In the case, they do become aggressive in the future, it would be at the cost of cannibalizing their click-based revenue. I am not saying it's impossible. In fact, its quite likely outcome in the longer run given that click-based revenue is a much smaller business than the actual booking business. But its a few years out in my opinion.

 

The other reason why a silicon valley start up won't start competing in the fragmented markets is because of the huge customer acquisition costs. Priceline spends about $2 billion dollars in online and offline advertising. Rumor mill has it that Priceline is the search giant's (whose name I won't mention) largest customer. Priceline spends 33% of revenue on advertising and Expedia about 36% on advertising. This percentage has been going up increasing the barriers to entry for small entrants.

 

Lastly, why can't a internet giant in a parallel business (FB, Amazon, G...) get into this business. Getting traction in this business is very difficult. Look at the downloads of the hotel apps by one such search giant. It is barely 500K vs. Booking.com has over 50 million downloads. The internet giants have problems of their own and upsetting their largest ad customers is not in their priority in my opinion.

 

So what does Priceline's numbers say today? I assume in the base case, Priceline Group can compound EPS at 15% for the next 5 years. You get EPS of $100. Using a multiple of 15-20x, you get $1500 - $2000. Current cash per share is $120. Add in $380 of cash per share generated in free cash flow over next 5 years. Buying at $1000, one compounds at 10-15% + whatever value you want to put on cash.

 

Here is 10 year data for Priceline:

https://docs.google.com/spreadsheets/d/11XzvbPSE8JSyFW3p-4t_nVa-_rjTqoFL9LKAUieKIaA/edit#gid=0

[Guest Schwab711]

Can someone explain why GOOG or AMZN can't beat them internationally? Its an industry still in its infancy, lots of time to develop and mature, so with that opportunity comes the risk that other (more financially strong) market participants claim their own share.

 

Also how would this compete if something social based like Uber for hotels comes around?

 

I'd say Uber for hotels is AirBNB. There is a value proposition with AirBNB, but there is also significantly more work involved with talking to your host and more risk as a traveler.

 

Google or Amazon could try to compete with travel companies foreign and domestic, but they are fighting an uphill battle against entrenched players. How would Amazon roll out such a service? They would post it on their home page as: Dear Amazoners - We now offer this service ..... It will not be cheaper than Priceline or Expedia, and will have a smaller network of hotels.

 

I'm not sure the argument is any different than: why doesn't Google overtake Amazon in online shopping by building a network of online stores and forming shipping agreements, why can't Bing/Yahoo replace Google, how does Discover/Amex have a credit card network even though Visa/Mastercard have an oligopoly? I think you can have new entrants, but its hard to catch the top players. PCLN has twice the network of EXPE.

 

I think Tripadvisor has the potential to steal revenue, but I see them as more a tax on the online travel agents than an agent themselves. Their instant booking is good if you are traveling on vacation and looking for a luxury, but if you need a commodity- Hotel in Zone 5 for $85 and a rental car from company Z at $30/day, and I'll book the airline ticket right now too, Priceline/Expedia is the way to go.     

 

Do you have any industry-wide presentations that compare all participants by market share, COGs, network size, ect? I'll have to look at PCLN closer tonight. I really like companies that benefit from total airline ticket spending (PCLN, TDG, ect).

 

Thank you rishig! Your post is awesome!

[Liberty]

Great post Rishi, thank you for sharing your thoughts on the company.

[Ross812]

Can someone explain why GOOG or AMZN can't beat them internationally? Its an industry still in its infancy, lots of time to develop and mature, so with that opportunity comes the risk that other (more financially strong) market participants claim their own share.

 

Also how would this compete if something social based like Uber for hotels comes around?

 

I'd say Uber for hotels is AirBNB. There is a value proposition with AirBNB, but there is also significantly more work involved with talking to your host and more risk as a traveler.

 

Google or Amazon could try to compete with travel companies foreign and domestic, but they are fighting an uphill battle against entrenched players. How would Amazon roll out such a service? They would post it on their home page as: Dear Amazoners - We now offer this service ..... It will not be cheaper than Priceline or Expedia, and will have a smaller network of hotels.

