dark days for OTAs
384 days ago
 

Dark days for online travel agencies

The days are getting darker for the mass-market online travel agencies (OTAs). The fundamentals of their business are weakening amid intense pressure up and down the value chain, especially in the mature US market.

How many times have people asked you: “Why should I book from Expedia or Orbitz?” In my world, that refrain is growing louder as more people are beginning their travel searches on metasearch engines and I have to admit there’s not much to say in response.

Expedia’s woes

The transcript for Expedia’s most recent quarterly earnings call read like a terminal diagnosis, with its own offspring as poisoner. TripAdvisor, once a loyal subsidiary, was no longer deferentially sending Expedia it’s lion share of traffic. The media giant was commanding the audience and Expedia was not the highest bidder.

The loss of traffic during TripAdvisor’s switch from pop up ads to hotel metasearch caused Expedia’s stock to plummet 27% in one-day; it’s now down about 20% on the year. The company is being attacked on all fronts, with its recently acquired metasearch engine Trivago the lone shining light.

The rise of metasearch

This pressure is not unpredictable. On one side we have the supplier brand.com sites, who have begun an aggressive campaign to build direct relationships with the consumer. The benefits to them are game-changing for both cost and revenue: A cheaper distribution channel and an increased opportunity to merchandise and upsell to consumers.

On top of that, direct relationships allow supplier brands more intimacy and brand engagement with the consumer, a boon to loyalty programs as they invest heavily in loyalty marketing.

Suppliers will try to exploit their stronger bargaining hand to haggle over commissions with OTAs and drive down distribution costs. Supplier consolidation has made air a zero-profit center for OTAs as it is, a trend we’re likely to see extended to hotels and wherever else possible.

On the other side, we have the major metasearch and media channels with Kayak (owned by Priceline) and TripAdvisor being the dominant players. The metasearch message has finally gone mainstream, and everyone from Kayak to Room77 to Trivago are reaping the benefits.

Metasearch offers a better search experience and make it easier to consistently find the lowest prices available online. Many of them now offer equivalently seamless booking for hotels. The line is blurred between metasearch and OTA for many consumers and it’s the OTAs who stand to lose.

Three things OTAS can do to stay relevant

Despite all this, I would argue it’s not the end of OTAs. There is still plenty of room in the market for them, but here’s what they need to do better:

1) Be a platform, not just a brand: Expedia with Expedia Affiliate Network (EAN) is probably the best example of this. Now all of the major OTAs have an affiliate network, which lets them distribute hotels through the major metasearch players as well as any other site that wants to sell travel in a plug-n-play way. It instantly expands their distribution footprint and scale, while forcing them to give up some margin.

Pros: Focuses on fulfillment value-add and scales easily
Cons: More of a commodity service; does little to reinforce a brand.

2) Improve the search experience: OTAs are getting killed by metasearch and media players in part because the search experience is just plain worse. TripAdvisor brings useful reviews to the search experience; Kayak has spent years perfecting its search technology and user interface. Start-ups like Hipmunk have built brands off of user experience and are iterating at a much faster pace.

These rivals offer better research and more consistent lower prices so it’s no wonder you’re better off starting there than going to an OTA directly. But there’s no reason the OTAs can’t compete. They have talent and resources and far more years of search experience.

Pros: Profit from the core, many been doing search for more than a decade.
Cons: Head to head competition with faster, more dynamic companies; UX superiority is unproven as a sustainable positive driver of return on investment (ROI) for the long-term.

3) Add value. Remember when Orbitz marketed its “TLC” service for better disruption support for their customers? Whatever happened to that? Maybe they couldn’t justify the ROI or perhaps they weren’t delivering on it effectively. But the point remains, for an OTA to be relevant they must do something better, faster, or cheaper than a supplier can direct.

Because they’re never going to be cheaper and probably never faster, they must do something better. To stay alive, they must differentiate one way or another and brand is not enough.

Pros: Holy grail of relevance. Cons: Margin pressure makes this challenging; Commodity rewards programs likely aren’t enough.

Channel vision

OTAs as marketing organizations are not sustainable for the long-haul. The brand message falls flat when consumers realize there’s no real advantage to using their products when metasearch offers a superior product and better prices, and transacting through supplier sites is intuitive and seamless.

The current plan of diversification through investment and acquisition up and down the value chain is a good medium-term solution, but for Expedia Inc. to thrive, it should find a path for expedia.com to have long-term relevance. I’m optimistic there’s a path to a durable business model here, but it won’t happen on auto-pilot.

