Expedia 2013 Annual Report Download - page 53

majority ownership interest in March 2013) as well as TripAdvisor (completed its conversion to a metasearch site
in June 2013), introduced differentiated features, pricing and content compared with the legacy online travel
agency companies. 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 ETP program to hotel suppliers in the United States and Europe and
is now in the process of rolling the program out globally. 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 online marketing spend by the travel suppliers
and intermediaries, and a meaningful reduction in our overall marketing efficiencies and operating margins.
During 2013, Booking.com, trivago and TripAdvisor launched offline advertising campaigns in the United States
for the first time thus increasing the number of participants in the travel advertising space, increasing competition
for share of voice; and we expect this activity to continue in the future. 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. The crowded online travel environment is now driving
secondary and tertiary online travel companies to establish marketing agreements with global players in order to
leverage distribution and technology capabilities while focusing resources on capturing consumer mind share.
Hotel
We generate the majority of our revenue through the marketing and distribution of hotel rooms (stand-alone
and package bookings). Although, our relationships with our hotel supply partners have remained broadly stable
in the past few years, as part of the global rollout of ETP, we have reduced negotiated economics in certain
instances to compensate for hotel supply partners absorbing expenses such as credit card fees and customer
service costs, which has begun to negatively impact the margin of revenue we earn per booking. In addition, as
we continue to expand the breadth and depth of our global hotel offering, we have made and expect to continue
to make adjustments to our economics in various geographies, including changes based on local market
conditions. Lastly, we have seen a higher mix of our room night growth coming from markets, such as China,
where our hotel margins are lower and we have implemented new customer loyalty and discount programs.
Based on these dynamics, our average revenue per room night has declined each quarter in 2012 and 2013 and
we expect it to remain under pressure in the future. All of these impacts are due to specific initiatives intended to
drive greater global size and scale through faster overall room night growth.
Since our hotel supplier agreements are generally negotiated on a percentage basis, any increase or decrease
ADRs has an impact on the revenue we earn per room night. Over the course of the last several years,
occupancies and ADRs in the lodging industry have generally increased 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 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 more than 260,000 hotels on our global websites, including
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