 

I'm not sure the argument is any different than: why doesn't Google overtake Amazon in online shopping by building a network of online stores and forming shipping agreements, why can't Bing/Yahoo replace Google, how does Discover/Amex have a credit card network even though Visa/Mastercard have an oligopoly? I think you can have new entrants, but its hard to catch the top players. PCLN has twice the network of EXPE.

 

I think Tripadvisor has the potential to steal revenue, but I see them as more a tax on the online travel agents than an agent themselves. Their instant booking is good if you are traveling on vacation and looking for a luxury, but if you need a commodity- Hotel in Zone 5 for $85 and a rental car from company Z at $30/day, and I'll book the airline ticket right now too, Priceline/Expedia is the way to go.     

 

Do you have any industry-wide presentations that compare all participants by market share, COGs, network size, ect? I'll have to look at PCLN closer tonight. I really like companies that benefit from total airline ticket spending (PCLN, TDG, ect).

 

Thank you rishig! Your post is awesome!

 

I'll look and see if I still have the PDF of a seeking alpha article from a year or two back that had the industry wide presentation pie charts. I don't have a pro subscription. Also, I think i remember seeing the same chart in Rolfe's Wedgewood quarterly note to partners. I'll look around if I have time tomorrow.

 

PCLN doesn't really benefit from airline spending as ScottHall stated earlier. Airlines have been pushing down commissions paid to travel agents. I know Southwest and I believe now Delta don't pay any commissions to travel agents. If you are looking for a play on the growth of the airline industry; I started a thread on Air Lease. Great management and selling pretty cheaply right now on currency concerns. 

[Guest Schwab711]

Can someone explain why GOOG or AMZN can't beat them internationally? Its an industry still in its infancy, lots of time to develop and mature, so with that opportunity comes the risk that other (more financially strong) market participants claim their own share.

 

Also how would this compete if something social based like Uber for hotels comes around?

 

I'd say Uber for hotels is AirBNB. There is a value proposition with AirBNB, but there is also significantly more work involved with talking to your host and more risk as a traveler.

 

Google or Amazon could try to compete with travel companies foreign and domestic, but they are fighting an uphill battle against entrenched players. How would Amazon roll out such a service? They would post it on their home page as: Dear Amazoners - We now offer this service ..... It will not be cheaper than Priceline or Expedia, and will have a smaller network of hotels.

 

I'm not sure the argument is any different than: why doesn't Google overtake Amazon in online shopping by building a network of online stores and forming shipping agreements, why can't Bing/Yahoo replace Google, how does Discover/Amex have a credit card network even though Visa/Mastercard have an oligopoly? I think you can have new entrants, but its hard to catch the top players. PCLN has twice the network of EXPE.

 

I think Tripadvisor has the potential to steal revenue, but I see them as more a tax on the online travel agents than an agent themselves. Their instant booking is good if you are traveling on vacation and looking for a luxury, but if you need a commodity- Hotel in Zone 5 for $85 and a rental car from company Z at $30/day, and I'll book the airline ticket right now too, Priceline/Expedia is the way to go.     

 

Do you have any industry-wide presentations that compare all participants by market share, COGs, network size, ect? I'll have to look at PCLN closer tonight. I really like companies that benefit from total airline ticket spending (PCLN, TDG, ect).

 

Thank you rishig! Your post is awesome!

 

I'll look and see if I still have the PDF of a seeking alpha article from a year or two back that had the industry wide presentation pie charts. I don't have a pro subscription. Also, I think i remember seeing the same chart in Rolfe's Wedgewood quarterly note to partners. I'll look around if I have time tomorrow.

 

PCLN doesn't really benefit from airline spending as ScottHall stated earlier. Airlines have been pushing down commissions paid to travel agents. I know Southwest and I believe now Delta don't pay any commissions to travel agents. If you are looking for a play on the growth of the airline industry; I started a thread on Air Lease. Great management and selling pretty cheaply right now on currency concerns.