NB: Image courtesy of Blue Sky Travel.

 
 
Evan Konwiser

About the Writer :: Evan Konwiser

Evan Konwiser is a contributing Node to Tnooz and was co-founder of FlightCaster, which was acquired by Next Jump in December 2010.

Currently, he works with travel start-ups and consults on new technology and trends in the travel industry. He started FlightCaster in 2009 to provide better tools for travelers using advanced technology.

After the acquisition, he managed Next Jump's travel distribution business, which includes employee discount programs for Fortune 500 companies.

Prior to FlightCaster, Evan was a consultant at Bain & Company and he also spent time at Kayak. He's an industry blogger and speaker on both consumer and corporate travel topics, a recipient of PhoCusWright's first ever Young Leadership Award and a member of the critics circle for the Travel Innovation Summit.

 

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  1. Romin

    Great article except for 1 thing…….what are metasearches comparing? For the most part OTA’s so what we are saying is by marketing for OTA’s they will put OTA’s out of business? Metasearch is not new, been around for years, people use them and after 4 or 5 bookings decide on an OTA that worked best for them and use it direct, it is a cycle and just another marketing tool, unless hotels all market direct through a metasearch (try sorting those feeds out) then OTA’s will die…now metasearch has control, demands higher fees..the door opens to OTA’s again, remember meta and OTA’s market in the same way yet meta has lower margins, this is a cycle and travel needs all of these channels, remember 2 years ago we were being convinced the wholesale model would die…..scare mongering for people who don’t see the bigger picture

     
  2. Conrado

    100% agree with the article. Meta search sites, specially try advisor add much more value (at least to me) than the big OTAs. As Manuel says they offer the same hotels at almost the same price. There is no real value besides the price comparison tools

     
  3. Richard Eastes

    I agree that OTA’s need to innovate and remain relevant. As an OTA myself, my goal has always been to teach my customers to be lazy. So lazy that they never want to consider trying someone else.

     
  4. Manuel Hilty

    One problem with OTAs that hasn’t been mentioned so far is that they’ve just become very interchangeable. Because they all offer the same things and don’t differentiate themselves by providing additional value-add, price has become the only separating factor. And that’s where the meta-search plugs in.

    The OTAs either have to innovate and provide real value or they have to win on price. But the price battle can only be won with sheer volume, and there’s not much space for winners here.

     
  5. Daniele Beccari

    Just a basic observation.
    I always start by searching across several metas for best fares. I end up booking 50% of the time direct and 50% on OTAs. I have no preference or loyalty to anyone.
    Why then OTAs win 50% of the time? Because 50% of the time, for my travel pattern, they offer better rates or itineraries than suppliers direct.
    Is it because of nego rates, prepurchased inventory, multicarrier ticketing, better understanding of overall travel patterns, or all of the above?
    Whatever the reason, OTAs have strong levers to be competitive if they want.

     
    • Murray Harrold

      I can answer that.

      Nego rates (CAT35 fares etc) – yes. But then again, you either have contract airline fares – or you don’t. The fares I have, as a travel agent, are just as good as an OTA’s. Pre-purchased – No. Not on schedule flights. Pre-purchase only exists in the charter flight domain (that is, basically, holiday travel). Multi-carrier ticketing. Not too sure what you mean – but *how* you ticket an itinerary is very, very important. OTA’s are actually rubbish at ticketing options. You can only get that via a travel agent – we call it “creative ticketing”.

      Better understanding of travel patterns (ie historical patterns) – No. Better understanding of what you are trying to achieve, yes. Again, only available via a travel agent.

      The above only works on more complicated stuff. If you are going from London to Amsterdam, first flight Monday back last flight Friday (that is, a short-haul commuter route at commuter times) – then the price is the price is the price. Anything slightly unusual or more than just a simple point to point then Online can be a very, very bad choice. For example, LAX to LHR one way biz class, direct – $6,000 – (airline, OTA, metasearch price, give or take a few cents) *but* agent price HALF that figure. Not going to tell you how … you would need to see a travel agent.

       
  6. Murray Harrold

    Bit of deja vu, here … When I was a high street travel agent we were told: “There is no longer a place for simple order-takers”

    We were told about “adding value” … airlines and travel suppliers do not “owe agents a living” … etc etc …

    Agents listened. OTA’s clearly didn’t or haven’t … High street agents became the ultimate (human) meta-search engine complete with augmented reality thrown in … and a few extras, like personal recommendation profile anaylsis, holistic query evaluation, to name a few.

