{audio:00:00:20} Bobby could you provide us with the lay of the land with reference to the market structure as a way to lead us into a bit of Google’s history?

{audio:00:00:32} The lay of the land today, which hasn’t really changed too much for quite some time structurally, is essentially that Google are the top of the funnel allowing advertisers to purchase traffic and to create the transaction behind that. It’s a pretty straightforward advertising model that has gotten more and more qualified. I wouldn’t specifically say Google Travel Apps, I would take it more from the generic search and downwards. The way Google have positioned themselves has been essentially a consolidator of all of the top of funnel demand. When I say ‘top of funnel’, I mean the search and discovery process that consumers go through. Google have done a great job at transitioning that from generic search with blue links (10 blue links for example), from organic search, to paid search hybrid with organic search to then, vertical specific search like Google Flight search or Hotel finder and so on.

They’ve made a progressive and constant evolution towards a more dedicated search function, which has turned into a change of mix, from organic free traffic, which I would say is logically the most relevant results, to an illogical but commercially driven set of results which is ‘sponsored results’. That progression has intensified over the last couple of years and what you’ve seen is essentially the structure of the entire travel industry (When I say travel I start off with flights because they underpin the entire travel industry), structurally nothing much has changed other than the economics have gotten tougher on the OTA [Online Travel Agent] side. While the OTA’s start to suffer from ever increasing margin erosion, that plays towards Google who are kind of the ‘Death Star’ here. Google growth continues to be 20-plus percent year on year, and that growth that we’re seeing is coming at the expense of the underlying players or the advertising partners that Google has.

For me, that’s the background to any discussion around “What do we think of Google, what do we think of OTA’s, what do we think of the next ten years and what do we do to control the outcome of the next ten years?”

{audio:00:03:17} Could you take us through some key milestones over the last decade in Google’s evolution in this vertical?

{audio:00:03:25} First you start with the thesis. Google’s thesis is very clear, I won’t say that it’s acknowledged by Google, but it’s pretty clear from their activities. If you don’t provide any additional value to the consumer in the aggregation that you provide, then Google will provide the aggregation directly to the consumer. For flight search that means it’s true that Google don’t believe that metasearch provides any value to the consumer other than the collection of aggregated results.

As you see with Google flight search, they’re effectively saying that, “We don’t believe that there’s a role for flight metasearch outside of Google.” The same applies to hotels to a lesser extent, and then any other product. The same for experiences, if you look at the trip or the pre-flight planning experiences and reviews, i.e. the TripAdvisor type businesses, they are simply an aggregator of information. Google will ultimately replace that with their own products. We’ve seen that with other verticals not just travel.

For me the seismic moment that should never have been either allowed, or should now be undone, is Google’s acquisition of ITA Software. Essentially what that allowed Google to do was make a plan or long-term strategy around flight search, that ultimately gives Google control of the entire travel ecosystem. Once they can control flight search – we’re talking in about 5-10 years – if you have a great flight search platform, which they got through acquisition of ITA, you can ultimately replace the OTA’s. That’s exactly what Google are doing.

For me, the big moment was ITA Software and thereafter, it’s about 7 years since they acquired ITA. It’s really interesting, if this was any other rational investment and rational business, either that would have been a failure because it’s taken 7 years to get any kind of market traction, or it never would have happened in the first place. But simply because of Google’s size and momentum and unique position in terms of monopoly on the search engine, they can make an irrational investment rational over time.

{audio:00:06:19} Alex, on the OTA side, how have you experienced this from your side of the industry?

{audio:00:06:34} I think there are two things to add to Bobby’s answer to your question. I was sat at the Expedia office 10 years ago and I was a marketing director in the European team. I can tell you, at some point, I was the Online Marketing Director for all the ‘non-interesting, non-Google’ stuff. To give you an idea, there was a time in Expedia where essentially, the good jobs were all the ones that were related to Google. The scale of the change that Bobby is talking about, I ran at some point: Flight comparison meta search, display advertising, mobile, Facebook, YouTube (that was just annoying), all the social media streams, affiliates and that was given to me as “You’re the Online Marketing Director for all the ‘non-Google stuff’, because that stuff’s not interesting to us. We’re interested in search engine optimization, the three blue links, and paid search”.

