n the waiting area outside Erik
Blachford's Bellevue, Wash., office you'll find a cheerfully tacky
tiki bar. He has put in cane barstools and a thatched roof on poles
in front of a wall painting of a tropical beach, all of which do a
nice job of brightening up the relentless vanilla architectural
gloom that pervades Expedia's suburban office park headquarters.
But if you like pina coladas, you're out of luck. Blachford has put
the bar project on hold. He's got more important things on his
mind.
It's been a busy year. In April, Blachford was named president
and CEO of Expedia while his boss at corporate parent
InterActiveCorp (IAC), Barry Diller, was on an acquisition tear. On
Sept. 22, Diller put Blachford in charge of a new division called
IAC Travel.
Now Blachford runs:
• Expedia,
owned 100% by IAC, as of August.
• Hotels.com, owned 100% by IAC, as of June.
• Coming soon, when the deal closes, Hotwire, an "opaque"
online deep-discounter, acquired by IAC in September.
• Classic Custom Vacations, a high-end vacation packager.
• Interval International, a time-share booker.
• Whatever other online travel properties Diller buys next,
whether in the U.S. or, more likely, overseas.
In short, Blachford finds himself responsible for the largest,
fastest-growing collection of online travel businesses on the
planet.
He must manage a portfolio of brands, each with its own
personality and target market, and coordinate technology, marketing
and back-office operations without harming what made each business
a success.
Blachford must move the group into new growth areas, most of
them overseas. He must fend off online competitors like Travelocity, Orbitz and Priceline as
well as keep an eye on the big-monied giants that are -- finally --
waking up to the Web, among them the likes of American Express,
Carlson and Thomas Cook.
All the while, he must persuade suppliers that their fears of
losing control of their distribution are overblown, that they and
IAC Travel can prosper together.
The tiki bar can wait.
'A mighty wind is blowing'
Blachford's fourth-floor office overlooks a parking lot. The
furniture comes straight out of an office supply catalog.
Coffee-drinking visitors are warned against the nasty office brew,
which is, in fact, nearly undrinkable -- Expedia staffers rely on a
nearby cafe. The whole place seems to shout "low overhead."
An amiable Canadian at age 37, Blachford is youthful, trim and
fit, with the kind of long, thick, combed-back, dirty-blond hair
that blends well with sunglasses, motorcycles and surfboards. He's
got a sense of humor.
"There is a mighty wind blowing from offline to online," said
Blachford, in broadly sardonic tones, as if he's both amused and
embarrassed at the PR game and wants you to know it.
Then he gets serious: The rapidly assembling IAC Travel group,
he said, is "a way of making sure we aren't left out of any of the
[online] segments that are going to grow very quickly.
"This is a pretty classic direct-to-consumer brand strategy,
something Expedia would not have had the resources to pursue, at
least not for some time," Blachford added.
On the other hand, to some suppliers, the IAC group represents a
pretty classic way of bottlenecking the distribution system for
maximum profit at suppliers' expense. Most famously, American
Airlines Vacations president Dan Westbrook, speaking at a Travel
Weekly Leadership Forum earlier this year, called Expedia "a Little
Shop of Horrors" with a hunger for "dominating travel distribution
-- look at what they're putting together." And he said that before
Diller's latest acquisitions.
Blachford takes the critics in stride. He claims to understand
their point of view. After all, merchant/supplier tension over
profits and margins is intrinsic to business, as each side jockeys
for advantage.
"Of course, [suppliers] will say it feels expensive," Blachford
said. "But you know, I'm a retailer, and if you can name me ever in
history a time when someone didn't complain about the margins, I'll
buy you lunch." (Apparently, even Expedia's casual bets are low
overhead.)
"Like any good retailer," he said, "we think of ourselves as a
marketing partner for suppliers."
One key difference, though: Suppliers aren't concerned only
about profits, they're also concerned about control of their
products and services.
Look at what's happened when distributors become more important
than the products they sell: bookseller Barnes & Noble now has
the power, in some cases, to change the title of a novel before
it's published. Wal-Mart sets the specs of just about everything it
wants to sell.
The solution to calming suppliers appears to represent a
dramatic shift in Internet commerce that travel consumers are not
aware of: a move away from transparency and toward opacity -- in
other words, judiciously hiding prices from consumers and
competitors but trying to do it in a way that leaves the travelers
feeling they got a good deal. But more on that in a bit.
Whatever IAC may think of itself or whatever suppliers may think
of IAC, here's the reality:
• The online travel distribution business is on a market-share
rocket with no limit in sight.
• Expedia may well be the best-managed online travel company in
the business; the other IAC properties are no slackers
themselves.
If the whole becomes greater than the sum of the parts -- and
Blachford has every intention of accomplishing that -- IAC Travel
likely is to remain the biggest force in online travel distribution
for many years to come.
• Nobody's going to bust IAC on antitrust charges, not even
close: The travel distribution market is too huge, too fractured,
too competitive.
