Priceline 2015 Annual Report Download - page 44

Our priceline.com brand offers merchant Name Your Own Price ® opaque travel services, which are recorded in revenue on a "gross" basis and have
associated cost of revenue. All of our other services are recorded in revenue on a "net" basis and have no associated cost of revenue. Therefore, revenue increases
and decreases are impacted by changes in the mix of our revenues between Name Your Own Price ® travel services and other services. Gross profit reflects the
commission or net margin earned for all of our services. Consequently, gross profit is an important measure to evaluate growth in our business because, in contrast
to our revenues, it is not affected by the different methods of recording revenue and cost of revenue between our Name Your Own Price ® travel reservation
services and our other services.
Trends
Over the last several years we have experienced strong growth in our accommodation reservation services. We believe this growth is the result of, among
other things, the broader shift of travel purchases from offline to online, the widespread adoption of mobile devices, the high growth of travel overall in emerging
markets such as Asia-Pacific and South America, and the continued innovation and execution by our teams around the world to build accommodation supply,
content and distribution and to improve the consumer experience on our websites and mobile apps. These year-over-year growth rates have generally decelerated in
recent years. For example, for the year ended December 31, 2015 , our accommodation room night reservation growth was 25% , a deceleration from 28% in 2014,
37% in 2013 and 40% in 2012. Given the size of our hotel reservation business, we expect that our year-over-year growth rates will continue to decelerate, though
the rate of deceleration may fluctuate.
The size of the travel market outside of the United States is substantially greater than that within the United States. Historically, Internet use and e-
commerce activity of international consumers have trailed that of consumers in the United States. However, international consumers are increasingly moving to
online means for purchasing travel. Accordingly, recent international online travel growth rates have substantially exceeded, and are expected to continue to
exceed, the growth rates within the United States. We expect that over the long term, international online travel growth rates will follow a similar trend to that
experienced in the United States. In addition, the base of hotel properties in Europe and Asia is particularly fragmented compared to that in the United States,
where the hotel market is dominated by large hotel chains. We believe online reservation systems like ours may be more appealing to small chains and independent
hotels more commonly found outside of the United States. We believe these trends and factors have enabled us to become the leading online accommodation
reservation service provider in the world as measured by room nights booked. We believe that the opportunity to continue to grow our business exists for the
markets in which we operate.
Our growth has primarily been generated by our worldwide accommodation reservation service brand, Booking.com, which is our most significant brand,
and has been due, in part, to the availability of a large and growing number of directly bookable properties through Booking.com. Booking.com included over
850,000 properties on its website as of February 15, 2016, which included approximately 390,000 vacation rental properties (updated property counts are available
on the Booking.com website), and compares to over 635,000 properties (including approximately 269,000 vacation rental properties) a year ago. In September
2015, Booking.com changed the way it calculates property counts. As a result, properties that are contracted with Booking.com but temporarily do not have
availability on Booking.com (for example properties that are closed during their off-peak season or for renovations) will remain included in Booking.com's
property counts during these temporary periods. Booking.com previously excluded properties that were temporarily unavailable for booking. We believe that
continuously including them provides a more consistent and useful property count. We believe that continuing to expand the number and variety of
accommodations available through our services, in particular Booking.com, will help us to continue to grow our accommodation reservation business.
As our international business represents the substantial majority of our financial results, we expect our operating results and other financial metrics to
continue to be largely driven by international performance. For example, certain markets in which we operate that are in earlier stages of development have lower
operating margins compared to more mature markets, which could have a negative impact on our overall margins as these markets increase in size over time. Also,
we intend to continue to invest in adding accommodations available for reservation on our websites, including hotels, bed and breakfasts, hostels and vacation
rentals. Vacation rentals generally consist of, among others, properties categorized as single-unit and multi-unit villas, apartments, "aparthotels" (which are
apartments with a front desk and cleaning service) and chalets and are generally self-catered (i.e., include a kitchen), directly bookable properties. The
approximately 390,000 vacation rental properties on Booking.com's website as of February 15, 2016 (updated property counts are available on the Booking.com's
website) represent approximately 1.9 million instantly bookable and confirmable units within these properties. Many of the newer accommodations we add to our
travel reservation services, especially in highly penetrated markets, may have fewer rooms, lower average daily rates ("ADRs") or higher credit risk and may
appeal to a smaller subset of consumers (e.g., hostels and bed and breakfasts), and therefore may also negatively impact our margins. For example, because a
vacation rental is either a single unit or a small collection of independent units, vacation rental properties represent more limited booking
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