Can moths avoid a bright, burning flame?

Expedia was one of the earliest aggregators or online travel agencies (OTA) in the global travel market, estimated at $1.6 trillion. As middlemen, OTAs secure contracts with providers (airlines, hotels, car rentals, cruises, activities etc.) and market these to travelers, earning a commission fee on the transaction amount. Expedia was able to leverage its early mover advantage, to build an effective marketplace for travelers and providers. The fragmented nature of the market made Expedia the big fish — small and mid-sized providers in the travel value chain (property owners, fleet owners, booking agents etc.) were quick to align themselves with the big fish.

However, the charm of the market is also a problem for the big fish. Despite generating total bookings (or the total transaction volume) of $88 bn, Expedia’s share was less than 6%! The reason is competition from regional players and from newer entrants.

Table 1

The proliferation of the Internet has spoilt the consumers for choice, further exacerbating the problem for Expedia. On one hand, traditional search providers have been able to make inroads in the market, on the other hand, start-ups have been nibbling away share.


Best known to be the leading Internet search engine, Google has slowly become a major player in the online travel market. Industry estimates suggest that travel may have contributed to as much as $14 billion to Google’s total revenue of $110 billion for F2017; Expedia’s total revenue for F2017 was $10 billion.

The reason for the rise of Google is not hard to understand. While Expedia had focused on long-term contracts with suppliers, Google had focused on helping consumers search. Google was never limited by the need to forge any alliances with the suppliers. Google’s consumer reach, the fragmented nature of the market and high commission levels charged by the market leaders made Google a preferred choice for suppliers. The availability of suppliers directly on Google was also in the interest of the consumers, who no longer had to go to another website (Expedia or another OTA).


A company that started out as a short-term rental lodging marketplace seems to be getting the better of global travel majors. Airbnb’s exponential growth has pitted it against the likes of Expedia — they compete for properties to rent and consumers to sell to. Unlike many of the revenue-buying start-ups, Airbnb has actually managed to turn profitable in 2017. And Airbnb isn’t stopping here. In a letter earlier this year, Airbnb laid out why it was a better choice than Expedia. The fact that Airbnb charges 3–5% commission to hosts vs 25–30% for Expedia (and other OTAs), has caused a stir among the property owners. However, the long-term contracts that Expedia has with owners are likely to limit the churn in the near term. Unless Expedia can push some of the commission fees to the users, the company is likely to face significant backlash from owners at the time of contract renewals.

While Expedia may have lost market share, the company appears to be in no mood of giving up.

1.Expedia has accelerated addition of properties: During the company’s 1Q18 earnings call, the management noted:

We accelerated the pace of new property additions for our global lodging portfolio, directly adding 50,000 properties in addition to making another 25,000 HomeAway properties available to our core OTA brands. All told, we now count over 665,000 properties in our core lodging portfolio.

The idea here is to try and scuffle competition by acquiring a large number of assets (at a rate that can keep up with the Expedia quality control).

2. trivago: The acquisition of the metasearch engine, trivago (and later its IPO), was also aimed at keeping Expedia in the metasearch game. Since consumers search an average of 3–4 sites before choosing, it is imperative to have an online funnel (meta search engine) which can direct traffic to Expedia’s online assets.

3. Facebook: As far back as 2011, Expedia had already understood the power of a Facebook campaign — FriendTrips Facebook campaign was a runaway success with an ~8x increase in Expedia’s fan base over six weeks. In 2016 also, Expedia was very bullish on the Facebook dynamic travel ads program, to reduce its dependence on Google. The Expedia Facebook chatbot is another example of Expedia attempting to increase its consumer reach using the power of the social media giant.

However, in the wake of the recent data privacy issues, Facebook will cut off access to third party data for ad targeting. The impact of this on Expedia’s overall strategy to increase customer reach remains to be seen.

Although Expedia has been able to maintain its revenue margin (defined as revenue/bookings), all is not well with the company’s growth plans.

Table 2

The biggest red flag was the departure of Mr. Dara Khosrowshahi. He has been credited with Expedia’s tremendous growth over the last 12 years. Mr Khosrowshashi left Expedia (a respected, profitable, growing, listed, industry-leading aggregator) to join Uber (a scandal-ridden, loss-making, unlisted aggregator) as the ride-hailing company’s CEO. Why did he jump ship? While there could be many explanations, a deeper look in the financials may help provide some clarity:

Table 3

The impact of rising competition has been eating into the efficiency of Expedia’s spending. The last row (in the table above) clearly shows that the incremental spend in S&M is not resulting in a commensurate increase in bookings. Infact, the efficiency of the spend has declined to almost half in 2017 from 2015 levels. There is scant evidence to suggest that this trend of 40–50% declines will abate. Not only does this make the Expedia guidance of 6–11% y/y EBITDA growth (for F2018) difficult to repeat, but also points towards a more serious long-term threat.

As Estella tells Pip, “Moths, and all sorts of ugly creatures, hover about a lighted candle. Can the candle help it?” Expedia is a bright and glowing candle; best to avoid becoming moth of an investor.