What went wrong for the OTAs?

To build a successful business, you have to add value. Your value can be popular with the masses like Netflix, Uber and Airbnb, or it can be a bit less popular like Exxon and Philip Morris, but the value has to be there. Once you stop offering added value like Kodak or Blockbuster, or you get found-out for not having it in the first place like Enron, then things go downhill rapidly.

In the travel industry, supply normally refers to hotels and tour, activity, and transportation companies. The demand is travelers / visitors / tourists.

Travel, as an industry, is the ultimate in fragmentation. I can’t think of anything that compares. Suppliers exist in every place in the world that people can travel to, and because you can’t just geographically move them, it's very difficult to consolidate. Demand also exists in every country of the world. Here’s the critical thing; demand exists FROM almost every country TO almost every country. With these conditions, it makes absolute economic sense for companies to aggregate supply and create a single point of distribution. This is nothing new - travel agents, tour operators, DMCs, receptive operators, tourist information centers, wholesalers…. have been doing it for years and all serve a similar purpose. 

The earliest OTAs started around 25 years ago, just taking this well established practice and bringing it online. Quickly, they started moving towards the model that dominates most things online today - the platform (or marketplace). 

Platforms

On the supply side, a platform gathers as much supply as possible, creates some structure and basic guidelines, and then makes these products and services available to sell. The ultimate supply-side platform was probably the Yellow Pages. Directories such as this used to print 540 million copies each year, just in the US, and deliver them to every household.

On the demand side, platforms enable consumers to come to a single place to shop for a variety of products. The demand side of platforms has been commonplace offline for a long time. It’s shopping at your local grocery store instead of going to the tomato ketchup shop, and then driving over to the toilet paper shop…

The internet, by removing the requirement for anything physical to be involved, has added huge efficiency to both the supply and demand side. Many of the largest companies in the world are now platforms. It’s clearly a more efficient model, and they are quickly dominating most industries. The advantage of a platform comes from two areas.

1) Economies of Scale

Supply. In the early 2000's, many suppliers either didn’t have websites, or if they did, they were often awful. (Even up to 2-3 years ago, some huge legacy airlines had almost unusable websites). Creating a great website was not top priority and it was often expensive. This was a win-win in many cases - the OTAs were happy to fill the gap and the suppliers had other things to worry about. A clear case of ‘boiling the frog slowly’. (For those who don't know the metaphor - if you put a frog in boiling water it will jump out, but if you put it in cold water and heat it up slowly, it will boil to death without realizing what is happening. Don't look it up. I just did. It's all lies. I wish I hadn't. Its still a great metaphor though, so it stays)

There are well over a million suppliers out there. Each had to create and manage a website, which included product pages, inventory management, reservations communication, security, privacy issues, payments etc. An OTA had to do this all just once. They create one product page, and that same page can be used to display 1 million hotels. That makes their model a million times more efficient. That’s not me being dramatic. It’s ONE MILLION times more efficient. That is (was) just a fact.

Demand. As above, there are huge benefits to scale on the demand side. From branding to advertising to search engine optimization, it’s the same argument. With scale, websites and conversion can be easily optimized, user experience constantly improved, and products can be offered in multiple languages and currencies.

Because you offer products in every destination the in world, you can build a relationship with that customer for multiple trips. Individual suppliers are most often starting a new relationship with each transaction. The focus (along with a few $billion) on that single brand builds up customer trust over time, which is also critical online.

All of these factors lead to benefits for the customer. The customer wants choice, and the ability to compare those choices for thousands of destinations all over the world. Platforms have a huge unfair advantage here. You can't get away from that.

2) Network Effect.

As if the economies of scale argument isn’t enough, you now have to talk about the network effect. What the network effect does is create a feedback loop. The more demand you generate, the more supply you attract (suppliers naturally want their products on platforms that produce $). The more supply you attract, the more demand you generate (you have more options for customers). The more you have, the more you get.

In addition, with enough worldwide supply, an OTA can then go out and grab all of the B2B contracts - the agents, wholesale and affiliate business. Those are really sticky. As long as you have a large selection of products and offer competitive commission, agents have little need to move around. Going direct to make an extra 5-10% is not normally a factor - they need global supply and a single contract. (The industry still has a long way to go in this space. A lot of legacy players are going to be disrupted.)

This is why platforms dominate e-commerce. They use economies of scale to grow very quickly, and then the network effect kicks in, increasing efficiency further and making it very difficult for competitors to catch up.

The Growth Period.

We all know the larger OTAs have spent many many $ billion promoting their brands, which undoubtedly have huge value. Much of the growth though over the last 20 years has come from online search. This was the lowest hanging fruit.

I heard some people are still old enough to remember a time before Google. Search engines like Alta Vista, Lycos and Yahoo, along with a dozen others shared the market between them. Alta Vista was the best. You could pick some keywords, build a well optimized web-page, submit it, and own 4-5 of the top ten search results by the next day. Maybe not great for users.

Google arrived a few years later and did 2 things.

1. Search-box with a clean, clutter-free background.

2. Added a score to the algorithm based on the quantity and 'authority' of inbound links. 

That’s all. Nothing that any of us couldn’t have come up with one night in the pub. They’ve improved their algorithm obviously, but the fundamentals are still the same.

I’ll add another thing though, they also came up with a fairly bland mission statement:

“to organize the world's information and make it universally accessible and useful.”

Maybe it was genius, or maybe Larry said to Sergei, "listen, I know its lame, but lets just use that for now until we hire somebody for marketing". Whatever you think about Google, they haven’t budged from that mission.