Therefore, if they haven't already, travel suppliers had better
learn all they can about how IAC Travel will continue evolving its
technology at a level that guarantees no one involved in travel
distribution can afford to sit still.
After all, said Blachford, "We're quite a ways from [the days
when] buying airplane tickets online [was considered] a great
technological tool."
It started with QVC
Diller, meanwhile, said his technological awakening came in 1992
on a visit to a company called QVC, which sells merchandise on TV.
He marveled at the way the network's computer system spit out
instant feedback on which merchandise was hot and which was
not.
He watched sales figures rise and fall in real time on a green
computer screen. He felt he was witnessing a new kind of
low-overhead, high-volume sales channel that went ka-ching,
ka-ching, ka-ching. He knew right then that electronic interactive
selling was the wave of the future.
Diller bought into QVC, later selling his shares to start his
own TV shopping channel, Home Shopping Network. When the Web came
along, he was ready to go, purchasing stakes in companies like
CitySearch and Ticketmaster.
Diller said he beat down the doors at Microsoft for two years
trying to buy into its Expedia, when at last in 2001 the software
giant decided Expedia was not a core business and sold 75% of the
stock to Diller.
Originally, Microsoft had envisioned Expedia not only as a
business but as a technology demonstration project to prove that
banks of relatively cheap PCs loaded with the company's
industrial-strength NT operating system could outperform
old-fashioned systems built on mainframes. Travel was a ripe
target, given the travel industry's utter dependence on the big
GDSs, all mainframe-based.
And Expedia's founding president, Rich Barton, knew full well
that it wasn't just mainframes that would be threatened by the new
technology but the very business and distribution models of the
travel industry itself.
Expedia's earliest managers saw that the combination of
friendlier technology, smart marketing applications and Web-only
fares were a sure path to higher margins, increasing traffic and a
rich bottom line.
The reductions and eliminations of airline commissions might
have put a damper on online travel growth, but hotels -- now the
largest and most lucrative slice of online travel -- saved the
day.
Expedia and Hotels.com, then both partly owned by Diller, were
the most aggressive. Post-9/11, hotels were desperate to fill
rooms. Using a merchant model rather than an agent/commission
model, the online sites effectively bought blocks of rooms at deep
discounts and sold them at markups that ranged from 15% to 30%. But
the sites never took inventory risk -- unsold rooms could be
returned. Talk about low overhead, high revenue and wide
margins.
Nerd power
The model was sweet, but Expedia was committed to taking it to a
richer level. Again, it turned to technology.
David Beitel, vice president for product development at Expedia,
is the quintessential Microsoft-trained computer nerd: He's
extremely bright, totally engaged in the topic at hand, constantly
in motion, a little spastic in his body language, clean cut and
eager to please -- a puppy dog with a high IQ.
"The beauty of online travel," said Beitel, "is that it's
completely dependent on technology."
Like many of Expedia's technologists, Beitel started out at
Microsoft. Bill Gates' software giant has a reputation for being
not very innovative, but let loose in a clean-sheet environment,
the Expedia programmers have come up with sets of code to search,
sort, mix, match, combine, filter and price travel packages and
itineraries -- software programs that have set competitive
benchmarks for the industry.
With its proprietary software, Expedia was able to set up a
merchant hotel program that offered the kind of flexibility that
many suppliers claimed Hotels.com lacked.
Hotels.com bought blocks of rooms for a set price and that was
that. If demand improved and a hotel wanted rooms back to sell at a
higher rate, too bad. Expedia's software and its supplier
agreements, by contrast, allowed hotels to vary their discounted
prices according to demand. Expedia grew its hotels business very
rapidly, to the point where many in the industry began to see that
Expedia's technology would enable it to beat Hotels.com at its own
game.
Now Expedia is rolling out what it calls Direct Connect to
hotels. The acquisition of a company called Newtrade enables hotels
and Expedia to communicate rate changes and other data in real time
electronically.
With Hotels.com and Expedia both reporting to Blachford's group,
Expedia's technology and supplier arrangements likely are to be
employed at Hotels.com.
"This will give us a tremendous amount of resources," said
Hotels.com president and cofounder Bob Diener.
"Being able to utilize technology and share across all the
companies is a huge competitive advantage," he said.
The reorganization also made it easier for Hotels.com to
abrogate its contract to supply rooms to Expedia rival Travelocity
(owned by Sabre) for alleged contract violations.
The next step in Expedia technology is dynamic vacation
packaging, the source of some of IAC Travel's juiciest margins.
It's also the fastest-growing segment in online travel.
Dynamic packaging enables online travel distributors to take
advantage of the best and avoid the worst aspects of Internet
pricing -- that is, customize products for consumers in a way
possible only through data-mining technology, while avoiding the
kind of price transparency that cuts back profits for suppliers and
distributors alike.
A smartly coded mega-database can assemble thousands of packages
from thousands of flight, hotel, car and tour options, all at
different price points and, theoretically anyway, spit out a dozen
or so that fit right into a consumer's desires.