That’s how geared towards Google OTAs were. Expedia and Booking.com were in a massive battle about control of traffic down-streaming from Google. That’s just the scale of the dependency of where OTA’s have come from. I was in the room in New York when Google announced Google flight finder. They had just bought ITA Software, there was a lot of ITA Software guys in the room, we were all invited to New York and there they announced. I was sat next to the team from Kayak and Cheap Flights and they all had their faces in their hands and were very depressed about the fact that a Tsunami was absolutely coming at them.

I think when we all saw it at first, the initial response from all of the OTAs in the room was: “But we’re such massive spenders of search engine marketing, we’re all spending money on your clicks, why are you trying to hurt us by taking control of another part of the funnel?” I think what Google’s answer was – to Bobby’s point – that they had looked at a much longer ROI window on the acquisition of ITA and the work that they did internally on their development. At the time you’ve got to remember, Microsoft had just launched Bing and they could see that there were certain verticals like furniture and credit cards where Bing had made some quite good inroads into better shopping experiences, they had this really cool functionality with images et cetera.

I think what Google were worried about is: “If people start comparing and searching for furniture and credit cards on Bing, it won’t be long until we lose other verticals.” So they put both of their feet in and went big time into travel comparison. Obviously, it started with flights, which I agree is key to this sector. From my experience, I think Google did a fairly poor job in the first few years. It wasn’t great functionality. It wasn’t very good, it wasn’t very clear, the filtering wasn’t very good, the product itself (Google Flights) wasn’t particularly good. For anyone researching the subject, they’ll look at Steve Hafner’s Phocuswright interviews, he’s the CEO of Kayak.

About three years into the project, Google moved the development of Google Travel out of ‘Google Travel’ and into ‘Google Shopping,’ which gave it essentially another 4000 developers. They acquired Room 77, the one in San Francisco, they took on another meta search in San Francisco. I went out to California a couple of times and sat with the Room 77 guys who really took over the project. They really started getting their teeth into this.
But, actually, in the initial period of this project, all the OTA’s were kind of rubbing their hands and going, “They’ve got polygon search for hotels, that looks weird and complicated,” the flight search wasn’t great, the filtering wasn’t that clever, it was all a bit clunky and wasn’t particularly well situated. So from an OTA’s perspective, those first few years we were all rubbing our hands saying, “Well, they actually haven’t built anything very good, we’re still better!” But, of course, as guys like Richard Holden, and the product guys, got more into it, they actually went out to the industry and got an awful lot of consultancy on the project and what we’re now seeing is a very credible product across hotels and flights, which is now more monetized.

I think this topic is incredibly relevant right now, it’s having a material effect on the valuation of businesses in the sector. What’s quite interesting is that they have been doing it for a long time and they didn’t really get it right for the first few years. It was all a bit clunky and cumbersome, but as they’ve started getting it right, it now becomes a real topic. That’s how we’ve lived it.

At the starting point, in my personal example, most of the resources were all about Google. If you look back on it and take an online marketeer now and say to them that the same guy was running Facebook, mobile, display advertising, retargeting and YouTube. That would be a massive mistake for any business online, to put all of those marketing channels together, but we come from a world where they were deemed irrelevant channels. I was just given a team of eight people and told, “work it out, we’re not actually that interested in this.” That’s the scale of the impact that changes in Google will have on a business like the one I used to work in.

{audio:00:13:02} I think that’s a great top-level summary there. The story that an OTA has seen, looking at those moves made by Google. It’s also a fair reflection that Google didn’t really get it right, but only for the first few years because, in my mind, flight searches are a really hard problem to get right. They’re generating around $120 Billion a year and travel – the numbers are hard to spit out – is somewhere around $10-20 Billion a year. They’re not really under commercial pressure to do anything right, so it’s only when the law of large numbers starts to hit a business that you need to really disrupt, transform or pivot. In a normal investment, you reach some level of market saturation with your own product and where you go. But Google had so many different levers that they can pull.

For me, Google Flights has been a long-term play saying, “Ultimately, we’re going to go from an aggregator of information to an advertising platform that’s really powerful for our OTA partners (and to a lesser extent our airline partners), but eventually we’re going to take over the entire user experience. Anyone that doesn’t power the transaction either as a supplier or a customer service function is going to go away. We’re going to take all of that layer out and completely replace it with Google products.” Which is where we are today.

Ironically if you use Google trends and look at the brand traffic for big metasearch brands like Kayak or Skyscanner vs Google Flights, you see that Google Flights has completely taken over brand traffic now for flight search. That’s the power of Google really, to be able to play a ten-year game essentially without needing to make a commercial reality of it as part of your strategy. No other company (certainly in the travel world) can do that. As Alex mentioned, look at what that’s doing finally to travel company valuations.