With their simple algorithm (lets call her 'Lucy') in charge, they quickly won the search engine wars. Since those early days, everybody who creates a website enters an unwritten contract with Lucy. It’s very simple. If you help her organize information and make it universally accessible and useful, she’ll reward you by delivering customers via links on the search engine results page (SERP) - there are even guidelines updated regularly telling you how to do it. You scratch my back......

The early OTA sites were a match made in heaven. They were already organizing global hotel inventory and were deploying huge resources to make it accessible and useful. Lucy was delighted - the perfect partnership. In other sectors, companies like Wikipedia and Amazon came along and made the same deal. Win-win.

The platforms (OTAs) went from strength to strength, and earned millions of inbound links, thus further solidifying their position as THE domain authority for travel. Links were never broken, navigation simple, information clear - users get what they want. Everything was working towards the goal, so Lucy just kept on rewarding, by delivering more traffic through the SERP.

So what went wrong?

This lasted for almost 20 years, but like most things, the problems started to come up when one of the parties stopped keeping up their side of the bargain. Even pre-covid, the larger OTAs saw valuations peak between 3-6 years ago. For a tech company, even one year without an increase in valuation is a minor disaster.

Unfortunately for the OTAs. the squeeze has been from both sides of the platform.

Supply. Suppliers have been rapidly catching up. It's very easy and cheap to have a great looking website these days, with optimized booking flows. Managing real time inventory is also easy, with dozens of off-the-shelf solutions. Payments, secure sites, customer communication.... all of these things are very cheap now. What might have cost $200,000 only 10 years ago, you can have today for $50 / month. To save the 20% - 30% commission, suppliers have been very active, and striving hard to get as much 'direct' business as possible.

Demand. Ever-generous, Lucy gave the OTAs almost 20 years to either create more value for customers, or else to become self-sufficient and wean themselves off codependency.

The major OTAs have done well to add more supply and build customer loyalty. Gradually, they have become more pure-play platforms - with tools for suppliers to manage their own products. Gradually, they have stopped humans from interfering with search pages, pricing, or sorting of products. Without doubt, these OTA sites have improved year after year. The problem is....by how much. Did they do enough?

In those same 20 years, Google has just been plugging away to 'organize the world's information'. To help with their quest, they also developed a few more products:

1. A map (70%)
2. A web browser (68%)
3. A mobile phone operating system (74%)
4. An advertising platform (73%)
5. Analytics software (73%)
6. A global business directory (80%)

The percentages are global market share. You have to REALLY try hard to get anything done online without Google knowing about it. So lets agree that's pretty good progress.

So that's really the problem. In 2000, 2005 and 2010, the OTAs were adding a lot of value. Lucy appreciated the help, But she outgrew them. With all of this data from Google Maps, Chrome, Android, Google Ads, Google Analytics and Google My Business, what value are the OTAs adding? The SERPs started displaying map listings, direct supplier listings, ads, social links, whatever best serves the customer. If bypassing the OTA is better for the customer, then that's whats going to happen.

Brad, in charge of strategic accounts at Google, heard about this and called a meeting to point out that the biggest two OTAs alone spend $11 billion per year, just on Google Ads. Sweet, sweet Brad. He means well, and he wants his Christmas bonus. Lucy is pretty smart though. She updates and factors in that number 12,000 times a day. She's also smart enough to know not to listen to humans. She hasn't told them, but she has completely ignored what they say for years. She knows though, that she can't make any sudden moves. Sudden moves will freak out the humans. They'll get all frazzled and start emailing and making phone calls to each other, which is not an efficient use of company resources. She makes gradual changes, over many years, and over a few billion tests. She keeps the humans happy, feeding them data points to talk about so they can feel valuable and important.

It's been the ultimate boiling of the frog, but to be fair, Google was actually up front from the start. Their mission statement was always there. They never promised to deliver free traffic to anyone. Google was never a search engine - its always been a platform, and the thing that is most likely going to disrupt your platform.... is another platform. Its a real problem. You spend 20 years building a company, but rely on somebody else's platform for most of your customers. Something to do with eggs in baskets. Worse than that - the platform that owns most of their customers is the most powerful brand the world has ever seen.

The Future

Its really been the perfect storm. As a platform, you know you're always at risk from suppliers trying to go around you. That's just life. You have a really clean market mechanism here called Price (commission), which adjusts to keep suppliers just upset enough to keep everything in place. If commission is too low, you're leaving money on the table. If it's too high, suppliers will look elsewhere.

OTAs do need to become more efficient on the supply side, that's beyond doubt (I have ideas, but Linkedin tells me this is already too long - looks like there'll be a part II.)

The Google problem is trickier. To this day, if you help them, they'll still help you. But you HAVE to add value for their customers. You have to offer something that Google can't. Maybe Google will have regulation issues. Maybe they won't. Maybe declare them the winner of Internet 1.0, hand out some trophies, and create 5 smaller companies? That's for somebody else to debate.

It's not impossible. Airbnb, despite the terrible name, created their own category in 10 years. As for Uber, when is the last time you googled “ride sharing car service in [city]”? They created pure-play platforms on day 1, and for that reason have grown many times faster than the traditional OTAs. They are probably in a better place going forwards. Can these legacy OTAs turn it around? Of course they can. Will they?

to be continued...... The Connected Trip, getting rid of the bloat, supply side automation, and demand side innovation - exciting stuff.