Packaging and pricing
"The combination of technology and inventory ... allows us to
offer consumers on Expedia what they can't find anywhere else,"
Blachford said. "The way we do that is by packaging stuff in
interesting ways, while making sure our pricing makes sense." Just
one example: a variety of elopement packages for Las Vegas.
That's how Expedia helps consumers. How about suppliers? "The
travel business is all about price discrimination," according to
Barney Harford, an energetic Brit who is Expedia's vice president
for air, car and private label. "It means you look at how much
someone is willing to pay and how to get as much of that as
possible."
Blunt, but that's business. Harford's tight analysis, however,
contains a rich irony. It seems contrary to the early promise of
online pricing, where the Internet's transparency led to price
visibility and, in turn, to lower prices for all.
The problem for businesses -- and for middlemen in particular --
is that price wars and rock-bottom rates don't leave much profit
for anybody. What most intermediaries don't want to admit is that
opacity, not transparency, is a middleman's best friend. If the
buyer isn't clear about real costs and market prices, it's easier
to jack the price higher.
So, ultimately, this is what IAC Travel's business model and
technology are set up to do: cover up prices well enough to protect
suppliers' profits while keeping costs low enough to please
consumers and encourage travel demand, all the while keeping IAC's
own margins wide.
It's no wonder that IAC Travel is putting so much emphasis on
growing the vacation-package business -- it relies on opacity. It
also explains, in part, why Diller paid more than $665 million for
opaque deep-discounter Hotwire, whose cumulative investment totaled
only $110 million, according to reports that Hotwire CEO Karl
Peterson does not dispute.
Ideally, consumers would like to travel free. Ideally, suppliers
would like costless profits and control over distribution. Ideally,
distributors would like to take all those profits for
themselves.
If IAC Travel (and its competitors) can use its technology to
mix and match travel products that make travel cheaper for
consumers and enable suppliers to keep their yields and profits
higher than they otherwise could -- all without feeling like
they're losing control of their distribution -- they could stop all
the talk about a "Little Shop of Horrors."
Of course, IAC Travel's clout depends on how well Blachford and
Diller manage their new collection of online travel properties.
Academic research shows that most mergers fail. Blachford,
naturally, is upbeat, not just about IAC Travel but about the
entire online travel market.
"It's about the whole fabric of society changing around the
Internet," he said. "Boy, oh boy, you think it's changed a lot now?
Wait until all these people 25 years old are five years older and
start buying travel. Wait until 2008 -- my God, it's going to be a
different landscape."
To contact reporter Russ Mitchell, send e-mail to [email protected].
Expedia eyes corporate growth
xpedia is a little minnow in
the corporate travel pool. The company won't reveal its revenues
but doesn't deny they'll amount to just a minnow in the
multibillion-dollar corporate travel market bucket. But in the
business world, minnows can grow into big fish. Since acquiring
high-end corporate agency Metropolitan Travel last year, Expedia
has begun winning companies over. Recently, Internet-caching
company Akamai shifted its travel account Expedia's way, and Amazon.com is
reported to be coming on soon.
Expedia and IAC Travel CEO Erik Blachford acknowledges the
company has had some growing pains. "The biggest lesson we've
learned is that we had to respect the needs of the corporate travel
manager," he said. Expedia, he said, has a good understanding of
the end user, but giving travel managers "the knobs and dials and
reports" they need to do their job has become a priority.
-- R.M.
What's the future for Hotels.com execs?
hen one company buys another,
the top executives at the bought company tend to slip away. They
might stick around awhile to help with the transition -- and for
appearance's sake. But the new owners usually want to run their own
show.
So what happens to Hotels.com cofounders Bob Diener and David Litman now
that Barry Diller's InterActive Corp (IAC) owns 100% of the
company's stock? We put the question to Erik Blachford, the Expedia
CEO whom Diller recently named to head all of IAC's travel
operations.
First, Blachford said the relationship between Expedia and
Hotels.com has been "one long sibling rivalry." Competition between
the two has been fierce, even though Diller has owned a majority
stake in both. How did that manifest itself?
"You name it and it manifested itself." Now, he says, "We are
starting to say it probably makes more sense for us to work
together."
So where does that leave Diener and Litman, who both report to
Blachford? "These guys are totally committed to doing what's right
for the business," he said, cryptically. Then he raised his
eyebrows, widened his eyes and held his expression, silent, for
several seconds.
For his part, Diener notes that IAC lets managers run their own
divisions. He expects cooperation on finance and strategy with
IAC's other travel properties, "but I don't see things day to day
really changing."
Asked about Blachford's statement about doing what's right for
the company, Diener said, "I think very highly of him."
He pointed out that he and Litman are major shareholders. "We
have a tremendous economic incentive to grow [IAC] and expand the
business," Diener said. "I can't think of a more exciting place to
be." -- R.M.