The Future of the Online Travel Giants: Priceline - Amy Scarth & Alex Hadwick - EyeforTravel

 
The Future of the Online Travel Giants: Priceline - Amy Scarth & Alex Hadwick - EyeforTravel
The Future of the Online
Travel Giants: Priceline
Amy Scarth & Alex Hadwick
The Future of the Online
    Travel Giants: Priceline

Disclaimer                                                                                      Authors:
The information and opinions in this report were prepared by EyeforTravel Ltd and its           Amy Scarth
partners. EyeforTravel Ltd has no obligation to tell you when opinions or information in
this report change. EyeforTravel Ltd makes every effort to use reliable, comprehensive          Alex Hadwick, Head of Research,
information, but we make no representation that it is accurate or complete. In no event         EyeforTravel
shall EyeforTravel Ltd and its partners be liable for any damages, losses, expenses, loss
of data, loss of opportunity or profit caused by the use of the material or contents of
this report. No part of this document may be distributed, resold, copied or adapted
without EyeforTravel’s prior written permission.
© EyeforTravel 2017

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About EyeforTravel
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   70,000+                          2,500+                       100,000+                          1,000+
      database                     annual event                     monthly                     online conference
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CONTENTS
Contents
About EyeforTravel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
    Our Values . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
    Our Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
    EyeforTravel in Numbers  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
List of Figures  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
List of Tables  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
1 Company Description and History . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
2 Financial Strength . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
    2.1 What Is Company Turnover?  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
    2.2 What Was the Profit Margin? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
    2.3 What Were the different Revenue Streams and How Much Did They Make? . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  12
    2.3.1 Agency Versus Merchant . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  14
    2.3.2 Revenue by Vertical and Season . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  16
    2.4 How Many Room Nights and Flights Were Sold?  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  16
3 Costs and Debts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  20
    3.1 How Much Is the Priceline Group Spending on Marketing? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  22
    3.2 Debts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  25
4 Mergers and Acquisitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  26
    4.1 Major Milestones for Priceline . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  27
    4.2 Key Recent Acquisitions or Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  28
    4.2.1 The Momondo Group  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  28
    4.2.2 OpenTable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  28
    4.2.3 Ctrip . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  28
    4.2.4 Meituan-Dianping . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  28
    4.3 M&A Outlook . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  29
5 Market Share and Competitive Landscape . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  30
    5.1 Competitive Landscape . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  30
    5.2 Market Share  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  31
    5.3 Key Competitors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  32
    5.3.1 Inside the Vertical . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  32
    5.3.2 Outside the Vertical . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  34
6 Dominance or Decline?  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  37
    6.1 Future Prospects . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  37
References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42

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List of figures / tables
List of Figures
Figure 1:    Priceline Gross Bookings (USD billions) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Figure 2:    Priceline Gross Revenue (USD millions) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Figure 3:    Gross Revenue by Quarter (USD Millions) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Figure 4:    Gross Revenue by Quarter (USD Millions) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Figure 5:    Gross Profits and Revenues 2012 to 2016 (USD Millions)  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  10
Figure 6:    Gross Margin Percentage 2012 to 2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  10
Figure 7:    Gross Profit Percentage Change YoY by Quarter  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  11
Figure 8:    Percentage of Gross Revenues Derived from US and International Markets 2012 to 2016 . . . . .  12
Figure 9:    YoY Percentage Change in Gross Revenues Derived from US and International Markets
             2013 to 2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  13
Figure 10:   Share of Gross Bookings by Source Market from 2012 to 2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  13
Figure 11:   YoY Percentage Change in Revenues and Gross Bookings Derived from US and International
             Sales 2014 to 2016  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  14
Figure 12:   Revenue by Model 2012 to 2016 (USD Thousands)  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  15
Figure 13:   Quarterly Gross Bookings – Agency Versus Merchant . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Figure 14:   Revenue Generated by Model as a Percentage of Gross Revenue 2012 to 2016  . . . . . . . . . . . . . . .  16
Figure 15:   Products Sold by Millions of Bookings made 2012 to 2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  17
Figure 16:   YoY Percentage Change in Products Sold 2013 to 2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  18
Figure 17:   YoY Percentage Change in Products Sold by Quarter from 2012 to Q3 2017 . . . . . . . . . . . . . . . . . . .  19
Figure 18:   Expenses Versus Revenues 2012 to 2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  20
Figure 19:   Priceline Costs by Company-Defined Categories 2012 to 2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  21
Figure 20:   Priceline Costs by Company-Defined Categories 2014 to H1 2017  . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  21
Figure 21:   Priceline Operating Expenses and YoY Percentage Change (USD Millions) . . . . . . . . . . . . . . . . . . . . .  21
Figure 22:   Sales and Marketing Spend 2012 to 2016 (USD Millions) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  22
Figure 23:   Advertising Spend by Self-Reported Categories 2012 to 2016 (USD Millions)  . . . . . . . . . . . . . . . . .  23
Figure 24:   Percentage Change in Advertising Spend in Self-Reported Categories 2013 to 2016  . . . . . . . . .  24
Figure 25:   2016 Costs as a Percentage of Gross Profit  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  24
Figure 26:   Priceline Total Debt Holdings 2012 to 2016 (USD Millions)  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  25
Figure 27:   Comparative Revenue Share of the ‘Big Four’  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  32
Figure 28:   Priceline Share of Total Global Travel Market . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  32
Figure 29:   Priceline Share of Global Online Travel Market . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  32
Figure 30:   Priceline Market Share of US Online Travel Market . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  33
Figure 31:   Priceline Share of International Online Travel Market . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  33
Figure 32:   Expedia Versus Priceline Gross Bookings (USD Millions) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  34
Figure 33:   Revenues for the ‘Big Four’ . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  34

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and History
                                                                                                                                     Company Description
1.

Company Description and History

The Priceline Group was founded in 1997 and went            allowed users to name their own price for hotel
public in 1999, raising a record USD12.9 billion in one     rooms and other travel services. On the other
day. Priceline operate a range of marketing websites        end, it enabled suppliers to sell excess inventory
that generate online travel bookings, predominantly         at a discount without affecting their retail price
linking consumers with suppliers. They make significant     structures. This model was discontinued in
investments in consumer demand generation and sell          September 2016 due to the growth in their retail
accommodations, air tickets, car rental, cruise, packages   business, competition, relative complexity, travel
etc, and more recently restaurant reservations since        restrictions by service providers, difficulty of offering
their acquisition of OpenTable.                             these services on mobile devices, increased discounts
                                                            through closed user groups, and lack of discounted
Priceline currently operate six primary, independently      inventory from suppliers in periods of high consumer
managed brands:                                             demand. Over the last couple of decades, Priceline
                                                            has been evolving into an array of leading site
■■Booking.com                                               for products and services of all sorts, and rapidly
■■Priceline.com                                             expanded with the acquisitions of sites such as
■■KAYAK                                                     Booking.com, KAYAK, and Momondo.
■■agoda.com