    One day, online may catch up at present, however, the techys are still too busy re-inventing the wheel ….

    :-)

     
  7. BJ Sangwan

    In point three, “Add Value,” in “Three things OTAS can do to stay relevant,” do you see a revisit to inspirational travel, where typically OTAs (and possibly metasearch might follow suit) start deploying, say, mini destination travel guides to add to the user experience at the point of engagement? For now, we see the trend proliferating among several European airlines such as Ryan Air, Air Berlin and the like. It would seem that it ought to be a natural progression for OTAs.

     
  8. Evan Konwiser

    Thanks for all the comments and the great discussion!

    In response to a few:
    1) Meta threatens OTAs because they can direct traffic anywhere they want — to hotels directly, brand.com sites, other OTAs that aren’t you, wholesalers, opaque sites….etc.
    2) Competition in hotel pushes margins down, not up. And hotels and air are sold the same: As temporary perishable inventory. Doesn’t matter that one is transportation and one is real estate (albeit the competitive landscapes do differ)
    3) OTA search experience is not better than meta, it’s far worse for most of them. Period. And most consumers don’t know the difference anyways, especially when meta engines are using in-path booking APIs for on-site transactions.

    Only time will tell what the future holds, but it’ll be interesting to watch and fun to discuss and analyze.

     
  9. Simone Puorto

    Well, I was speaking with a colleague about this article yesterday and he came out with a interesting point: these TripAdvisor-post-switch-data take it on the “visits” prospective only.
    But what about the actual Expedia bookings?
    Who knows if the actual reservations are going better or worse.

    The only thing I am sure about having all the results in TripAdvisor corepage is that disparity rate is way more evident.
    So the best rate wins.
    This is quite a problem, especially here in Italy, where B2B with static rate contracts sometimes (well, often) sell with a very low markup so they always offer better rates than both OTAs and official website.

    I spoke with a guy from a wholesaler a couple of weeks ago and he confimed me that they’re making way more money after this switch.
    This is a very interesting matter, as it looks like hotels have no control at all on that, even less than with OTAs.

     
    • RustyM

      Interesting. Why do you say that it looks like hotels have no control with B2B static rate contracts?

      OTA’s do not take any risk in unsold rooms. It is the hotel’s prerogative to also offer static rate contracts to businesses that guarantee rooms or to fill in the gaps at any opaque price.

       
      • Simone Puorto

        I mean that hotels have only control on the actual static rates given to the operator, but not on the markup the wholesaler apply when he re-sell.
        As a result you often have minor travel agencies with better rates that official website and OTAs.
        This is a major problem on the south of Italy.
        In Sorrento, Sicily, Naples, etc. this disparity is doing a lot of harm.
        And in these cities wholesaler are still huge.

         
  10. RustyM

    The OTA’s have never been about brand, but pushing branded products like an outlet mall or the Yellow Pages. If you offer everything, you can’t be a real travel adviser.

    I see the beauty of metasearch as finding the best OTA per destination.

    The best seller of New York, may not be the best seller of Stockholm or Buenos Aires. Pick a niche and be the best. An OTA could improve the buying experience by offering added value such as travel advice and local activities.

    Metasearch only works if third parties give them content. Tripadvisor is the best so far, but it’s easy to improve it.

     
  11. Michelle Grant

    Curious to hear your opinions. Was it a good idea for Expedia to spin off TripAdvisor?

     
  12. HotelierEcommerce

    The Metasearch model isn’t what will hurt the OTA’s since ultimately it’s the OTA’s that are feeding the search engine. If anything, it just evens the playing field for the smaller sites to get a piece of the pie.

    However, what is going to hurt the 4 major players (Expedia, Booking, Orbitz & Travelocity), as well as the Brand.com sites, is the traditional wholesalers of the world, like Tourico Holidays and Hotelbeds, that are starting a very nasty trend of feeding out the traditional contracted net rates (rates that are contracted to be packaged with air, tickets, transportation, etc) to Affiliate websites that are putting those rates online instead as Hotel Only rates with very little to no markup on those rates. Feeding the package net rates to the Hotel Only distribution path is creating MAJOR deterioration of rate integrity for the hotel brand, as well as the OTA’s that are playing fair and by the rules because the difference can be as high as $40 per night or more.

    What hoteliers really need to be more concerned about is what we are going to do as a group to put a stop to this non-sense! Traditional Wholesalers are where the margin/markup change overhaul will need to occur, and sooner than not!!