We’ve seen in the last few weeks what’s happened with Expedia, what’s happened with Priceline, you can apply this scary logic to any OTA. If it was a standalone metasearch that’d be really bad, but even for a group company like Expedia that plays in all sectors. For Mark Okerstrom to come out and to point to a colossal brand like Expedia and say, “We’ve been sunk below the bow by an arbitrary decision by Google to go from three to four links in paid search,” just points to the weakness of anybody that’s not called Google.

Where this really becomes a problem, the regulators need to think about this. In the end if Google Flights is better than Expedia flight search, arguably you’d say, “Well that’s better for the consumer”. But actually, what’s happening today when investors - be it venture capital investors or private equity investors - assess investability of a sector or investability of a layer within a sector such as Travel, they’re going to run a mile from anything that needs access to the consumer with a travel product.

You already see that the innovation capital available in the travel technology industry is pretty much non-existent now, unless you have an established business with a strong annual recurring revenue [ARR] and a three-year exit plan. That’s actually the impact that’s going to play out over the long term, there’s going to be – and there already is – a stifling of information because Google are just too big and too powerful and they’re going to cap the ultimate market potential of any innovation in the travel sector.

{audio:00:17:34} So if you’re the CEO of a large OTA, what do you do?

{audio:00:17:40} You do what Dara Khosrowshahi did and get another job.

{audio:00:17:47} That’s right. I think there are various angles to this. What’s interesting if you look at the two big OTA’s in this space is Booking Holdings vs the Expedia Group: Booking has been slightly more resilient than Expedia, ironically, because they didn’t have the brand that Expedia had over the last ten years, they’ve had to build a much more efficient system; they’ve invested a lot more in optimizing Google traffic that wasn’t branded. Expedia were probably – and it’s maybe a little bit harsh to say – able to rest on the laurels of their brand, where Booking couldn’t because it didn’t really have a brand.

Booking have made paid Google traffic work for them on the premise that they didn’t have many alternatives but to make it work if they wanted to scale. Expedia had different options. Where possible, if you were the CEO of an OTA, there is paid traffic available, Google aren’t taking 100% of paid traffic available away from you, and as a result of which, where there is profitability and positive ROI, that has to continue. To be fair Booking have a massive rate (by all accounts) of the ROI they’re able to drive from Google paid traffic versus Expedia.

What we’re all looking for, if you’re an OTA, is $10-20 Billion worth of sales from a channel that isn’t SEO, that isn’t paid of Google that exists elsewhere. The only other big drivers of traffic are things like Facebook and social channels. There doesn’t seem to be yet, the mindset of 20-30 years ago. If we go back further, someone worked out that advertising on TV made sense, and when they did that something happened to their sales. But the old adage of course is: “I know that 50% of my marketing works I just don’t know which 50% it is”.

I think what hasn’t been cracked at the OTA level by any means – these are very transactional businesses, they’re not particularly inspirational businesses – is that they haven’t found a way of activating that huge amount of social/app/mobile (the millennial stuff) into anything that drives any kind of ROI or traffic. I’m not convinced the current marketing teams or the current management teams have built either the tech or the ROI (or more importantly a way of calculating the ROI and the different steps of the journey) on those kind of channels.

There has to be more innovation in that space, there’s too much traffic to not get that right. The second part is, to respond to Bobby’s point, if you’re not adding value Google will disintermediate you and they will do their own tech. This could apply to furniture, retail, insurance comparison, there’s no reason why that couldn’t happen in other spaces.

Two businesses have done this incredibly well, net of Google. One is a very small business, but very big in their marketplace which is Finn.no in Norway, which has more traffic on its website than Google and that provides unbelievable consolidated and localized comparison. That’s one way of doing it. The other one is Amazon, which has gone for a pure marketplace approach, very well executed obviously. But rather than feel like a transaction engine, it’s gone for a marketplace approach and generating it’s ROI and traffic on the intersection of supply and demand as opposed to the transactional part of supply and demand.

These are really big strategic calls and they’re not particularly easy to execute. Doing the same thing as they have been doing over the last 5-7 years and just trying to optimize the current, which I think is currently the path they’re on, is clearly not going to work for them.

{audio:00:22:40} I agree, there’s one other company you forgot there, which I love to talk about, it’s Airbnb. Where you have an incredibly strong brand that, according to their own numbers, is north of 40% direct traffic, that is becoming more and more things to a growing customer base.