■■rentalcars.com                                            Today, their strategy involves maintaining multiple
■■OpenTable                                                 brands to capture growth in the online travel market,
                                                            including mobile. They aim to achieve this through
At the end of 2016 Priceline employed 18,500                expanding their product/service offerings and
employees (81% based outside the US) which is a             penetrating new markets around the world, with
significant growth from their 700 employees back in         China a particular focus for a number of minority
2007. Priceline have also grown quickly from a small        investments. They largely invest resources into
player a decade ago, generating around USD1 billion         organically growing brands through advertising,
in revenue, to over USD10 billion in revenue in 2016.       targeting new markets or expanding the products
They now operate in 225 countries and territories. Their    they are able to offer consumers. In addition, they
revenue, however, represents a fraction of the global       have and are expected to further invest in strategic
travel industry so further growth potential for Priceline   transactions, such as acquisitions, joint ventures
is very possible.                                           or other investments, in order to expand their
                                                            businesses into complementary areas, expand their
Priceline were originally known for their reverse           current business, acquire innovative technology
auction model, called Name Your Own Price, an               and build their brand portfolio to keep up with the
opaque transactional process they patented that             continuously changing travel distribution landscape.

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Financial Strength
2.

Financial Strength

Priceline make their money from a range of sources and   largest OTA in the world in terms of revenue. Overall
models. Revenues and gross profit are derived from the   business for Priceline has generally been healthy
following:                                               and they have more than doubled their revenue
                                                         over the last five years and their EBITDA growth
■■Agency commission: earned from the sale of travel      even outpaces Amazon in percentage terms. Annual
   products and services.                                growth rates have slowed since 2013, a period in
■■Merchant sales: transaction gross profit and           which they managed to boost their revenue by 38%.
  customer processing fees from the sale of travel       Although increases may be slower, they have reported
  products.                                              continuous growth nonetheless.
■■Advertising: primarily earned by their metasearch

  brand KAYAK, from sending referrals to online travel
  companies and travel suppliers, as well as display     2.1 What Is Company Turnover?
  advertising on KAYAK websites and mobile apps.         2015 was a relatively tough year for Priceline which
■■OpenTable: reservation revenues, subscription fees     is reflected in their reports; revenues increased by
  and other revenues from restaurants.                   just 9% on 2014 results. However, after the set-back
■■Other fees: including excess waiver fees, travel       of this weaker year, in 2016 they reported stronger
  insurance and GDS fees.                                growth again, with gross revenue increasing by
                                                         16% and appear to have built on this on this in
The Priceline business is primarily driven by            2017, with total revenues growing 18% across the
international sales generated by Booking.com, agoda.     first three quarters of 2017. The 2015 decline in
com and RentalCars.com, as well as the international     growth was partly driven by external factors such
business from KAYAK, Momondo, and OpenTable.             as terror attacks in Europe and the various health
There are also minority stakes and distribution          epidemics, as well as their efforts to expand into
agreements with Ctrip and Meituan-Dianping.              new markets across the world. The improvements in
The significant majority of their gross profit comes     2016 are thought partly to be a result of improved
from accommodation reservations. The majority of         technologies and customer experience for Booking.
international bookings are generated through Booking.    com on both desktop and mobile and came in the
com and in 2016 the Booking.com brand represented        face of a strong dollar depressing revenues from
approximately 88% of their gross profit.                 international markets. KAYAK also performed well in
                                                         2016 and expanded to Asia-Pacific and Latin America.
In December 2016, the Priceline Group revenue hit        Agoda, which is Singapore-based, also performed
USD10.7 billion, a 20% CAGR over the five-year review    well despite some challenges in its markets, and
period from 2012. Most of this growth was organic        rentalcars.com increased its mobile bookings and
rather than through acquiring brands. They are the       grew its supplier base.

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Financial Strength
Figure 1: Priceline Gross Bookings (USD billions)

$80

$70                                                                                                  $68.09

$60
                                                                                 $55.53
                                                              $50.30
$50

$40                                   $39.17

$30                    $28.46

$20

$10

 $0
                         2012           2013                   2014               2015                 2016

Source: Priceline Group, 2017

Figure 2: Priceline Gross Revenue (USD millions)

$12,000                                                                                                                35%
                                                        n Y/Y change                                 $10,743
                                                                                                                       30%
$10,000
                                                                                 $9,224
                                        29%                   $8,442
                                                                                                                       25%
 $8,000
                                      $6,793                  24%
                                                                                                                       20%
 $6,000                                                                                                16%
                       $5,261
                                                                                                                       15%

 $4,000
                                                                                                                       10%
                                                                                    9%
 $2,000
                                                                                                                       5%

      $0                                                                                                               0%
                         2012           2013                   2014               2015                 2016

Source: Priceline Group, 2017

With sales growth having resumed, gross bookings                 revenue. The annual growth rates of actual bookings have
reached a value of USD68 billion in 2016, achieving a            been slightly stronger than associated revenues generated,
24.4% CAGR over the five years. They have multiplied the         but trends are generally similar. During 2016, gross
value of their gross bookings by 2.4 times from 2012. Gross      bookings increased by 23% over 2015 results and 19.4% in
bookings capture the total dollar value, include taxes and       the first three months of 2017.
fees of bookings through their Online Travel Company
(OTC) brands, net of cancellations. Their non-OTC brands,        By reviewing results on a quarterly basis, we can identify
KAYAK and OpenTable, and the search queries through              some seasonality in Priceline’s revenue. Q3 has been
these channels, do not contribute to gross bookings, only        the most thriving financial period each year since 2012,

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Financial Strength
Figure 3: Gross Revenue by Quarter (USD Millions)

  $5,000
  $4,500
  $4,000
  $3,500
  $3,000
  $2,500
  $2,000
  $1,500
  $1,000
    $500
        0
             2012 Q1

                       2012 Q2

                                 2012 Q3

                                           2012 Q4

                                                     2013 Q1

                                                               2013 Q2

                                                                         2013 Q3

                                                                                   2013 Q4

                                                                                              2014 Q1

                                                                                                        2014 Q2

                                                                                                                  2014 Q3

                                                                                                                             2014 Q4

                                                                                                                                       2015 Q1

                                                                                                                                                 2015 Q2

                                                                                                                                                           2015 Q3

                                                                                                                                                                     2015 Q4

                                                                                                                                                                               2016 Q1

                                                                                                                                                                                          2016 Q2

                                                                                                                                                                                                    2016 Q3

                                                                                                                                                                                                              2016 Q4

                                                                                                                                                                                                                        2017 Q1

                                                                                                                                                                                                                                    2017 Q2

                                                                                                                                                                                                                                              2017 Q3
Source: Priceline Group, 2017

Figure 4: Gross Revenue by Quarter (USD Millions)

  $5,000
                       n Q1                 n Q2                    n Q3                     n Q4
  $4,500

