Expedia 2012 Annual Report Download - page 53

rates have increased over the past few years, and are expected to continue growing. This significant growth has
attracted many competitors to online travel. This competition has intensified in recent years, and the industry is
expected to remain highly competitive for the foreseeable future. In addition to the growth of online travel
agencies, airlines and lodging companies have aggressively pursued direct online distribution of their products
and services, and supplier growth outpaced online agency growth for several years. Competitive entrants such as
“metasearch” companies, including Kayak.com (which entered into a merger agreement with Priceline.com in
November 2012) and Trivago.com (in which Expedia has agreed to acquire a majority ownership interest), have
in some cases been able to introduce differentiated features and content compared with the legacy online travel
agency companies. In addition, models, such as daily deals and private sale sites have also begun proliferating.
We have a number of “daily deals” offered on our retail websites as well as a partnership with Groupon called
Groupon Getaways with Expedia. Finally, we have seen increased interest in the online travel industry from
search engine companies as evidenced by recent innovations and proposed and actual acquisitions by companies
such as Google and Microsoft.
The online travel industry has also seen the development of alternative business models and variations in the
timing of payment by travelers and to suppliers, which in some cases place pressure on historical business
models. In particular, the agency hotel model has seen rapid adoption in Europe. Expedia has both a merchant
and an agency hotel offer for our hotel supply partners and we expect our use of these models to continue to
evolve. During 2012, Expedia introduced the Expedia Traveler Preference program to hotel suppliers in the
United States and Europe. ETP offers travelers the choice of whether to pay Expedia at the time of booking or
pay the hotel at the time of stay.
Intense competition has also historically led to aggressive marketing spend by the travel suppliers and
intermediaries, and a meaningful reduction in our overall marketing efficiencies and operating margins. We
manage our selling and marketing spending on a brand basis at the local or regional level, making decisions in
each market that we think are appropriate based on the relative growth opportunity, the expected returns and the
competitive environment. In certain cases, particularly in emerging markets, we are pursuing and expect to
continue to pursue long-term growth opportunities for which our marketing efficiency is lower than that for our
consolidated business but for which we still believe the opportunity to be attractive.
Hotel
We generate the majority of our revenue through the marketing and distribution of hotel rooms (stand-alone
and package bookings). Our relationships and negotiated total economics with our hotel supply partners have
remained broadly stable in the past few years. We have, however, implemented new customer loyalty and
discount programs and have eliminated or reduced some fees in that timeframe and, as such, the margin of
revenue we earn per booking has declined. In addition, the introduction of ETP could negatively impact the
margin of revenue we earn per booking in the future.
Since our hotel supplier agreements are generally negotiated on a percentage basis, any increase or decrease
in average daily rates has an impact on the revenue we earn per room night. Over the course of the last two years,
occupancies and ADRs in the lodging industry have generally improved in a gradually improving overall travel
environment. Currently occupancy rates are near 2007 peaks and there is very little new, net hotel supply being
added in the U.S. lodging market with large chains focusing their development opportunities in international
markets. This may help hoteliers with their objective of continuing to grow their ADRs and could lead to
pressure in negotiations with hoteliers and may ultimately lead to pressure on terms for us and our OTA
competitors. In international markets, hotel supply is being added at a much faster rate as hotel owners and
operators try to take advantage of opportunities in faster growing regions such as China and India, among others.
We have had success adding supply to our marketplace with almost 200,000 hotels on our global websites,
including eLong, as of the end of 2012. In addition, our room night growth has been healthy, with room nights
growing 18% in 2011 and 27% in 2012. ADRs for rooms booked on Expedia sites grew 5% in 2011, while they
declined 2% in 2012.
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