I think about a horizontal approach, I put travel in one component. If you look at how the user behaves, if you look at China and the super apps, the rise of WeChat, the food ordering apps, Uber Eats, all of these. You can go around the world, I think it’s Rappi in Latin America or Glovo in Spain, you have an app that is a high frequency use app with a payment system built into it and you start to see those apps providing micro-mobility services, on demand rides, on demand scooters, all of them going into travel as well. I think there you could see very strong brands emerging on a regional basis that become more things to more people, not just food or mobility but also travel.

These are very well capitalized businesses with giant high frequency bases and payment systems underneath that potentially could move into travel that would have a better shot at defense against Google than Expedia or Priceline. On the Priceline thing, you have to think about Priceline (Booking Group) and Expedia completely differently, Expedia is an American company with a largely US customer base that largely gets its traffic from a flight planning standpoint. Booking gets its traffic largely from a European (albeit starting to go much more international) base that is starting its discovery for lodging and hotels.

It’s a different type of traffic mix, therefore Booking has a far simpler business model that’s basically arbitrage, it’s traffic arbitrage and a really super strong conversion funnel with a highly fragmented supplier base. That’s always going to work against the Google context because Google are never about to aggregate the hotel industry, they could do it from a simple informational standpoint but they’re never about to provide the translation features or the customer support across such a wide customer base.

You can’t really compare correctly Booking and Expedia, because Expedia should be the first one to suffer from Google because they’re simply a flight experience funnel all the way down and that brings them into the hotel search. But if you look at Airbnb, they’re the same as Booking in that context. The only difference is that they've got an incredibly strong brand with a unique product with very little competition in that. If you look at what Airbnb might do, they’re kind of proving my point a little bit here, they’ve hired Fred Reid, they’ve 400 people working a travel vertical product and a ground transportation product that will ultimately seek to do everything for the travelling consumer.

That’s with the strong backing of a brand that can transition into a ‘super app’ that doesn’t require a user to go searching around for options in the first place. There are brands that are a credible alternative to a Google future, the only one I think in the travel industry is Airbnb. Then outside of that you have the Rappi’s, the Uber’s and so on that could very easily either build or acquire a travel vertical. Just because their apps are there and they have high frequency uses with a currency that can go across verticals I think they’ve got an edge that could very well give Google a problem in the long-term future.

{audio:00:27:14} They are adding value aren’t they, they’re aggregating, they’re comparing stuff that's difficult to compare. I think what Airbnb do, well I’m sure Google would love a piece of it, but it’s not their core business is it. They sell the unsellable right, but what Booking and Expedia are trying to do is sell highly commoditized (particularly with flights, but even hotels), but as brands go it’s highly commoditized. Airbnb does offer something different.

So your core question, “What would they do?” There is a problem here which is if you continue to do the same thing – bad; change – to a highly commoditized, transaction only, no new marketing channels. From a marketing perspective, there’s movement, from a customer value proposition, there’s definitely movement and I think there are some examples like Airbnb, like Amazon that can move. Actually, if they don’t move, the risk is that Uber or Glovo or Rappi could say, “I’ll sell you some socks, some milk and a flight.” They could essentially use very commoditized products in those super apps.

{audio:0:28:42} Correct, look at WeChat in China. I always look to China to see where the rest of the world is going to be in 5 years. There, that entire ecosystem, you have Baidu on the side for sure, but people discover and transact travel services inside the super app that has the payment as well. There’s an opportunity if you look at the growth and the capitalization of some of these super apps. Rappi, a Latin American player, relatively small, but a leader in Latin America, just took a Billion-dollar investment from Softbank and you see where the capital is interested in plays that have an unlimited market headroom.

The way you look at market headroom is you say, “Well, there’s a customer base, in the case of Rappi, of 4,000,000 monthly users, but we can sell those users any product we want because we have a relationship with that customer that is based on a one touch payment.” It’s like the Amazon relationship. So your market headroom becomes a summation of any product you can imagine that can be made to be relevant for that customer base.

So that’s why if those guys extended into travel, then you have a valuation that is a function of an unlimited market headroom. Whereas, if you look at the traditional travel companies, it’s pretty easy to calculate what the current market headroom is because you know the size of the market. And then, you apply a bit of headwind to that because of Google, you pretty quickly get to something that starts to give Expedia and Priceline a valuation problem.

How do they get out of that? Well, there is only organic growth for Expedia and Priceline, there’s no further way out for them while Google still control (in a monopolistic fashion) the outcome. Only regulation can fix that problem.