  $4,000

  $3,500

  $3,000

  $2,500

  $2,000

  $1,500

  $1,000

    $500

        0
                           2012                                 2013                                    2014                                     2015                                    2016                                     2017

Source: Priceline Group, 2017

and increasingly so. Revenue peaked in Q3 2016 when                                                                         the bulk of their customers. Indeed, such is the increase
Priceline generated USD3,691 million in gross revenues.                                                                     in profits that Priceline’s EBITDA from 2006 to 2016 has
It should be noted though that Priceline recognizes                                                                         grown more in percentage terms than such lauded
revenue from these bookings only when travel occurs,                                                                        internet giants as Apple, Amazon, Alphabet (Google),
thus it is often in a quarter other than when it is booked                                                                  and has trounced Expedia (The Economist, 2017).
and there is some lag in the reporting.
                                                                                                                            The Priceline.com brand, predominantly based on the
2.2 What Was the Profit Margin?                                                                                             merchant model, is recorded on a ‘gross’ basis and has
Priceline’s gross profit is a healthy picture. Due to its                                                                   associated cost of revenue. All their other services are
scalable business model, much of the revenue increases                                                                      recorded in revenue on a ‘net’ basis and have no associated
they have achieved have been converted into profit.                                                                         cost of revenue. The decline of merchant model revenues,
There is little or no cost associated with an increase in                                                                   which we discuss in more detail later on, is partly behind

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Financial Strength
Figure 5: Gross Profits and Revenues 2012 to 2016 (USD Millions)

$12,000
                                              n Gross profit          n Revenue         n Cost of revenue

$10,000

  $8,000

  $6,000

  $4,000

  $2,000

        0
                           2012                      2013                  2014                 2015                 2016

Source: Priceline Group, 2017

this trend. Cost of revenue has been reduced and margins                   other profit. Gross profit for the group reached USD10.3
have been increased. Their cost of revenue in 2016 was                     billion in 2016 and they have achieved a CAGR of 26% over
reduced to USD428.3 million, four times lower than that of                 the five-year review period. In 2016 gross profit increased
2012 and a negative 30% CAGR over the last five years. In                  by 20% on the previous year. Growth on a constant
2016 costs were further cut, down by -32% and across the                   currency basis was approximately 23% if considering the
first quarters months of 2017 this section of Priceline’s costs            strength of the US dollar impacting results.
fell by a a further -39% YoY.
                                                                           International operations accounted for approximately
Gross profit includes agency, merchant and advertising/                    USD9.1 billion of Priceline’s total gross profit in 2016

Figure 6: Gross Margin Percentage 2012 to 2016

$12,000                                                                                                                         120%
                                  n Gross profit          n Revenue        n Cost of revenue n Gross margin
                                                                                                                 96.0%
$10,000                                                                                       93.1%                             100%
                                                                         89.8%
                                               84.1%
                         77.6%
  $8,000                                                                                                                        80%

  $6,000                                                                                                                        60%

  $4,000                                                                                                                        40%

  $2,000                                                                                                                        20%

        0                                                                                                                       0%
                       2012                        2013                  2014                2015                  2016

Source: Priceline Group, 2017

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Financial Strength
Figure 7: Gross Profit Percentage Change YoY by Quarter

 180%
                                                   n Q1 n Q2 n Q3 n Q4
 160%

 140%

 120%

 100%

  80%

  60%

  40%

  20%

    0%
               2012                   2013                    2014                     2015                      2016

Source: Priceline Group, 2017

compared to USD7.4 billion in 2015, and an increase           Gross profit as a percentage of gross bookings was 15.1%
of 22.3%. Gross profit from US business increased 5.7%        in 2016 compared to 15.5% in 2015. Priceline’s opaque
in 2016 owing to growth in gross profit of KAYAK and          bookings model, ‘Name Your Own Price’ had even more
OpenTable, and partially offset by a decrease in gross        premium pricing, leading to revenue margins in excess of
profit for Priceline.com.                                     30% but that has now been discontinued.

Agency gross profit represented the majority of total         As we have established, Priceline’s business is
gross profit and included commissions, certain GDS            predominantly generated from the hotel sector, and
booking fees and travel insurance fees. Merchant gross        because hotel bookings offer online travel agencies
profit included profit from their transaction revenues        higher revenue margins compared to other segments
from merchant retail, Express Deals sales and Name            such as air ticket bookings and car rental sales, it helps
Your Own Price sales, ancillary fees, certain GDS fees        them drive and sustain healthy margins. Priceline also
and customer processing fees. Advertising and other           currently has a significant share of the relatively less
revenues consisted primarily of KAYAK revenue from            competitive and huge international hotel market, and
referrals, OpenTable, Priceline.com display advertising       it is this which should keep the margins of their hotel
and Booking.com’s BookingSuite analysis services.             business at the higher end of the scale.

Total gross margin is gross profit as a percentage of total   The Priceline revenue margins (revenue earned by the
revenue. In 2016 Priceline’s gross margin was 96%, up 3%      travel service provider as a percentage of the size of the
from 2015 or 16% higher than margins of 2012. In the last     booking) differ between sectors – hotel bookings stood
couple of years annual growth of gross profit has slowed,     at over 19%, air tickets at about 3% and car rentals at
particularly in 2015, but there is not too much room left     about 9% in 2016.
to grow for their gross margins! It is expected, however,
that Priceline is in a good position to make higher           We recognize substantial seasonal trends in the
revenue margins from its international business, because      quarterly data for gross profit; for example, in 2016 Q1,
Europe and Asia-Pacific offer scope for premium pricing.      Q2, Q3 and Q4 recorded fluctuations in reported profit

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Financial Strength
of 7%, 20%, 48% and -37% respectively. The reason late       2.3 What Were the Different Revenue
2016 increased more than late 2015 was reportedly                Streams and How Much Did They Make?
because their revenues were disproportionately               Priceline’s biggest earner, Booking.com, is available in 43
affected by Priceline.com’s Name Your Own Price              languages so is well positioned to service international
reservation services, which are recorded as ‘gross’          online travel markets. In 2016 international revenues
with a corresponding cost of revenue, of which these         increased to USD9,603 million and domestic (US)
represented a smaller percentage of total revenues           revenues dropped to USD1,680 million. The figures
in 2016 compared to 2015. Priceline suggest that             represent a 22% increase for international revenue from
seasonality can sometimes be exaggerated in the short        2015 and a -8% reduction for US revenues. Throughout
term by their gross bookings growth rate, for example        2015 and 2016 the US dollar strengthened significantly
in periods when gross booking rates substantially            and, because results are reported in US dollars, it is
decelerate, operating margins benefit from relatively        important to note that international figures will be
less variable advertising expense. Gross profit growth is    impacted by a couple of percentage points. What is
typically less impacted by decelerating gross bookings       interesting is that 2016 was the first year in this review
in the near term due to revenue related to reservations      period that we have witnessed a decline. Growth in
booked in previous quarters.                                 previous years for the US market has at times been
                                                             more modest, between 1% and 6%, but this has slowed
Priceline generates the majority of its business in          much further over the last few years to the point
markets outside the US, where they’re headquartered.         of decline in 2016. Priceline’s Name Your Own Price
The company has built a deep global presence over its        business has been diminishing as consumers rejected
lifetime, strategically adding brands with international     the uncertainty of product quality so not meeting
appeal and expanding their global footprint as a result.     consumer demands stifled their US business somewhat.
Priceline established its market share in Europe during      In terms of international revenues, growth has also
the late 2000s and is now paying more attention to Asia      slowed since 2012, a particularly strong year growing at
and North America.                                           a significant 40% on 2011. 2015 was the toughest year,

