The world’s largest online travel company
NOT since the dotcom boom at the turn of the century have tech stocks seen such a tear. On July 19, the S&P 500 Information Technology Stock Index hit an all-time high, closing above its previous high of March 2000 (see Buttonwood). While titans like Google, Facebook and Amazon take the limelight, other companies can go unnoticed. The one that deserves more attention is Priceline, the world’s largest online travel company.
Those old enough to remember the dotcom boom can still associate Priceline, which was founded in 1997, with its “name your own price” feature, which allows consumers to bid on hotel rooms and flights. Today he is a Goliath. Its stable of online sites for booking hotels, cars, flights and restaurants spans the globe and includes Booking.com, Kayak, Agoda and OpenTable. Over the past decade, Priceline’s pre-tax profits have grown at a compound annual rate of 42%, faster than Apple, Amazon, Netflix and Alphabet (see chart). It also has a gross margin of 96%. Its stock price has risen by over 50% in the past 12 months, about four times faster than the broader stock market. On July 26, the company’s market value exceeded $ 100 billion.
Perhaps because Priceline is based in Connecticut, not Silicon Valley, it’s often overlooked by geeks and tech investors, who revere Airbnb, a platform for booking nights in other people’s homes rated at. about $ 30 billion. Ask a contractor in San Francisco about Priceline, and you’ll likely get a blank stare. Insiders know better. “There’s nothing you can point out and say, ‘This is something that no one else could have done,’ says Adam Goldstein of Hipmunk, another online travel company. “It’s just that Priceline did everything better in every way. “
The most important reason for Priceline’s success is making smart deals. In 2005, he paid around $ 135 million to buy Booking.com, a Dutch website that aggregates hotel inventory, and merged it with another acquisition, a UK travel site called Active Hotels. Today, Booking.com has the largest supply of hotel accommodation in the world and accounts for the lion’s share of Priceline’s revenue and market value. Booking.com was one of the best deals “in Internet history,” says Mark Mahaney of RBC Capital, an investment bank.
Priceline’s emphasis on accommodation helps explain why it is more profitable and more popular than Expedia, a rival online travel company that operates sites such as Orbitz, Travelocity, Trivago and Hotels.com. Expedia does more commercial flight bookings, but these aren’t as lucrative. According to Brian Nowak of Morgan Stanley, another investment bank, online travel agencies charge a hefty 15-18% commission of the price of a hotel room, compared to 3-4% for airline tickets. .
Unlike Google and Amazon, Priceline doesn’t aim to be at the cutting edge of technology, but it makes smart use of it. Booking.com excels in bidding for online search keywords. He is said to be the world’s largest consumer on Google: last year he spent $ 3.5 billion on “performance marketing”, which is primarily related to search advertising. Booking.com is also constantly trying new features: it runs around 1,000 tests a day to see what makes people more likely to click ‘book’. Some of these experiences, such as free cancellations and ranking hotels based on their Wi-Fi, have become permanent features.
Stable management has also helped the business. Glenn Fogel became the boss of Priceline in January, after the previous boss, Darren Huston, resigned for having an affair with an employee. But Mr Fogel, a former investment banker and trader, has worked at Priceline for 16 years and is credited with initiating the Booking.com deal. Asked about the success of his business, he attributes part of it to letting acquired businesses go about their business. Kayak, a travel ad aggregator that Priceline bought for $ 1.8 billion in 2012, for example, still maintains a separate headquarters in Connecticut, 10 miles from Priceline.
And then there are the lessons from the history of the company. You shouldn’t try too many things at once. During the dotcom boom, the company took the “name your own price” concept to the extreme, allowing people to bid on gas, groceries and even mortgages. The ensuing fall was grim: Priceline’s market value fell more than 99% to $ 190 million (the share price has risen 30,000% since that low). This experience taught management to value discipline and profitability. Today’s business ethic is that of a “workhorse, not a workhorse,” says a person close to the company.
If analysts are right, the future looks bright for Priceline. Last year, travel accounted for around 10% of global GDP, or $ 7.6 billion. But only about a third are booked online. This share is expected to grow by a few percentage points per year over time, at roughly the same rate as e-commerce in general. And as people get richer, they tend to travel more; many in emerging markets are venturing abroad for the first time.
New markets are also waiting for you. The concept of “alternative housing” – apartment, villa and house rentals – has been popularized by companies such as Airbnb, HomeAway and VRBO (the latter two are now owned by Expedia). But Priceline is strengthening itself in this area: last year, it offered 568,000 “alternative accommodation” ads on Booking.com, nearly 50% more than a year earlier. Airbnb lists 3M, but many of these are single rooms for rent in a larger house, while Priceline primarily offers entire properties, many of which are professionally managed.
Mr Fogel argues that Priceline’s approach of offering both hotels and other accommodations makes sense, as people like to have a variety of choices available in one place. But Priceline will increasingly compete with Airbnb, which is slated to go public next year and hungry for growth. Airbnb reportedly plans to add more boutique hotel and guesthouse listings to its own department and has suggested it may offer flights, though it didn’t provide any details.
Priceline and Airbnb will also compete for a greater portion of consumers’ budgets when they travel. Earlier this year, Airbnb started selling local “experiences” with guides. Booking.com is experimenting with selling tours and other field activities in several cities. The idea is to offer a “holistic system” for travel, explains Mr. Fogel, so that people can use the Booking.com app to check in at hotels without queuing, entering their rooms by swiping their phones like they do to board an airline, and make dinner reservations through OpenTable. These features aim not only to increase the company’s share of consumer spending, but also to ensure that customers continue to book through Priceline sites rather than directly with hotels and restaurants.
But becoming a one-stop-shop for all travel needs won’t be easy. The least successful acquisition of Priceline was OpenTable, for which it spent $ 2.6 billion in 2014. Last year, Priceline depreciated about a third of its value, acknowledging that the restaurant reservation service does not. was not growing as quickly as expected. This suggests that consumers may be comfortable using multi-purpose sites to book hotels and flights, but still want to use actual concierges for local recommendations.
Airbnb isn’t the only competitor Priceline has to worry about. Tech companies will launch sharper attacks. Google already offers consumers the ability to search for flights and routes, taking Kayak directly from Priceline. The search giant can use its vast mine of consumer data to dive deeper into the travel industry.
The most dangerous rival, however, may well come from elsewhere. “We are all waiting for the moment when a large Chinese company will come and try to take market share,” said Erik Blachford, former boss of Expedia. Ctrip, a Shanghai-based giant valued at $ 30 billion, is the obvious candidate. But if he does move, Priceline won’t necessarily suffer. Not only is its Chinese business growing well, but it has also invested nearly $ 2 billion in Ctrip’s debt and equity. No wonder some analysts consider Priceline to be the best-run internet company after Amazon.
This article appeared in the Business section of the print edition under the headline “The Priceline Evening”