{audio:00:30:51} How well organized is the industry in presenting its case to regulators and what is the current relationship between regulatory bodies and industry protagonists?

{audio:00:31:07} My experience of this is: really poor. You get these questionnaires from the European Union, I’ve seen it when I was at Opodo and Expedia, you get these ‘random’ questions. You see mergers, for example Thomas Cook UK and Thomas Cook Germany coming together. I’ve been at Opodo and talked about flights and I’ve had questions about cruise business. I think the fundamental issue is that the questions you get – from a European perspective, I haven’t seen it from a US perspective – I’m always amazed that the guy running the questionnaire, the process, usually has very little clue of the ins and outs of the industry.

Travel is such a broad brush, it is camping, cruise, flights, hotels, it could be Uber. When you put it all together, what’s amazing is that particularly European regulators take such a broad approach to the concept of ‘travel’, that you don’t usually get a regulator that says, “This is a problem for flights, this is a problem for camping, this is a problem for ski rentals,” for example. What usually happens is they take such a broad-brush approach and they’re always running about 2 years before something actually happens. My experience, particularly in Europe is that they seem to pick up on things with such a broad brush that it’s very difficult to establish a pure monopoly.

The US is slightly different, we’ve seen some examples of that. But what we do know is that FairSearch, when Microsoft and Expedia and others joined ranks and lobbied the government on this, four to five years ago, particularly as the ITA Software plus Google product was improving. It really didn’t tickle much and no one really gave it that much attention, because I think politicians particularly look at travel with such a broad brush that I don’t think they really fully understand.

Bobby’s point is well made, he said, “Flights matter, Google is controlling flights!” But it seems to me the regulatory bodies look at this and go, “Yeah, but they’re not affecting cruise and camping, so it’s not a proper monopoly of ‘Travel’ as such.” That seems to be where regulation seems to fall over, because they don’t really understand the implications of different travel components being monopolized. They look at it with such a general, overall market view.

{audio:00:34:11} Another thing to consider that, for me, the regulator doesn’t get right is, when you look at travel, if I were really starting to look at the ten-year view. Where Google Flights is going, I think it’s a relatively comfortable position that most industry players have albeit with a capped future. I think where Google Flights is going, ultimately, is to monopolize the flight search funnel such that if you’re an airline and you want to be relevant or appear in your local market, you’re going to have to pay Google to be visible.

In my view, for the next 5 years anyway, it’s going to be the start of Google inserting quite a significant cost layer between the airlines and their consumers through Flight Search. That’s actually new, it’s going to repeat what happened with global distribution systems (GDS’s) decades ago, but in a much bigger way. So, if I’m a regulator, I’m saying, “Okay, what moves are Google making now that are monopolizing that position between an airline and it’s consumer.”

So, if you look at what regulators did with GDS’s about fair and neutral availability and neutral search, that’s actually what a regulator should be looking at. What moves are Google making now to remove any other ways that airlines can get to consumers. That’s the threat. Because when that cost goes into an airline, ticket prices rise. You need to really think about a transition over ten years, not what’s going on now. That’s already happening, if you do a search for flights on Delta Airlines or American Airlines, there’s already costs being inserted there for no reason whatsoever between a consumer and an airline. If you look at traffic to flight metasearch over the last five years, first is traffic to Google Flight search. You see an inferior product getting growth with superior products starting to decline. Google are saying, “Hey, if you want to discover flights the only way to discover them is with us!” and then a unilateral surcharge on the entire airline industry being imposed. That’s the monopolistic abuse that’s going on.

The regulator needs to see that ahead of if happening, because if they don't, the damage is already done to the ecosystem of innovation and existing companies that are powering flight search. You’re starving the entire ecosystem by allowing Google to do that.

{audio:00:37:07} I agree, but Bobby how confident are you that the regulators that we have on both sides of the Atlantic get that?

{audio:00:37:15} I wouldn’t underestimate the smarts of the regulator; I think the regulator is extremely smart. I agree by the way with Alex, I’ve seen some really weird questions coming out from the regulator to test the market. But I think it’s not rocket science what Google are doing, there’s plenty of consultants out there that will understand this and can speak to it. Particularly in Europe, would I bet my future on it? No. What I mean by that is, I wouldn’t invest in one single company today that drove traffic to their site with flight as the flagship, but the European regulator has teeth and politically is what’s important here.
Politically, they have an incentive to take action on Google that maybe the United States does not have because antitrust in the United States is very different than antitrust in Europe. In the United States it’s: “Are you hurting the consumer or not?” They don’t care if you’re monopolizing at the company level. It’s only if it’s bad for the consumer.