Figure 8: Percentage of Gross Revenues Derived from US and International Markets 2012 to 2016

                                                     n US n International
 100%

  80%

                68%
  60%
                                     74%
                                                             79%                      80%
                                                                                                               84%

  40%

  20%
                32%                  26%
                                                             21%                      20%                      16%

    0%
                2012                 2013                    2014                     2015                     2016
Source: Priceline Group, 2017

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Financial Strength
Figure 9: YoY Percentage Change in Gross Revenues Derived from US and International Markets 2013 to 2016

    50%
                                                      n US               n International
                                     40%
    40%

                                                             32%

    30%
                                                                                                                     22%

    20%

                                                                                            11%
    10%               6%

                                                 2%                             1%
      0%
                              2013                    2014                           2015                     2016

    -10%                                                                                                -8%
Source: Priceline Group, 2017

growing by just 11%, owing to terror attacks etc., but in          the hotel market is dominated by large hotel chains,
2016, Priceline picked up the pace once again, growing             and that poses certain opportunities for Priceline.
their international revenues by 22%.                               Priceline have designed reservations systems that are
                                                                   appealing to small chains and independent hotels
It is clear that international markets are at the heart of         and have become a very competitive and well-known
Priceline’s business success, and increasingly so. In 2012         distribution channel for accommodation suppliers in
international gross revenue accounted for 68% of total             these regions.
revenues and in 2016 this proportion increased to 84%.
They operate not only in markets with high growth                  The proportion of gross bookings by international
but also markets that combined are substantially                   markets has historically been much higher than gross
greater in size than the US. Europe and Asia also have             revenues, possibly indicating greater margins in the
very different characteristics than the US; they are               US market. The change in the proportion of gross
particularly fragmented compared to the US where                   bookings from domestic versus international markets

Figure 10: Share of Gross Bookings by Source Market from 2012 to 2015

2015                                                   88%                                                             12%

2014                                                   87%                                                             13%

2013                                                   85%                                                             15%

2012                                                   82%                                                             18%

       0%            10%             20%   30%         40%         50%          60%           70%    80%        90%          100%

Source: Expedia Inc. (2017)                      n International         n US

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Financial Strength
Figure 11: YoY Percentage Change in Revenues and Gross Bookings Derived from US and International Sales 2014 to 2016

 50%
                                       42%
 40%

                                32%                                               31%
 30%
                                                                                                                      22%
 20%
                        15%
                                                                  13%                                                       12%
                                                                           11%
 10%

                2%                                         1%
  0%
                            2014                                        2015                                 -2%
                                                                                                                   2016
-10%                                                                                                  -8%
                           n Revenue derived fom US sales                 n Gross bookings derived in the US
                           n Revenue derived from international sales     n Gross bookings derived internationally
-20%
Source: Priceline Group, 2017

has been less significant, because in 2016 international                the vast majority of Priceline’s revenue, a fruitful lower
markets contributed 88% of gross bookings, up from                      risk approach in that they generate revenue from
82% in 2012. Therefore, based on the situation that                     transactions without being the merchant. Rather, they
international markets are contributing relatively similar               connect the travel consumer with the travel supplier,
proportions of gross bookings during the review period,                 and collect a commission when the booking is made.
but a greater proportion of gross revenues, it would                    Priceline’s goal in the context of its agency model is to
suggest either margins in the US are tightening or                      maintain and grow the volume of transactions, thus
margins in the international markets are increasing.                    drive revenue from associated commissions. This model
                                                                        gives them less control around pricing compared to the
Considering year-on-year growth patterns over the last                  merchant model, but delivers higher profit margins as it
three years, we can identify a real shift in the source                 has almost no associated cost of inventory on sales.
markets for Priceline bookings and revenues, particularly
in 2016 when both bookings and revenues from the                        Merchant revenues are Priceline’s second largest
US market declined, by -2% and -8% respectively.                        segment; however, this model has not actually
Despite modest growth earlier in the review period, in                  contributed to the recent growth of the company,
2014 and 2015 both bookings and revenue in the US                       with a -0.7% CAGR between 2012 and 2016. In 2016
market increased. In 2015, for example, bookings grew                   the merchant model generated USD2,048 million
by 13% and revenue by 1%, but 2016 really indicates                     in gross revenue, a significantly smaller value than
a weakening domestic market. International bookings                     agency transactions. Merchant bookings include
and revenue on the other hand have continued to                         merchant accommodation reservations of Booking.
increase, at 12% and 22% in 2015 and 2016 respectively.                 com and Agoda.com, revenue from rentalcars.com, and
                                                                        merchant airline ticket sales from Priceline.com.
2.3.1	Agency Versus Merchant
In 2016 agency revenues reached USD7,982 million,                       Their declining proportion of total sales is not because
up by 22% from 2015, and a 26% CAGR during the                          of its less favorable cost of revenue, but is driven mainly
2012-2016 review period. The growth was primarily                       by the supply side according to Priceline, who do not
due to Booking.com. The agency model accounts for                       have as much perishing inventory as previous years,

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Financial Strength
Figure 12: Revenue by Model 2012 to 2016 (USD Thousands)

$9,000,000
                                                                                      n Agency n Merchant n Advertising & Other                                                                                     $7,982,116
$8,000,000

$7,000,000
                                                                                                                                                                     $6,527,898
                                                                                                                    $5,845,802
$6,000,000

$5,000,000
                                                                 $4,410,689

$4,000,000
                   $3,142,815
$3,000,000
                                 $2,104,752                                 $2,211,474                                         $2,186,054                                                                                     $2,048,005
                                                                                                                                                                                 $2,082,973
$2,000,000

$1,000,000                                                                                                                                                                                     $613,116                                      $712,885
                                                                                           $171,143                                        $410,115
                                             $13,389
            0
                                   2012                                              2013                                           2014                                             2015                                               2016

Source: Priceline Group, 2017

and because suppliers have raised their efforts in direct                                                                      behalf of customers, especially for those not accepting credit
distribution with their own deals. The opaque travel                                                                           cards, as well as creating more flexibility for consumers in
industry (such as their Name Our Own Price) is fading                                                                          terms of the form and timing of payment. It remains to be
and with that, their merchant revenues follow that trend.                                                                      seen if this shifts the balance in the next few years.