 

I have SA Pro for the rest of the month (thanks SA!), send me the link and I'll help you out.

[Liberty]

PCLN doesn't really benefit from airline spending as ScottHall stated earlier. Airlines have been pushing down commissions paid to travel agents. I know Southwest and I believe now Delta don't pay any commissions to travel agents. If you are looking for a play on the growth of the airline industry; I started a thread on Air Lease. Great management and selling pretty cheaply right now on currency concerns.

 

They still benefit (indirectly) because people who fly tend to book hotels. More flying equals more hotels...

[Ross812]

I have SA Pro for the rest of the month (thanks SA!), send me the link and I'll help you out.

 

I can't find the article on SA. I did some googling and found quite a few presentations on slideshare regarding the travel industry and market share of various participants, but it will not let me link them in readable quality in a post. Here is a good SA article I came across comparing EXPE to PCLN:

 

http://seekingalpha.com/article/2329685-priceline-vs-expedia-who-will-take-investors-where-they-want-to-go

 

For US based hotel stays Q1 '14 OTA captured 15% of overall bookings while hotel websites captured 28%. The penetration of online travel bookings in the US is ~43% (15% + 28%) with OTA capturing ~35% of the online market. See below.

 

http://static.zacks.com/images/zacks/blogs/1415640907_scaled_425.jpg

 

For US, Europe, and Asia in '13 see below. Keep in mind the online market share for OTA vs. Hotel Websites favors OTAs in Europe and Asia because the independent hotel chains do not have the infrastructure to drive their own bookings.

 

 

Here is the proportion of OTA vs. Hotel Website bookings for various countries in Europe:

 

http://blog.euhotelpinboard.com/wp-content/uploads/2012/11/business_traveller_book_hotel.jpg

 

From the blog above (I don't know how accurate it is) it appears OTA captures ~43% of online bookings. I've heard 47% thrown around as well. This proportion is growing as OTAs add smaller hotels to their network.

 

I thought this chart comparing OTA market share in China was interesting. Ctrip is a Priceline partner:

 

http://img.chinainternetwatch.com/wp-content/uploads/china-online-travel-ota-market-share-in-q2-2013.png

[roughlyright]

Rishig,

 

  That is a great post. If I may ask,  What are your top 5 holdings?

 

roughlyright

[rishig]

Rishig,

 

  That is a great post. If I may ask,  What are your top 5 holdings?

 

roughlyright

 

Sure - MasterCard/Visa, AIG, GM, Priceline, Petroleum Geo Services

 

 

[Genyi]

Hello Rishig,

 

I worked briefly for booking.com (albeit a few years ago) and found your remarks spot on. I do have some concerns that I would like to share and maybe hear your thoughts about. Disclosure: I do not have a position in Priceline Group Inc.

 

As far as I remember the average commission earned by booking.com is 15% of the total room price (all the days!) as booked by the guest. But it may be 10-12% by now. Still a high commission for an average hotel, which is generally a low margin business. As bookings are done online increasingly, the commissions paid to booking.com and other OTAs may simply become unaffordable to the hotels. Something's gotta give. Remember that earlier the hotels just picked up the phone or maybe ran a call centre, but certainly did not spend 10-15% of their revenue acquiring guests. These commissions are mostly new expenses.

 

At the same time, other developments may tip the advantage towards hotels.

 

Booking.com is a pioneering technology company which hired employees with hotel expertise to interact with the hotels. Priceline.com probably too, but I know less about them. They were right early on about affiliate marketing, Google adwords, webads, mobile, social media, tracking cookies, etc etc. We may bet that Priceline/booking.com will be right again about the next online trend, but they may also miss it.

 

But more importantly: the hotel industry is no longer ignorant about the impact of the internet. They were still asleep when Booking.com was pioneering the trends mentioned above and found themselves depending on their online marketing power to get online bookings. Now that the internet is at a more mature stage, the larger hotel chains are aware they can hire technology and media experts to handle their own online marketing.

 

I agree that there are network effects at play, but I wonder if those are strong enough to prevent a shift to bookings on the hotel websites directly.