The Online Travel Agency industry is among the industries that has changed the most over the past decades.(Granados et al., 2008) It is a platform market that brings together consumers and producers. In the OTA market the role of the consumer is played by travelers. Their aim is book a flight, book a hotel room or rent a car during their holiday or business trip. The role of the supplier is played by the airlines, hotels and car rental agencies who want to sell their product to the traveler.
Our analysis focuses on how the OTA market was disrupted by a new business model. In the old situation the OTA industry was dominated by Expedia. Expedia used a business model called the Merchant model. The Merchant model works as follows. First, Expedia buys hotel rooms in bulk from the hotels, before they displayed the accommodation on their website. At this point Expedia is the owner of these hotel rooms, giving them the right to sell them how they wanted. This means that Expedia was in charge of room allocations and placement of the accommodation on their website. Until sold they are sold, the hotel rooms are considered inventory. Then Expedia sells the hotel rooms to the consumer at a markup rate. (Smith, 2015) The margins they enjoyed were between 20 and 30%. (Cardenal, 2016)
This model made the industry vulnerable to disruption for several reason. The OTA has to bear the cost of inventory on sales. Lack of control, room allocations and disagreements over preferred placement in OTA search caused suppliers to be dissatisfied.
The new model
In 2005 The Priceline Group acquired Booking.com, an Amsterdam-based firm that currently is responsible for two thirds of the revenues of The Priceline Group. (Booking.com, 2017) Booking.com used a different business model that would disrupt the OTA industry: the agent model. (Cardenal, 2016)
The agent model is a commission-based model. In the agent model, the OTA doesn’t buy the hotel rooms as bulk in advance. Booking.com let’s producers use their online platform to display their accommodations. After an accommodation has been booked and the customer has paid, Booking.com collects their commission.
This model also means that Booking.com has no inventory costs, allowing them to charge a lower commission, starting at 12%. (Cardenal, 2016) Hotels can pay a higher commission if they want better placement at the platform. This way the hotels had more control. Booking.com introduced a preview button to avoid Expedia’s disagreements with the hotels about placement on their website. This way, hotels could see how they would be placed, before they made any commitment.
The disruption.
The agent model attracted suppliers of hotel rooms because it resolved much of the problems caused by the merchant model. Because a large amount of suppliers was attracted, Booking.com created several positive network effects. Positive cross-side network effects were, on the one hand, caused by the increasing amount of suppliers made Booking.com more valuable for users. More suppliers means lower prices and more variety. Following the increase of users, the platform became more valuable for suppliers, since demand increased.
Same-side positive network effects occurred on the consumer side. As more consumers used the platform, it became more valuable for other users. Consumers had more security about the accommodation they booked because of the reviews of other users.
The years after
The past year the amount of properties listed on Booking.com grew by approximately 30% per year, to over one million in 2016. Because of the disruption in the hotel market, The Priceline group was able to become the market leader in the entire OTA industry. (Cardenal, 2016)
The Priceline Group conquered the market by acquiring car rental agency RentalCars.com in 2010 and the flight comparison websites Kayak, Momondo and Cheapflights (2013, 2017 and 2017). The firms they acquired complement each other, allowing The Priceline Group to bundle their products. (The Priceline Group, 2017)
Expedia has been chasing The Priceline Group since the introduction of the agent model. You can see that Expedia has adopted the Agent model until a certain extend. In the second quarter of 2016, 86% of Priceline’s gross bookings were made through the agent model. Expedia has adapted the model until a certain extend, 56% of their gross bookings were made through the agent model, while the remaining 44% are still made through the merchant model. (Cardenal, 2016)
The future
To determine the future of the market we must determine whether the Winner-takes-all scenario is likely. The Winner-Takes-All scenario leads to a monopoly if certain conditions are met. (Eisenmann et al., 2006)
- The network effect for consumers and producers must be high.
- The costs of using two platforms at the same time must be high. This is called the multi-homing cost. The demand for differentiated features must be low.
In the OTA industry, the latter two are not met. For both consumers and producers, the main costs are variable costs, making it not very costly to use two platforms at the same time.
In the OTA market, consumers have a very differentiated demand. Producers might also prefer using platforms that differentiate from each other.
We thus conclude that a multi-homing situation is likely to occur in the OTA market. This is reflected in the current industry situation, a duopoly. Therefore we do not expect that either Expedia or The Priceline Group will conquer the market.
The threat of substitutes will pose the biggest problems. The sharing economy has allowed companies outside the OTA market to compete with the incumbents Expedia and The Priceline Group. Airbnb and Couchsurfing for example offer cheaper or free accommodation and have a enormous supply. In the car rental sector firms like SnappCar and Turo form substitutes for traditional car rental companies. Companies like Booking.com now have a very large and powerful substitute.
We predict that the current players will envelop the Shared Economy travel market. Envelopment means that Expedia and The Priceline Group will acquire firms like Airbnb and Turo to include their service in their own bundle. Envelopment can occur when platform providers serving separate markets may share users and components. Even though the OTA’s and Sharing Economy firms act in different markets, they share their consumers. Therefore we expect that in our case envelopment is likely to happen.
- Ally Smith (2015, 28 Sept) What Business Model Does Expedia Follow? Retrieved from: http://marketrealist.com/2015/09/business-model-expedia-follow/
- Andrés Cardenal (2016, 18 Oct) Priceline Has a Brilliant Business Model. Retrieved from:
https://www.fool.com/investing/2016/10/18/priceline-has-a-brilliant-business-model.aspx
- Booking.com (2017, 3 Oct) In Wikipedia. Retrieved from:
https://en.wikipedia.org/wiki/Booking.com
- Eisenmann, T., Parker, G., and Van Alstyne, M.W. 2006. Strategies for Two-Sided Markets. Harvard Business Review 84(10) 92-101.
- Expedia, Inc. (2017, 17 Sept) In Wikipedia. Retrieved from:
https://en.wikipedia.org/wiki/Expedia,_Inc.
- Granados, N., Kauffman, R.J., and King, B. 2008. How Has Electronic Travel Distribution Been Transformed? A Test of the Theory of Newly-Vulnerable Markets. Journal of Management Information Systems 25(2) 73-96.
- The Priceline Group (2017, 16 Sept) In Wikipedia. Retrieved from:
https://en.wikipedia.org/wiki/The_Priceline_Group
- Van Alstyne, M. W., Parker, G. G., & Choudary, S. P. 2016. Pipelines, platforms, and the new rules of strategy. Harvard Business Review 94(4) 54-62
