Will an online travel agency’s acquisition of a metasearch service result in a genuine referral service or just a bigger billboard?
That’s what some analysts are asking in the wake of recent decisions by Priceline and Expedia to acquire metasearch travel sites Kayak and Trivago, respectively, for a combined $2.4 billion.
Metasearch sites let users run hotel, air and car rental queries, then canvass both online travel agencies (OTAs) and supplier websites for the best prices.
Kayak, which was founded in 2004 and went public last July, doesn’t break out its revenue sources, but Lazard Capital Markets analyst Jake Fuller estimated the company derives about 45% of its revenue from supplier and OTA referral fees generated when metasearch users click through and make a reservation.
While the rest of Kayak’s revenue comes from advertising, the breakdown is shifting gradually toward a higher percentage of referral-based revenue.
“Metasearch is supposed to bring the horse to water,” said Henry Harteveldt, travel industry analyst with Hudson Crossing. The OTA and suppliers, he said, “have to make them drink.”
Metasearch engines like Kayak, Trivago and Hipmunk, which was founded in 2010, have grown in popularity as more people book travel through the Internet and put a greater emphasis on the best deal than on any particular brand loyalty. For the three months ended Sept. 30, Kayak processed 302 million queries, up 31% from a year earlier.
Such growth in metasearch popularity will likely be duplicated and even increased overseas, where the hotel market is far more fragmented than it is in the U.S. and where customers will value metasearch’s broader reach and its ability to track down the best prices.
That growth persuaded Priceline to agree last November to buy Kayak for $1.8 billion.
Last week, Priceline received approval from U.S. antitrust regulators to go forward with the acquisition. With Federal Trade Commission approval, Priceline appears to be cleared for its acquisition of Kayak, which is slated to close by the end of March.
Meanwhile, Expedia last month agreed to buy Germany-based Trivago for $632 million. And this month, Expedia was identified as an investor in Silicon Valley-based metasearch company Room 77 and its $30.3 million third round of funding.
Granted, the acquisitions aren’t likely to drastically shift how the metasearch engines refer customers to their new parent companies. That’s because metasearch is strictly valued on finding the best travel options among all potential suppliers, and any perception that the process is being compromised to favor affiliate OTAs would, as Harteveldt put it, “sabotage the investment.”
Still, since about 85% of Kayak’s queries are for air tickets, Fuller said, the acquisitions might mean different things for Priceline and Expedia, both of which are looking to spur growth in overseas online travel markets that are less mature than in the U.S.
Expedia’s buyout of Trivago will likely pay off sooner than the Priceline-Kayak deal because Trivago is better established in Europe than Kayak and generates more queries for the highly fragmented European market.
Meanwhile, Priceline, which already accounts for about 11% of Kayak’s revenue by way of referral fees and advertising, will need to invest in building out the Kayak brand overseas in order to ultimately get a longer-term return on its investment.
As a result, Fuller says the Kayak acquisition will actually reduce Priceline’s 2013 earnings by as much as 2%, whereas Trivago will boost Expedia’s earnings by about 1%.
“There’s a lot more work to do with Priceline,” Fuller said. “Expedia’s getting the better deal.”
Follow Danny King on Twitter @dktravelweekly.