Expedia 2010 Annual Report Download - page 45

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Online Travel
Increased usage and familiarity with the internet have driven rapid growth in online penetration of travel
expenditures. According to PhoCusWright, an independent travel, tourism and hospitality research firm, in 2010,
approximately 54% of U.S. leisure, unmanaged and corporate travel expenditures occurred online, compared
with approximately 37% of European travel. Online penetration in the Asia Pacific region is estimated to be
around 20%, lagging behind that of Europe. These penetration 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. As a result, according to PhoCusWright, by 2010 travel supplier sites accounted for
59% of total online travel spend in the United States. More recently, due to booking fee reductions and
eliminations, online agents appear to have regained some share of overall online travel spend. Our visibility on
whether these share gains continue in 2011 and beyond is limited.
Differentiation among the various website offerings has narrowed dramatically in the past several years, and
the travel landscape has grown extremely competitive, with the need for competitors to generally differentiate
their offerings on features other than price. Competitive entrants such as “metasearch” companies have in some
cases been able to introduce differentiated features and content compared with the legacy online travel agency
companies; although in most cases they are not providing actual travel booking services. Some of these
competitors have raised significant amounts of capital and have begun to aggressively market their service
offerings. In addition, beginning in 2009 and through 2010, 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 and, in 2009, Expedia introduced
a competitive offering. While agency hotel is an important component of our European strategy, we expect it will
continue to take time for Expedia to drive meaningful demand to those hotels.
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. In 2009,
we experienced a reversal of these trends due to several factors including the softer macro environment, lower ad
rates and a pullback in spend by some of our online competitors impacted by lower fee revenues. Our marketing
spend in 2010 has returned to a more normalized environment as the economy has improved and as we have
increased marketing spend associated with our international growth opportunities. We believe that over the long
term we can manage our sales and marketing expense largely in line with revenue growth. As a result of our large
and growing travel advertising business, we have a partial hedge with regard to the price of advertising. As
advertising prices rise, our leisure transaction brands may spend more on their marketing efforts, while the
TripAdvisor Media Network benefits from rising prices through revenue growth.
Strategy
We play a fundamental role in facilitating travel, whether for leisure, unmanaged business or managed
business travelers. We are committed to providing travelers, travel suppliers and advertisers the world over with
the best set of resources to serve their travel needs by leveraging Expedia’s critical assets — our brand portfolio,
technology and content innovation, global reach and breadth of product offering. In addition, we intelligently
utilize our growing base of knowledge about destinations, activities, suppliers and travelers and our central
position in the travel value chain to more effectively merchandise our travel offerings.
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