In their goal to increase the volume and variety of                                                                            Seasonality patterns for merchant and agency gross
accommodations available on Booking.com, according                                                                             bookings differ. Agency bookings are more seasonal and
to Priceline they are, however, increasingly processing                                                                        Q2 and Q3 generate the annual peaks. For example, in
transactions on a merchant basis, facilitating payments on                                                                     2016 Q1, Q2, Q3 and Q4 accounted for USD14.5 billion,

Figure 13: Quarterly Gross Bookings – Agency Versus Merchant

$20,000
                                                                                                          n Agency                        n Merchant
$18,000

$16,000

$14,000

$12,000

$10,000

  $8,000

  $6,000

  $4,000

  $2,000

        0
             2012 Q1

                       2012 Q2

                                   2012 Q3

                                             2012 Q4

                                                       2013 Q1

                                                                 2013 Q2

                                                                           2013 Q3

                                                                                      2013 Q4

                                                                                                2014 Q1

                                                                                                          2014 Q2

                                                                                                                     2014 Q3

                                                                                                                                2014 Q4

                                                                                                                                            2015 Q1

                                                                                                                                                      2015 Q2

                                                                                                                                                                 2015 Q3

                                                                                                                                                                           2015 Q4

                                                                                                                                                                                     2016 Q1

                                                                                                                                                                                                2016 Q2

                                                                                                                                                                                                          2016 Q3

                                                                                                                                                                                                                    2016 Q4

                                                                                                                                                                                                                              2017 Q1

                                                                                                                                                                                                                                          2017 Q2

                                                                                                                                                                                                                                                    2017 Q3

Source: Priceline Group, 2017

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Financial Strength
USD15.4 billion, USD15.8 billion and USD13 billion,          In 2016 agency revenue grew to 74% of Priceline’s
respectively. The seasonal trend within the merchant         total gross revenue, up from a 60% proportion in 2012.
model is more flat. However, they do also peak in Q2 and     The agency model has eroded the significance of the
Q3. In 2016 gross bookings under the merchant model          merchant model which now accounts only for 19% of
generated USD2.1 billion, USD2.5 billion, USD2.7 billion     total gross revenue, a big change from the 40% back
and USD2.1 billion for Q1, Q2, Q3 and Q4 respectively.       in 2012. We can see that advertising revenues are have
                                                             become a key part of the revenue mix, growing to
2.3.2	Revenue by Vertical and Season                         7% of total revenue in 2016 but strong growth in the
Advertising revenue has been Priceline’s largest and         core agency accommodation bookings means that
newest growth area, resulting in a 170% CAGR over            advertising revenues decreased to 6% of the revenue
the period 2012 to 2016. This is a particularly high rate    mix across the first three quarters of 2017. The real
because growth is initially expected when they only          growth of this revenue stream began in 2013.
recently began to push this revenue stream in relation
to others. Targeted advertising as a revenue stream has      According to Priceline, Q1 is typically their lowest
generally grown to become more important for OTAs            level of profitability due to seasonal timings. In
in recent years as they capitalize on their huge volumes     Asia-Pacific business they experience the highest
of online consumer traffic. Priceline generated USD713       levels of accommodation bookings in Q3 and Q4,
million in gross revenue from their advertising revenue      and the highest levels of travel consumption in Q4.
streams during 2016. Growth is primarily generated           In Europe and North America the highest levels of
from their KAYAK metasearch platform, OpenTable              accommodation checkouts are in Q2 and Q3, thus
reservation and subscription fees, and advertising           where their highest levels of profitability are right now.
revenue from Priceline.com. KAYAK has experienced
healthy growth and is currently expanding into key           2.4	How Many Room Nights and Flights Were
regions such as Asia and Latin America and Momondo               Sold?
has added a strong European brand into the advertising       By taking a look at the different travel product
revenue mix. Growth rates for advertising revenue are        volumes distributed via the Priceline websites and
expected to slow over the next few years, but continue.      considering room nights, car rental and air tickets

Figure 14: Revenue Generated by Model as a Percentage of Gross Revenue 2012 to 2016

                                            n Agency n Merchant n Advertising & Other

H1 2017                                       78%                                                    17%          7%

    2016                                     74%                                                     19%          7%

    2015                                     71%                                                  23%             7%

    2014                                    69%                                                   26%               5%

    2013                                65%                                                    33%                     3%

    2012                              60%                                                   40%                        0.3%

          0%            10%     20%     30%         40%       50%       60%         70%        80%         90%         100%
Source: Priceline Group, 2017

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Financial Strength
Figure 15: Products Sold by Millions of Bookings made 2012 to 2016

     600
                                                                                                         557
                                          n Room nights   n Rental car days n Airline tickets

     500

                                                                                   432

     400
                                                           346

     300                            271

                198
     200

     100                                                                                                       67
                                                                  52                      60
                                            44
                        32
                                6                 7                     8                       8                     7
        0
                       2012                2013                  2014                    2015                  2016

Source: Priceline Group, 2017

sold, as this is all they publicly report, it is very            Car rental has a higher margin than airline tickets,
clear that accommodation is Priceline’s key product              but is much lower than hotel bookings. Car rentals
and where the growth is. In 2016 they sold 557                   are particularly useful in their consumer offering of
million room nights, up 29% from 2015 and a 30%                  packages, which overall have better margins.
CAGR over the five-year review period. Rental car
days have performed well, rising at a 20% CAGR                   Airline ticket sales have been lagging behind
between 2012 and 2016, but this is based on far                  throughout the entire review period and in the last
lower volumes. In 2016 they sold 67 million rental               two years they reported negative growth rates of
car days. This is higher than airline tickets which is           -1.6% and -5.2% in 2015 and 2016 respectively. This
a comparatively insignificant proportion of their                is due to a decline in Priceline.com’s retail airline
overall business, and growth has been relatively                 ticket reservations and the discontinuation of Name
static over this review period, a 2012-2016 CAGR of              Your Own Price in September 2016, partially offset
3%. Priceline sold 7 million airline tickets in 2016,            by an increase in Priceline.com’s Express Deals airline
down from 8 million in 2015.                                     ticket reservations. Airline bookings are increasingly
                                                                 common on metasearch sites such as Priceline.com
In terms of products, as we have established above,              and KAYAK, but still make up a small part of their
the hotel business remains the fastest growing                   overall business. Margins on these transactions are
segment for Priceline and makes up the majority                  also very low.
of their revenue and profit, driven by the fact that
hotel bookings have higher margins compared to                   Some of the success of Booking.com has come from its
other products. In 2013 annual growth rates for room             wide range of accommodation products, not charging
nights and rental car days were on a par at 37%,                 a booking fee and being able to instantly confirm
but since then, the volume of room nights sold has               reservations. They intend to increase their supply
grown at a faster rate – last year by 29% for room               base in order to expand consumer choice further.
nights, compared to 11% for rental car days. Priceline           Booking.com is currently becoming more aggressive in
expect their room night growth to decelerate further.            penetrating the single-owner, single-room market – a