     
  13. Martin

    1. I find it hard to believe that the value of Expedia crashed due to less visits and nobody went to check conversions. Tripadvisor may drive less traffic but they drive more relevant traffic with their pop up change.

    2. OTAs are the new meta-search. They have a better UX than metasearch does. They deliver a better result etc. The future of meta-search is to build a site somewhat like an OTA. All OTAs need to do is give one more choice and the end user will have the feeling they did the right choice. The future for OTAs is brighter than that of meta. Anyone can scrape the internet and deliver meta experience. Not that many can sign up as many hotels, train them on their back-office and deliver a complete UX.

     
    • Matt Radack

      “OTAs are the new meta-search. They have a better UX than metasearch does.”

      You’re joking, right? Exactly which OTA’s have better UX than which metasearch sites?

       
  14. TimH

    I have been hearing about zero margin for hotels because the “commercial airlines” cut commissions for over 20 years now. I predict the opposite.
    The reason people get airlines and hotels confused is they group them both in the travel industry, but that’s incorrect. Hotels are in the real-estate sector and airlines are in the transportation sector. Airlines compete with buses, cars and trains, while hotels compete with short term and long term apartment, villa and home rentals. With all the housing competition (airbnb, homeaway) margins for hotels will get higher not smaller.
    While commercial airlines have cut commission, charter airlines are paying 20% plus margins, and with TSA private jets are a better option and becoming more affordable every year. My bet is commercial airlines will be forced to compete with charter air soon and start offering commissions again for business and first class customers.

     
    • John Pope

      ” With all the housing competition (airbnb, homeaway) margins for hotels will get higher not smaller.”

      Wanna bet?

       
  15. Kris

    Do you expect hotel brands to be able to distribute hotel rates direct to meta search player if they have an affiliate program?

     
  16. AHotelGM

    This would have been a really good time for the OTAs to rely on the relationships they have developed with their hotel partners. Too bad they decided to shaft hotels at every given opportunity instead of building those relationships.

     
  17. John Caldwell

    Wake me up when the OTA commission & markup structure makes sense, will ya?

     
  18. Michael Jacques

    Interesting perspective (again) Evan. However, the first point, the platform, is on target and mirrors the recent Concur acquisitions of TRX & GDSX – sort of a be more, do more, for more approach and will help create brighter days ahead for the OTAs who do the same. Who’s ready to be acquired next and add to the OTA plaktforms? Will OTA’s embrace this for the speed to market, to compete or just continue to build on their own? Point two, search, it’s been there for 30+ years and will not go away any time soon, continue to innovate or more over, and the third point, “add value” – well, enough said and agreed.

     
  19. romin Selahi

    What makes no sense to me in the article is this: as long as metasearch is flourishing they keep OTA’s alive, all said and done what are they comparing…..OTA’s and rather than the OTA’s paying marketing costs, the metasearch has paid to get the consumer on their site, if the metasearch take commissions on sales not per impression it works great for OTA’s if it is per impression is this not what we are doing with PPC anyway?

    The only threat is Hotel Chains directly listing on metasearches, Compare OTA’s to car thief’s the better the alarms get the better the break in tools get, metasearches are tough to start up, huge volumes are needed with low margins, so you are going to be limited to 2 or 3 huge metasearch engines, at this point the metasearch just becomes a new google for OTA’s it is more of the same, not long ago we were told the wholesale model was out, look how GTA responded.

    It was all about last minute bookings, mobile but what did we see the tried and tested OTA model will always have a market share but what I do agree with is being dynamic and offering added value, we start looking at packaging, offering white label products, and we see a lot of room for OTA’s.

    Some smaller OTA’s loath the big player, Booking.com, Expedia etc, I love them they make sure the OTA model lives on with their deep pockets that can out market industry threats, even if there are better product out there……

     
  20. Simone Puorto

    Very interesting article.
    The data about the TripAdvisor switch are just insane.
    I was pretty sure this change from popups to metasearch would have affected the market somehow but this is a huge change…

     
  21. Bob

    Interesting. Do you expect hotel groups to be able to exert the kind of leverage airlines needed to drive commissions to zero? Isn’t the market just too fragmented, especially outside of the US?

     
    • John Brew

      OTAs will disappear only if hotels do not sell/block any room inventory to OTAs, but instead will just list their rooms directly through meta-search engines.

      The moment the hotels will enter into direct commercial relationship with the meta-search engines, then the engines will become themselves an OTA.

      It’s a Mary Go Round. After all, we can already see the aggregators of meta-search engines :)

       
 
 

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