New semi-opaque sales model has Priceline fighting its legacy

By Danny King
In early 2010, Priceline introduced a large, hairy, knuckle-cracking henchman named "Big Deal" as a sidekick to William Shatner's "The Negotiator." Big Deal's mission was to intimidate helpless hotel managers into lowering their room rates.

Two years later, the Negotiator and Big Deal are gone, and Priceline finds itself doing battle with a more formidable opponent than hotel managers: its own legacy, the opaque sale.

Priceline has long been known for its "name your own price" bidding feature, extolled in those campy Shatner ads that began back in 1998, pitching hotel-room discounts of as much as 60% off published rates.

It's a tough image to undo. Yet Priceline now finds itself looking to gain ground on Expedia for U.S. online-booking share by trying to lure more travelers to semi-opaque hotel listings.

Priceline made its most recent strategic move late last month by introducing a semi-opaque hotel-booking feature it calls Express Deals. The online travel agency (OTA) says Express Deals offers hotel rooms for as much as a 45% discount off the lowest published rates.

Much like Expedia's 'Unpublished Rate' feature and its Hotwire division, Express Deals lets customers book a yet-to-be-disclosed hotel reservation based on price and specific characteristics such as neighborhood, star rating, customer ratings and amenities. Priceline then discloses the name of the hotel once the reservation is booked.

Priceline stepped up that effort last week by promoting a special Express Deals sale through July 16 that offers discounts of as much as 50% off published rates.

Express Deals comes close on the heels of the company's decision earlier this year to kill off the Negotiator in a TV ad showing the character meeting his demise in a fiery bus crash. The Negotiator first appeared in 2007, joined in 2010 by Big Deal.

"They're realizing that consumers are finding 'naming your own price' to be a little more cumbersome," said Herman Leung, an analyst with Susquehanna Financial Group who covers both Priceline and Expedia. "They don't want to be viewed only as a discount-travel provider."

Within the online travel landscape, Price-line is a bit of an oddity because it's the largest U.S.-based OTA yet is still a relative fringe player when it comes to online-travel bookings by U.S. consumers. Founded in 1997, a year after Microsoft launched Expedia (and two years before Microsoft spun it off), Priceline started making its big push overseas with its 2005 acquisition of Europe-based Bookings BV, followed by its purchase of Asian OTA Agoda.com two years later.

As a result, Priceline, whose 2007 revenue was just 55% of Expedia's, overtook Expedia in annual sales in 2010. Last year, Priceline generated $4.36 billion in revenue, compared with $3.45 billion for Expedia and just $767 million for Orbitz. (Travelocity is owned by closely held Sabre Holdings, so its revenue figures are not public.)

Adjusted Stock Prices For Three Public OTAsInvestors have responded in kind. Priceline's share price has quadrupled during the past two years, to more than $680 a share as of last week. By comparison, Expedia's stock price has almost doubled during the same time period, while Orbitz's is up less than 10% (click on the image, left, for larger view of the chart).

Yet, according to travel-research firm PhoCusWright, Priceline accounts for just about 12% of U.S.-based OTA bookings, compared with about 45% for Expedia, about 25% for Orbitz and about 20% for Travelocity. For Q1 2012, Priceline's international gross bookings, excluding foreign-exchange effects, jumped 58% from a year earlier, while domestic growth was just 12%.

That disparity could put Priceline in a vulnerable position, analysts warn. With so much dependence on overseas markets, especially Europe, Priceline could be more susceptible to booking drop-offs because of the Continent's spreading sovereign debt crisis.

Last month, J.P. Morgan analyst Doug Anmuth, who estimated that just 20% of Priceline's revenue will come from the U.S. this year, lowered both his revenue and share-price forecasts for the company because of concerns about fewer hotel bookings in southern Europe.

Leung, meanwhile, estimated that about 60% of Priceline's global listing inventory of 226,000 hotels is in Europe, compared with about 13% in North America.

PhoCusWright estimates that U.S.-based OTA revenue is continuing to increase at about 5% a year. In 2012, Americans will book $37.6 billion worth of travel, or about 15% of all travel, on OTAs. That number is up from $30.9 billion in 2009.

Priceline Revenue Share Among OTAsWith its leadership established among OTAs in sales through transparent listings, Expedia made a major move toward the opaque-listing market and, specifically, Priceline's user base, in late 2010 by launching its "unpublished" listings. Since then, Expedia has stepped up its efforts to promote Hotwire, which analysts say ultimately prompted Priceline to counterpunch with Express Deals. (See image, left, for a chart depicting Priceline's revenue share among public OTAs.) 

With hoteliers trying to cut distribution costs by directing more of their online bookings to their own sites (six of the world's largest hoteliers launched Room Key earlier this year specifically for that purpose) Priceline's Express Deals could represent a way for the OTA to work with its hotel-room suppliers that's less contentious than what was portrayed in the Negotiator ads.

Either way, say both Leung and Chris Anderson, associate professor at the Cornell School of Hotel Administration, the decision by both Expedia and Priceline to focus on semi-opaque listings for the U.S. is a good one. That's because about 80% of U.S. hotels are chain-affiliated, compared with about 20% overseas, and star ratings are more reliable, so travelers are more comfortable with semi-opaque bookings.

"The distribution landscape is changing," Anderson said. "There's a lot more semi-opaque product than there was a few years ago. Here, you'll probably pay a 10% to 15% premium [relative to Priceline's name-your-price model], but all of a sudden, Priceline has an opaque product a family can use to book."

For hotel and hospitality news, follow Danny King on Twitter @dktravelweekly. 
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