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Financial Strength
Figure 16: YoY Percentage Change in Products Sold 2013 to 2016

 40%
           36.9% 37.0%
                                  n Room nights           n Rental car days        n Airline tickets
 35%

 30%                              27.9%
                                                                                    28.7%

                                                          24.9%
 25%                                                                                                        24.1%

 20%                                      18.1%
                                                                  15.6%
 15%                                                                                                                13.4%
                                                  12.0%                                     11.2%
                           9.1%
 10%

  5%

  0%
                   2013                   2014                    2015                      2016                H1 2017
                                                                          -1.6%
 -5%
                                                                                                    -5.2%                   -5.6%
-10%
Source: Priceline Group, 2017

growing segment of the industry, referred to as vacation          46% in 2016. They have followed this up by continuing
rentals or alternative accommodations. They do not                the drive to increase the number of available properties
currently split the growth rate of hotels and vacation            to 1,534,000 at the time of writing (November 2017),
rentals, but suggest vacation rentals are contributing to         equivalent to a further increase of 38%. This includes
their room night growth quite substantially, and expect           more just over 860,000 vacation rentals, representing
this will grow.                                                   a notable slowdown in growth on this front to a crawl.
                                                                  According to Priceline, their growth in the vacation
Priceline suggest the growth in their hotel business is           rental sector had been helped by not charging
partly a result of:                                               a booking fee like their competitors Airbnb and
                                                                  HomeAway. The recent slowdown may be indicative
■■Growth in the online travel market.                             of over exposure in the sector as a whole as reports
■■Emerging market travel growth (focused on APAC                  from UBS and Morgan Stanley have also suggested that
  and South America).                                             Airbnb’s growth has also slowed down recently (CNBC,
■■Increasing mobile device use for travel research and            2017; FT, 2017a).
  booking.
■■Building accommodations supply globally.                        Priceline’s vacation rental properties generally consist of
■■Effective content and distribution.                             single-unit and multi-unit villas, apartments, ‘aparthotels’
■■Consumer experience improvements on their                       (which have a front desk and cleaning service) and
  website and mobile apps.                                        chalets, they are generally self-catered and directly
                                                                  bookable. As they represent an increasing proportion
Booking.com generated the majority of the company’s               of total properties added to their websites, they expect
room night growth and by the end of 2016 they listed              their gross bookings growth rate and property growth
over 1,115,000 properties on their website, including             rate to diverge over time as this segment offers fewer
568,000 vacation rental properties. This has increased            booking opportunities, thus this may negatively affect
from a total of 852,000 properties in 2015, equivalent to         their profits margins owing to different characteristics
an increase of 31% YoY. Vacation rental properties rose           from hotels.

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Financial Strength
Figure 17: YoY Percentage Change in Products Sold by Quarter from 2012 to Q3 2017

    50%
                                                                                                        n Room nights                                n Rental car days                            n Airline tickets
    40%

    30%

    20%

    10%

      0%

    -10%

    -20%
             2012 Q1

                       2012 Q2

                                 2012 Q3

                                           2012 Q4

                                                     2013 Q1

                                                               2013 Q2

                                                                         2013 Q3

                                                                                   2013 Q4

                                                                                             2014 Q1

                                                                                                       2014 Q2

                                                                                                                 2014 Q3

                                                                                                                           2014 Q4

                                                                                                                                     2015 Q1

                                                                                                                                               2015 Q2

                                                                                                                                                          2015 Q3

                                                                                                                                                                    2015 Q4

                                                                                                                                                                              2016 Q1

                                                                                                                                                                                        2016 Q2

                                                                                                                                                                                                   2016 Q3

                                                                                                                                                                                                             2016 Q4

                                                                                                                                                                                                                       2017 Q1

                                                                                                                                                                                                                                 2017 Q2

                                                                                                                                                                                                                                           2017 Q3
Source: Priceline Group, 2017

The below chart illustrates the change in volumes of                                                                       pattern, but car rental appears more erratic quarter
sales by product in each quarter for the last five years.                                                                  to quarter. Airline ticket sales growth were looking
Room nights and rental car days have followed a similar                                                                    relatively good in 2014, but are now in negative growth.

www.eyefortravel.com                                                                                                                                    The Future of the Online Travel Giants: priceline                                           | 19
Costs and Debts
3.

Costs and Debts

Priceline need to maintain their expenses to fend off              with other costs, such as personnel, sales and IT costs,
the competition and, whilst the mix of expenses may                the total operating expenses have drifted upwards,
well change, the way Priceline split their budgets has             causing concern among investors and undercutting the
remained relatively static recently. During our review             headline stellar performance of Priceline’s EBITDA, with
period Priceline have slightly changed their reported              stocks taking a beating after Q2 and Q3 results in 2007,
expenditure categories for advertising. In 2012 and                even though earnings growth was strong in both (see
2013 they reported online and offline advertising,                 Chapter 6 for more).
but in 2016 adjusted their 2014 onwards advertising
to performance and brand advertising. Figure 18                    In terms of overall expenditures we can see that
shows revenues, gross profits, and costs as reported               advertising makes up the majority of Priceline’s
by Priceline. Priceline has been able to push down its             expenditure, a total of 61% in 2016, rising to 63% in
cost of revenues, leaving Priceline with a self-reported           2017. If the sales and marketing costs category is
gross margin of 97.6%. However, this doesn’t tell the              included, then this rises to 70% of costs. The majority of
whole story, with the cost of advertising continuing to            their advertising spend is online or performance based,
rise across the period, with a CAGR of 23.6%. Combined             56% of all costs in 2016 and 58% in H1 2017. Personnel

Figure 18: Expenses Versus Revenues 2012 to 2016 (USD millions)

$12,000

$10,000

 $8,000

 $6,000

 $4,000

 $2,000

        0
                  2012                     2013                    2014                     2015                     2016

                         n Total operating expenses n Cost of revenue n Revenue n Gross profit n Advertising costs
Source: Priceline Group, 2017

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Costs and Debts
  Figure 19: Priceline Costs by Company-Defined Categories 2012 to 2016

   2016                                     56%                                5%        7%             22%                 7%   2%

   2015                                   54%                                 5%         7%             23%                 8%   2%

   2014                                   54%                                 6%         7%             22%                 8%   2%

   2013                                         56%                            4%        7%             22%                 8%   2%

   2012                                         58%                                2%    9%             21%                 8%   2%

         0%            10%         20%          30%       40%           50%        60%           70%    80%           90%         100%

                            n Online advertising n Offline advertising n Performance advertising n Brand advertising
                                       n Sales & marketing n Personnel n General & administration n IT
  Source: Priceline Group, 2017

