Saturday, 20 September 2014

Why Google's designs on travel aren't good news for the big OTAs

Why Google's designs on travel aren't good news for the big OTAs

by David Stevenson
by David Stevenson

by David Stevenson, FT columnist and Travel Weekly's City Insider
Is the travel industry going the way of publishing - unwillingly turned into a digital product which is under the effective control of a single dominant player, such as Amazon or Google?
Until fairly recently I'd have laughed out loud at this kind of techno babble suggestion.
Travel is quite clearly completely different from publishing and being honest I'd be a wealthy man worth many millions of pounds if I'd have pocketed a £1 from each and every person who said Google is coming after travel.
Well, truth be told Google hasn't actually done very much in travel to date and to compare its baby steps with Amazon's omnipotent control of the publishing sector has until now been frankly risible.
Yet over the last few weeks I've slowly started to change my mind. 
Big changes are afoot in the world of digital travel and we may eventually end up in a market place where Google has indeed built a dangerously powerful position.
My damascene conversion to the threat from Google has been prompted by a number of varying encounters and observations over the long summer months.
The first epiphany came via a friend in publishing who is trying at a very senior level to fight off Amazon's predatory pricing regime.
He observed - with a deep sigh - that all business battles are in essence a fight between brands and channels, all mediated by the customer's experience of both researching and then consuming a product.
In the good old days before the internet we physically shopped for product of course, and welcomed the choice and variety on the high street. In the new digital age the reality is very different.
We welcome lots and lots of brands producing varying products but in reality we actually only want a few channels to market and distribution.
No-one really takes pleasure in shopping in the digital 'mall' unlike the real world ones where there are nice coffee shops and fun places to visit and spend your money.
So the internet has the net effect of drastically reducing the avenues of distribution.
Book publishers thought the internet would be revolutionary and promising whereas what they've actually discovered is that everyone bar Amazon has failed to make a profit (and even they struggle) distributing the elusive 'content'.
So in simple language the internet eventually consumes its channels and produces one or two omnipotent distributors.
Amazon is quite clearly that channel in books, but what makes us think that Google could eventually offer up that role in travel?
Cue my next conversation with a major West Coast VC who is also a good friend and sadly for my first acquaintance a very happy investor in Amazon.
This  venture capitalists view is simple - Google wants to rip apart the existing model of digital travel (populated by all manner of OTAs) and create a new architecture with it and TripAdvisor at the top of the ecosystem.
And once it realises that its vision is slowly becoming reality it'll simply buy TripAdvisor - "I give it three years before it decides to spend a tonne of money on buying Trip".
But why on earth would Google want to own the world's dominant review site - one simple word should suffice, search. 
This elusive term - which means so many different things to different people - is being revolutionised by mobile which is turn opening up a land grab.
Google is determined to own lock, stock and barrel this mobile opportunity as  part of its strategy to own multiple channels to personalised data.
It's intuition is based on something I've been aware of for many years - travel is disjointed and profoundly annoying as a consumer.
Every day I look at my inbox and see multiple emails from the likes of Tripit asking me to organise my trips,
Hotels.com telling me about yet another private members only sale, Groupon shouting about some amazing local offer and TripAdvisor educating me about some of my favourite places.
In sum its confusing and disjointed and for the most part these emails end up in the deleted folder. But rather like the journalists who  use Google Alerts to keep them posted of all news about a favourite subject, what if Google could control all those flows of offers, and then personalise them to my own interests ? At minimum I'd let the message  into my inbox and may even be tempted to buy off its list.
This aggregation of research and search requires three essential components from a supplier :
a) I want it to inform me of the latest offers relevant to me
b) Tell me about products I trust, in places I like, supplied by people who I've used before or are recommended by friends 
c) Last but by no means least, some of us may also be interested in a constant social conversation about the product to help shape my friends views (though quite why anyone would actually want to do that is beyond me). This step may involve not only views but also content and video.
It's against this backdrop that a bunch of papers by US advisory firm Evercore stand out. Penned by Ken Seda and his colleagues these start to map out precisely what Google may be up to in the world of digital travel and search - and why the OTAs in particular have a great deal to fear.
The most recent report is from September and is entitled Google's Travel Plans in a Post-Atomic Era, but you should also make a point of reading the earlier Google’s Summer Online Travel Plans report from March.
Seda and colleagues think that Google has essentially decided to cross the rubicon and take on its big customers like Priceline and Expedia. These huge OTAs have been very reliable customers for the search giant but history teaches us that eventually Google decides it can do the job better .
Starting with a number of small scale initiatives  Google is pushing into the OTA territory, with products such as Limited Offers linked to Google's Hotel finder service.
