Expedia 2014 Annual Report Download - page 51

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Part II. Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Overview
Expedia, Inc. is an online travel company, empowering business and leisure travelers with the tools and
information they need to efficiently research, plan, book and experience travel. We have created a global travel
marketplace used by a broad range of leisure and corporate travelers, offline retail travel agents and travel service
providers. We make available, on a stand-alone and package basis, travel products and services provided by
numerous lodging properties, airlines, car rental companies, destination service providers, cruise lines and other
travel product and service companies. We also offer travel and non-travel advertisers access to a potential source
of incremental traffic and transactions through our various media and advertising offerings on our transaction-
based websites. For additional information about our portfolio of brands, see the disclosure set forth in Part I,
Item 1, Business, under the caption “Management Overview.”
All percentages within this section are calculated on actual, unrounded numbers. We have reclassified
certain prior period amounts in our results of operations revenue and operating expense tables to conform to our
current period presentation. There were no changes to consolidated totals.
Summary of the Spin-Off of TripAdvisor
On December 20, 2011, following the close of trading on the Nasdaq Stock Market, we completed the spin-
off of TripAdvisor, which consisted of the domestic and international operations previously associated with our
TripAdvisor Media Group, to Expedia stockholders. In connection with the spin-off, we entered into various
agreements with TripAdvisor, a related party at that time due to common ownership, including, among others, a
separation agreement, a tax sharing agreement, an employee matters agreement, a transition services agreement
and various commercial agreements.
Trends
The travel industry, including offline agencies, online agencies and other suppliers of travel products and
services, has historically been characterized by intense competition, as well as rapid and significant change.
Generally, 2013 and 2014 have represented years of continuing improvement for the travel industry. However,
natural disasters and severe weather conditions, health-related risks such as Ebola, geopolitical conflicts,
significant fluctuations in currency values, sovereign debt issues and macroeconomic concerns are examples of
events that contribute to a somewhat uncertain environment, which could have a negative impact on the travel
industry in the future.
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 2014,
approximately 60% of U.S. leisure, unmanaged and corporate travel expenditures occur online, compared with
approximately 50% of European travel. Online penetration rates in the emerging markets, such as Asia Pacific
and Latin American regions are lagging behind that of Europe, and are estimated to be in the range of 20% to
25%. These penetration rates have increased over the past few years, and are expected to continue growing,
which has attracted many competitors to online travel. This competition 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. Competitive entrants such as “metasearch” companies, including Kayak.com (which The
Priceline Group acquired in May 2013), trivago (in which Expedia acquired a majority ownership interest in
March 2013) as well as TripAdvisor (which completed its conversion to a metasearch site in June 2013),
introduced differentiated features, pricing and content compared with the legacy online travel agency companies.
In addition, certain metasearch companies adopted or intend to adopt various forms of direct or assisted-booking
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