  Figure 20: Priceline Costs by Company-Defined Categories 2014 to H1 2017

H1 2017                                     58%                                    5%      7%           20%                 8%   2%

   2016                                   56%                                  5%         7%            22%                 7%   2%

   2015                                   54%                                 6%         7%             23%                 8%   2%

   2014                                         54%                           6%         7%             22%                 8%   2%

         0%            10%         20%          30%       40%           50%        60%           70%    80%           90%         100%

              n Performance advertising n Brand advertising n Sales & marketing n Personnel n General & administration n IT
  Source: Priceline Group, 2017

  Figure 21: Priceline Operating Expenses and YoY Percentage Change (USD Millions)

  $80                                                                                                                            50%
                                            47%
                                                                                                              74.08
                                                                                                                                 45%
  $70
               n Total operating expenses                         37%
               n % change                                                                                     39%                40%
                                                                                         53.33
  $60
                                                                                                                                 35%
  $50                                                            45.11
                                                                                                                                 30%
                                            33.03
  $40                                                                                                                            25%
                    22.54
                                                                                                                                 20%
  $30

                                                                                         18%                                     15%
  $20
                                                                                                                                 10%
  $10
                                                                                                                                 5%

   $0                                                                                                                            0%
                     2012                   2013                 2014                     2015                2016

  Source: Priceline Group, 2017

  www.eyefortravel.com                                                                 The Future of the Online Travel Giants: priceline   | 21
Costs and Debts
make up the next biggest cost taking 20% of these               3.1	How Much Is the Priceline Group
total budgets, followed by sales and marketing at 8%,               Spending on Marketing?
general and administration at 7%, and IT using 2% (see          Sales and marketing, which does not include their
Figure 20).                                                     advertising costs, increased to USD435 million in 2016,
                                                                up from USD353 million in 2015, and had a 2012-2016
With growth in the overall business comes an increase in        CAGR of 22%, reflecting the growth patterns in both
operating expenses. In 2016 Priceline’s operating expenses      revenue and bookings. Sales and marketing expenses
reached USD74 million, an increase of 39% from 2015             consist primarily of:
and a 35% CAGR during 2012-2016. These growth rates
are over and above the growth in gross bookings and             ■■Merchant transaction credit card and other payment

revenue, at 24% and 20% respectively. 2013 saw a big shift          processing fees.
in operating expenses, increasing by a significant 47%.         ■■Third party call centers, website content translation

                                                                    fees, etc.
However, with cost of revenues under control, and gross         ■■Customer relations.

revenue going up, margins as we looked at above are             ■■Merchant transaction customer chargebacks.

healthy. Cost of revenues consisted primarily of:               ■■Bad debt usually related to agency accommodation

                                                                    commission receivables.
■■The cost paid to travel suppliers for Priceline.com’s         ■■Promotional and trade shows.

  Name Your Own Price and package services, net of
  taxes and charges                                             According to the Priceline 2016 annual report, the
■■Fees to third parties by KAYAK and Priceline.com              increase in sales and marketing spend is due to increased
                                                                transaction volumes and a higher provision for customer
The decrease in cost of revenues is partly due to the           chargebacks associated with merchant transactions.
decrease in Priceline.com’s Name Your Own Price                 Information Technology (IT) expenses have increased
services, as well as a positive impact by a reduction in        because of their growth in worldwide operations.
travel transaction taxes of USD5.1 million in Q3 2016
related to a cash refund from the State of Hawaii.              Advertising, both online and offline, increased at a 30%

Figure 22: Sales and Marketing Spend 2012 to 2016 (USD Millions)

$500                                                                                                                 35%
               n Sales and marketing   n % change
$450                                                                                               $435.2
                                                                                                                     30%
$400
                                                                                  $353.2
$350                                                                                                                 25%
                                                           $310.9
$300
                                                                                                                     20%
$250                                    $235.8
                     $195.9                                                                                          15%
$200

$150                                                                                                                 10%
$100
                                                                                                                     5%
 $50

   $0                                                                                                                0%
                       2012              2013                2014                  2015              2016

Source: Priceline Group, 2017

www.eyefortravel.com                                                            The Future of the Online Travel Giants: priceline   | 22
Costs and Debts
CAGR during 2012-2016 and they spent USD3.8 billion          a year-over-year decline in advertising ROIs and has
on advertising in 2016, a three-fold rise from 2012          increased again across the first three quarters of 2017
which was a much smaller USD1.3 billion budget. This         from 34.1% of gross profit in 2016 to 34.7% in 2017.
slowed slightly in the first three quarters of 2017 but
was still a substantial 22% YoY rise.                        Brand advertising is predominantly related to Booking.
                                                             com, KAYAK, Priceline.com and agoda.com and includes:
From 2012 to 2015 Priceline divided their advertising
spend by online and offline. Online advertising has          ■■TV advertising.

been a key driver of the Priceline business, but offline     ■■Online video advertising.

has marginally increased in significance in terms of the     ■■Online display advertising.

overall budget. In 2012 online advertising accounted
for 97% of all advertising spend, but during 2013, 2014      Priceline intends to continue to promote brand
and 2015 offline advertising grew to 7%, 9% and 7%           awareness through online and offline advertising,
of total advertising spend in those respective years.        including executing various brand campaigns as
This continued to be relatively stable, remaining at 9%      they expand into new markets around the world.
through the first three quarters of 2017.                    It is fundamental for Priceline to acquire and retain
                                                             customers through maintaining and strengthening
Performance advertising includes:                            their brands.

■■Search engine keyword purchases.                           According to Priceline, in 2016 their performance
■■Referrals from metasearch and travel research              advertising efficiency declined over 2015 due to growth
  websites.                                                  in paid traffic channels, lower ROIs and timing and
■■Affiliate programs.                                        booking versus travel.
■■Other performance-based advertisements.

                                                             To generate traffic to their websites they mainly use
Performance advertising as a percentage of gross profit      third-party websites including online search engines
increased in 2016 due to paid traffic channels and           (primarily Google), metasearch and travel research
Figure 23: Advertising Spend by Self-Reported Categories 2012 to 2016 (USD Millions)

$4,000
                  n   Online advertising
                  n   Offline advertising                                                            $295.7
$3,500
                  n   Performance advertising
                  n   Brand advertising
$3,000
                                                                                 $273.7

$2,500                                                     $257.1

$2,000                                          $127.5
                                                                                                    $3,479.3
$1,500                                                                           $2,738.2
                         $35.5
                                                           $2,334.5
$1,000
                                                $1,798.6

  $500                 $1,273.6

     $0
                          2012                   2013        2014                  2015               2016

Source: Priceline Group, 2017

www.eyefortravel.com                                                      The Future of the Online Travel Giants: priceline   | 23
Costs and Debts
Figure 24: Percentage Change in Advertising Spend in Self-Reported Categories 2013 to Q1 to Q3 2017