Next up will come a yet to be branded 'captive demand platform' which will allow Google's hotelier customers the ability to upload their secret lists of loyal, valuable customers into the Google engine and then churn out very special rates to customers.
Finally all this will be connected back to Google Wallet, allowing the search giant to control the whole process of research and booking.
This activity opens up a number of possibilities  not least the rise of opaque pricing based on personalised information - a huge departure from the existing rate parity agreements signed with the OTAs, with the potential to push prices below the advertised price on Priceline and Expedia.
Key to this push by Google is the bait for hoteliers - they keep the customer lists and transactions and don't have to rely on the existing 'atomic' model managed by OTA merchants where between 15% and 25% of all revenues is taken as commission.
Data is now owned by the brand marketing channel, allowing them to aggressively market to their own private lists of customers.
According to Ken Seda at Evercore, the OTAs are going to lie down in this battle, with Priceline in particular fighting back by buying up specialist outfits such as Buteeq, HotelNinjas and Open Table - the game plan here is to effectively build another leg to the business allowing the OTAs to turn into white label customer intelligence and servicing propositions for hoteliers.
As these changes start to ripple through the industry I'd wager that we'll see some profound changes, not least for the rabble of OTAs scrapping around for business.
The key challenge is that the direct travel model is a classic 'middle man' squeeze waiting to happen. Technology teaches us that eventually the market finds a way to squeeze out the expensive middle man, even if they provide a valuable service.
Lurking beneath this push for market control is a cold reality - the OTAs who account 20% of travel ad spend while contributing to 8% of global bookings, and they simply charge too much. According to the Evercore analysts they reckon that Priceline and Expedia "charge hoteliers over 20% of each booking  on average (adjusted to account for just hotels), whereas Amazon and EBAY take closer to 13% and 9%, respectively)....".
Google is slowly but surely eying up this model and seeing a huge new market especially as mobile helps to redefine everything, almost instantly removing some traditional channel superiority.
This'll force the OTAs to plump for one of  three options - be the biggest and offer the most comprehensive selection (the Expedia model), start to look at white labelling and working with hoteliers to provide optimisation services (the fast emerging Priceline approach) or become the brand customers trust and base your product around search and knowledge via reviews (the Tripadvisor model).
And what of the implications for the rest of the travel sector ? The obvious issue here is that Google has woken up to the simple realty that all travel research is about search and that what helps us all search better is personalised, valuable information.
Cut the jargon and one simple fact jumps out - we all want to cut the time we spend online working out what to do next. 
Evercore cites a  Google Travel study presented to its Hotel Finder partners, which cited " that travellers spend an average 55 minutes to book a hotel and flight, visit 17 websites, and click 4 different search ads per travel search, with 90% of those travellers conducting the booking process over multiple screens. 
The point of its presentation seemed to be a need for a streamlined bookings path, one where Google can retain the traveller from Search to Research to Book".
And Google already starts off with an advantage - according to the Evercore paper again "22 billion hotel searches are performed on Google per month with 58% of travellers (64% of business travellers) beginning their travel experience on Google, according to Ipsos MediaCT/Google Travel Study.  However, there is some question as to how many of those that start their search on Google were actually led to a booking decision by Google”. 
My own slightly off-beat take on this is that most major existing travel businesses should give up thinking they can stop the Google juggernaut, back it in its fight against the OTAs and then build their own platforms on top of the search giants architecture.
And last but by no means least what happens to the poor old customer, befuddled by all the channels and brands?
Clearly the big game changer is mobile and the degree to which phones and tablets will become the main digital interface.
These relatively constrained devices will lend themselves to modern day equivalents of the old Compuserve walled garden i.e software based architecture that keeps the customer within the world of Google via browsing through Chrome and then paying through Wallet.
Or as Evercore's analysts put it "we see the integration of HPAs to Google Wallet, Maps and Now as creating a seamless travel experience for the user (from search, to research, to book  -- to travel and return)".
And just in case you thought this was all pie in the sky remember that according to analysts at Evercore, “10%-20% of all online-booked occupancy is [already] driven by Google properties, including Search and Hotel Ads (aka Hotel Price Ads).  Moreover, this measure roughly equals all OTAs combined".
My sense is that customers will happily live within these closed gardens because the net effect will be that prices - for most - will be driven down, not least by Google taking a hunk out of the OTAs revenues.
Sadly this downward pressure on prices will have two nasty knock on effects - more of that opaque pricing via personalised offers and a slow but steady move towards online forms of internet social stratification.
In the new world that is fast emerging, power will sit in the hands of those marketers with the right lists of wealthy travellers who also happen to be on the right loyalty card lists and have the right credit scores.