Essec Business School

In a sector where size means everything, the accelerating consolidation currently being seen in the Online Travel Agencies (OTA) market is adding to the ever increasing range of challenges being faced by hotels within the electronic distribution arena. Today, effectively because of their sheer scale, two companies (Priceline and Expedia) have gained near total control over the global online travel market. And, despite their already considerable scale, both continue to grow at a very rapid pace. With their range of alternatives shrinking, it is getting harder than ever for suppliers such as hotels to both maintain visibility as well as capture their fair share of today’s online travel customers.

How Priceline and Expedia came to dominate the OTA landscape

Priceline (or more properly The Priceline Group) originally gained dominance through a series of well-targeted international takeovers, including most notably Activehotels.co.uk and Booking.com in Europe and Agoda.com in Asia, as well as leading meta-search engine Kayak.  Taken together these helped position the company in pole position in the global marketplace.  Much of its subsequent growth has been organic, driven by both its massive scale and its very strong online, particularly search, marketing expertise.  It has however also invested in leading Chinese player Ctrip.com to cement the two companies’ strategic relationship and to give it access to the fast growing Chinese online travel sector.

Expedia Inc. on the other hand, has plotted practically the opposite tack.  While originally the company focused on growing organically, meticulously setting up market offices in target markets and signing up supply on a case by case basis, more recently it has aggressively bought its way into key markets, for example acquiring Australia-based WotIf in addition to snapping up competitor Travelocity from Sabre and consolidating its dominance of the U.S. online travel marketplace.  Reading the writing on the wall, it too has invested in China, acquiring a significant interest in number two-player eLong, as well as also attacking the meta-search market by acquiring leading European player Trivago.  Despite this rapid growth, and challenges integrating such disparate companies, rumors abound that Expedia’s war chest is still quite full and that the company is still actively searching for further acquisition targets.  Most recent it has declared it’s intent to acquire rival Orbitz Worldwide, a move that, assuming it receives regulatory approval, would take its share of the U.S. OTA market to nearly 70%.

With the two market leaders pulling further and further away from the pack, many of their competitors are throwing in the towel.  Even when just considering the big names, in recent years the once mighty Travelocity, considered by many to be the original OTA and once a seemingly unstoppable giant, was reduced to a white label, and then subsequently acquired for peanuts, by Expedia.  Lastminute.com, the company’s once mighty European arm, has been sold off to Bravofly Rumbo Group for a song, while number three player Orbitz Worldwide / eBookers has also put itself on the market, with parent Travelport trying to jettison it rather than continue to try to compete with the sector’s big boyy.   Hopefully a buyer will be found, lest the company follow the fate of the once might OctopusTravel, whose parent company GTA decided to put out of its misery rather than continue to support sustained losses and drag the company as a whole down with it.

What the OTA oligarchy means for the travel industry

Having the sector dominated by such a small number of players acts as a stifle on innovation.  Although opportunities exist to enter the market, particularly by targeting highly specialized niche areas, such an approach is unlikely to be sustainable in the long run.  If the niche is too small, the fledgling company cannot gain sufficient traction to survive in the long term.  But if the niche is sufficiently big and the company manages to exploit it successfully, its risks attracting the attention of the larger players and thus becoming an acquisition target or even worse being bombarded out of existence. 

The example of HotelTonight, which enjoyed considerable success as a niche player until it gained sufficient scale to attract a little too much attention, should serve as a lesson to those pondering similar strategies.  While the company remained a small player pursuing a marginal market in a small number of geographical locations, no one particularly took much notice.  But as soon as the concept began to scale (and more importantly attract supplier attention), both Priceline and Expedia immediately introduced highly similar products, leveraging their extensive supplier relationships to provide more comprehensive product offerings as well as their superior marketing expertise to insure higher consumer visibility, in effect blowing the upstart out of the water while at the same time trying to hoover up the potential of the developing market segment.

Given this pace of industry consolidation, not only is the number of options available to hotels on which to distribute their room rapidly shrinking, but their ability to negotiate visa vie these colossal e-commerce conglomerates is also plummeting. In addition the sheer volume being driven through these systems givens the OTA conglomerates massive scale, an advantage they can exploit in marketing, in search and in customer relationships.  Priceline and Expedia are already amongst Google’s top paid-search customers globally (across all sectors) and are acknowledged leaders in search engine optimization, online merchandising and customer loyalty.  Faced with such a skill set, how can hotels even attempt to win the battle for the customer?

Faced with such a challenge, for the vast majority of hotels the question is no longer how to battle against the increasingly dominant OTAs, but how to successfully work in synergy with them to deliver business.  To maintain their stellar growth, the one thing OTAs need is consistent access to suitable hotel supply.  Thus most are keen to find win-win solutions to insure they have the right product to sell and keep their customers happy.  Unfortunately in recent years conflict rather than cooperation has been the name of the hotel-OTA relationship game, something that will have to change as hotels adjust to the new reality of an oligopoly in the vital online travel space.

A previous version of this article was published in Hotel Analyst Distribution & Technology