300%
                259.1%                                                                          n     Online advertising
                                                                                                n     Offline advertising
250%
                                                                                                n     Performance advertising
                                                                                                n     Brand advertising
200%

150%

100%                                81.5%

 50%       41.2%                31.2%                                                                                        22.3%
                                                       18.5%                                    27.1%
                                                                                                                                 19.4%
                                                                                                     8.0%
   0%
                                                           -7.2%

-50%
                    2013                2014                   2015                            2016                      2017 Q1-3

Source: Priceline Group, 2017

services, as well as affiliate marketing. Pay-per-click        decade this low-end funnel strategy has driven their
advertising is core to their strategy. They bid on             business, but in 2013 they started offline advertising
hundreds of millions of multilingual keywords across           in the US and are eyeing up more investments in this
desktop and mobile to raise their share of demand              area to boost Booking.com’s presence as a household
channels. Priceline have continuously fine-tuned their         brand in travel. They have also recently invested in TV
sites so that when they attract the consumer through
                                                               Figure 25: 2016 Costs as a Percentage of Gross Profit
advertising expenditure, they raise conversions and
turn buyers into long-term loyal customers. Mobile
is increasingly important for Priceline and their
competitors, and they have experienced a significant
shift of business to mobile platforms. Performance
advertising sits across both web and mobile channels.                                                               33.7%
                                                                         40%
In terms of value, Priceline spent USD296 million on
brand advertising in 2016, and USD3,479 million on
performance advertising.
                                                                                                                    2.9%
In 2016 the increase in brand advertising was due to                                                              4.2%
                                                                                    1.4%
investments in online video and TV advertising for
                                                                                       4.4%             13.1%
Booking.com; figures include production costs. KAYAK
and Priceline.com were allocated lower TV advertising
                                                               n   Performance advertising
budgets in 2016 which slightly offset the above                n   Brand advertising
increase. Booking.com has been increasingly using              n   Sales & marketing
                                                               n   Personnel
TV advertising and targeting consumers at the mid to           n   General & administration
higher end of the travel funnel, whereas historically          n   IT
                                                               n   Other
they tended to focus very low in the funnel, where
consumers have a very clear intent. Over the last              Source: Priceline Group, 2017

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Costs and Debts
Figure 26: Priceline Total Debt Holdings 2012 to 2016 (USD Millions)

$7,000                                                                                                               140%
                 n Long-term debt   n Y/Y change                                $6,158.4          $6,170.5
                                                          121.0%
$6,000                                                                                                               120%

$5,000                                                                                                               100%
                                        97.5%
$4,000                                                    $3,849.8                                                   80%

                                                                                  60%
$3,000                                                                                                               60%

$2,000                                 $1,742.0                                                                      40%

$1,000               $882.0                                                                                          20%
                                                                                                    0.2%
     $0                                                                                                              0%
                       2012              2013              2014                   2015               2016

Source: Priceline Group, 2017

advertising for Europe as well, hoping to create greater       3.2 Debts
awareness up in the funnel, and then, as a result,             Priceline have been focusing on organic growth in the last
improve their performance marketing at the low end             year. Their debt did not change significantly between 2015
of the funnel.                                                 and 2016. In 2016 long-term debt was USD6.1 billion. The
                                                               size of their debt jumped particularly significantly in 2014
Whilst brand and offline advertising is increasing in          by 121% to USD3.8 billion. Over the five-year review period
comparison to the historically more pure online focus,         the CAGR was 63%, up from just USD881 million in 2012.
performance advertising is at their core and in 2016
they raised the budgets by 27%, compared to an 8%              According to Priceline, consequences of their debt
increase for brand advertising. Across the first three         could be:
quarters of 2017, overall combined advertising costs
from both categories rose by 22%, with performance             ■■Take a portion of their cash flow from operations and

increasing 22.3% and brand increasing 20.4%.                         capital expenditures.
                                                               ■■Increase their vulnerability.

In 2016 performance advertising accounted for 34%              ■■Reduce their ability to obtain additional financing on

of gross profit, compared to 2.9% of brand advertising.          acceptable terms.
Personnel made up 13% of gross profit.                         ■■Decrease their flexibility when planning for or

                                                                 reacting to changes in their business or the industry.

www.eyefortravel.com                                                          The Future of the Online Travel Giants: priceline   | 25
Mergers and Acquisitions
4.

Mergers and Acquisitions

The Priceline Group have introduced a range of brands             this might be a namesake brand, it is not the company’s
to their family over the last 20 years. Priceline’s acquisition   most important website in terms of revenue. It was
of Booking.com in 2005 has driven a major part of their           until recently famous for its opaque travel reservation
financial success, particularly due to their ability to capture   business Name Your Own Price and Express Deals,
the fragmented European accommodations market. The                but, as we have established, demand for this opaque
resulting cash gave Priceline financial strength to buy some      product is declining and their focus has changed.
of the competition and invest in other growth opportunities.
                                                                  Booking.com: This is focused on hotels in Europe and
Booking.com has easily been the most successful of                their most important site contributing the majority of
Priceline’s acquisitions and represents Priceline’s general       revenues to the group. It is also a competitor in the
philosophy towards M&A. Compared to other major                   alternative accommodation space, listing a growing
players in the digital space, Priceline has not been as           number of vacation rental properties.
acquisitive, preferring to make careful investments on
strong growth prospects which can add to their bottom             agoda.com: This is similar to Booking.com but
line rather than outright buying up nearest competitors.          focused on the APAC markets and based in Singapore.
The independent management of their brands helps                  It operates primarily on the merchant revenue model,
them remain agile and adaptable to changing consumer              unlike the rest of the OTA brands.
demand and market dynamics. This outlook and structure
does not mean that Priceline will not feel the need to add to     rentalcars.com: This competes with Expedia’s
or adjust its portfolio, however. Booking.com’s strength is a     carrentals.com and, whilst generating both merchant
marker of success but it does leave the company leveraged         and agency bookings, including opaque, margins are
towards the brand and the accommodation sector. The               low. The car product does, however, enable package
overall online travel environment is also highly competitive.     products and helps service the entire customer trip.
Priceline and its associated brands will therefore most
likely look to make acquisitions that they can incorporate        OpenTable: Is a website and a mobile app focused
to enhance their brand offerings, particularly from a             on restaurant reservations targeting in-destination
technology perspective. Otherwise, Priceline seems most           sales, charging a flat fee for all bookings. The brand was
likely to step up its holdings into its promising Chinese         established in the US, but the network was recently
investments of Ctrip and Meituan Dianping.                        expanded into Europe as growth potential there
                                                                  is considered particularly significant. It has not yet
The Priceline Group brands currently are:                         performed as they hoped so they have adjusted their
                                                                  short/long-term approach recently.
priceline.com: This is heavily focused on the US and
more of a metasearch tool for all travel products. Whilst         KAYAK.com & Momondo: This brand brought

www.eyefortravel.com                                                           The Future of the Online Travel Giants: priceline   | 26
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