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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.

 

1. Ally Smith (2015, 28 Sept) What Business Model Does Expedia Follow? Retrieved from: http://marketrealist.com/2015/09/business-model-expedia-follow/

2. 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

3. Booking.com (2017, 3 Oct) In Wikipedia. Retrieved from:
   https://en.wikipedia.org/wiki/Booking.com

4. Eisenmann, T., Parker, G., and Van Alstyne, M.W. 2006. Strategies for Two-Sided Markets. Harvard Business Review 84(10) 92-101.

5. Expedia, Inc. (2017, 17 Sept) In Wikipedia. Retrieved from:
   https://en.wikipedia.org/wiki/Expedia,_Inc.

6. 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.

7. The Priceline Group (2017, 16 Sept) In Wikipedia. Retrieved from:
   https://en.wikipedia.org/wiki/The_Priceline_Group

8. 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

 

 

5/5 (3)

I stumbled upon this business model while learning Swedish. My girlfriend is fluent in Swedish so I thought it would be nice to start learning the language myself. Since it is a side project I am not willing yet to spend money on it and in such situations your go-to place is Duolingo. After finishing Duolingo’s language tree I will be nowhere near fluency but it is a great place to pick up the basics. Duolingo offers no premium option and it shows no advertisements whatsoever, it’s just free!

As a dedicated BIMmer I started wondering about their business model so I began digging into it. Soon I found a TED talk by one of the founders and frankly I was astonished by the vast scope of possibilities of this business model. The video is over fifteen minutes so let me summarize it for you and set the stage for some brainstorming.

Some of you might be familiar with Captcha, the funny looking words that can distinguish you from computers. A widely used method that everyone has come across at least dozens of times. It takes about ten seconds each time, adding up to millions of hours if you combine all internet users.

Then there is a second, seemingly unrelated problem that occurs in the digitizing of books. Modern books can easily be read by computers, turning them into e-books. But the older books get, the more words are intelligible for computers, resulting in hours of manual labour. The creators of captcha then founded Recaptcha, which kills two birds with one stone.

One sure thing, the words that couldn’t be digitized can’t be read by computers, by definition. Recaptcha uses those words as a means to separate you from computers, while creating your Twitter account. This way over 750 million (10% of earth’s population) contributed to digitizing books. The idea is, when ten people give the same answer then it probably is the correct one.

This idea was used in the creation of Duolingo. Students get to learn a new language while actually conducting labour. The translations that students make are used to translate, for instance, Wikipedia pages. The TED talk was given a few weeks before Duolingo’s pilot phase, so I can’t tell what the results are based on that video, but the idea is brilliant.

I got me wondering what else is possible with the combined knowledge of millions of people. Free education is a whole new market that is just starting to unfold. During the first lecture of DBA we were taught that there is no silver bullet for software development. One of the reasons was that debugging is an arduous, labour-intensive task.

The coding equivalent of Duolingo is arguably Codecademy. Codecademy offers free courses in coding, allowing you to pick up the basics. The site engages with millions of students who would love to get some practical experience in debugging, which would be a great means of practice. Perhaps these students could help software developers with their work, making them much more efficient. I just thought of this idea while writing my blog in the bus home. I think if each BIMmer would spend fifteen minutes thinking about the possibilities, we could make some great impact!

4.5/5 (4)

In his TEDx talk, André LeBlanc portrays how Artificial Intelligence will influence the future of humans. What particularly struck me was his statement that working weeks might drastically decrease in terms of hours. In the far past, the majority of the population was a farmer, working over 80 hours a week to sustain themselves. Now it has decreased to 40 hours and the rise of AI promises to decline that number even further. I would like to proceed on this assumption.

It seems that in the near future, we don’t have to devote all our time to a job that allows us to sustain ourselves. I would like to use this blog to brainstorm about all the possibilities that lay in front of us and how humankind will use this extra time. I thought of a few possibilities of my own and I hope that some of the readers will post their ideas of how AI and other technological developments might change the way we use our time.

Could it be possible that we are so far in the evolution process that we don’t have to work anymore? That the end goal of humanity is to live life in freedom with no restrictions or obligations because we are completely provided with what we need due to advanced technology. I personally think that too much free time will cause all sorts of social problems because of lack of purpose. So perhaps there are more meaningful ways to use the spare time AI provides us.

With a large portion of the job market being outsourced to advanced machinery, humankind could focus at the current global problems for instance. Famine is still a major global, wicked problem. Would it be possible to combine the ever evolving technological possibilities with the spare hours of a major part of the population, to overcome problems like this? A paradoxical shift towards agriculture because of technological advancement.

Or could the spare time be used for more education, allowing to move forward as a species even further. Start exploring space at a more rapid pace, find cures for diseases that are now deemed incurable or finally develop the flying cars that we have been dreaming about for decades. If a larger portion of the population would devote their time to sciences, society will reap great benefits.

I would be utterly surprised if any of these options became reality, but it is a good thing to think about the endless possibilities that AI might provide us. I am curious to hear your thoughts.