Whereas in Europe, they take a broader view, and they say, “If you’re damaging innovation by destroying capital valuations or unfairly promoting your own products, that’s a different story.” They’ve already taken blunt action and fines; they haven’t worked at all. The next phase of it is going to be a far more disruptive set of actions and remediations that they’re going to take against Google. My hope is that they use the travel industry as their test bed for that. My suggestion is to require a divestiture of Google Flights in the first instance.

{audio:00:39:16} If you were in the regulators office today and looking at this problem, what sort of series of actions would you be taking today and going forward?

{audio:00:39:44} Fines don’t work. All they do is they delay everything. The most practical and clear-cut action, as I said, is that I think Google need to be, not broken up, but in the case of travel, Google Flights needs to be sold off. I think it has a huge conflict with the entire industry in that it has an unnatural and unfair advantage in its access to the Google Search funnel and that gives it an unfair advantage over the rest of the world.

I think Google Flights on its own could be a very valid product, it’s a great product, there’s no argument that it’s an inferior product now, they’ve done a great job. But I think it’s got an unnatural advantage and that unnatural advantage is being used to abuse the search monopoly and the android monopoly.

I think the easiest, clear cut and effective change would be to force a divestiture of Google Flights. That would be a great starting point because that will immediately prevent Google from extracting a tax from the entire airline industry at the cost of not just the airlines but also OTA’s. That’d be a great start. Even that signal alone would put Google on a footing that they would be very careful about replicating similar moves in any other vertical. For me, it’s the easiest one to do, it’s short of an entire break up but it would certainly cure what might be the future for the next ten years.

{audio:00:41:40} Just brainstorming here, the weakness and risk for Google is that they don’t have the content. So, the risk is if Ryanair, EasyJet, Southwest, Delta and Emirates (examples of key airlines) say, or if in some way the regulator said, “You don’t have to sell Google Flights but, we don’t want this content to appear in Google Flights” That would weaken the value proposition of Google Flights and there is another play, rather than force a sell off, I guess. There are massive practical and legal issues here, but from a commercial perspective, when they launched Google Flights, I remember sitting there in New York and speaking to someone and saying, “Do you have Ryanair?” and they went, “No,” and they recognized that it was a weakness, without Ryanair on Google Flights it won’t be that interesting to Europeans.

In the same way that, “Do you have independent hotels in Rhodes and Crete on Google Hotel Finder?” “No, we’ve only got the Hilton and Marriott’s in New York.” Users will be turned off from a product if they don’t have the full suite of inventory available to them, because otherwise it’s not going to feel like a sensible search and they will look elsewhere. From a regulatory perspective, regulators could argue, Google Flights is increasing the price of Flights for consumers, therefore we won’t allow airlines to collaborate with Google Flights.

The indirect effect of that of course is that less people would use Google Flights because if they want to look at EasyJet, Emirates or British Airways they would have to look elsewhere and that would ferment some level of competition. Difficult legally I think, but that’s another option that’s on the table, I guess.

{audio:00:43:51} It’s a tricky one because actually, I remember that argument with Ryanair and I remember Kenny Jacobs when they decided to participate in Google Flights. He said two things, one is, “We don’t pay one red cent for Google Flights,” which is true and also, “If we don’t like it, ultimately, we can switch it off any time we want”, that’s also true. But Ryanair is a worldwide exception in that they’re a price lead and their brand is price and they can do whatever they want.

Look at North America though, look at Delta Airlines and American Airlines, neither of them are very happy about getting their brand search replaced with Google Flight search. So much so that, American Airlines to all intents and purposes have challenged Google on it and no longer appear on Google Brand search, nor does Google Flight search appear on American Airlines in the brand search. But it does with Delta. The reason that’s happening is because there’s not enough fragmentation in the United States market, so in the case of Delta they don’t have a choice but to appear because if they don’t appear, there are alternatives that customers will use Google Flights to discover.

In the case of Ryanair, they know that the customer will go looking for them if they’re not on Google Flights so it doesn’t matter. But Google Flights ultimately will change consumer behavior. You can argue all you want about this, but once consumers adapt to something as compelling as Google Flights that takes all of your data and is far more relevant to you. You’re going to use EasyJet instead of Ryanair if EasyJet choose to match that schedule.
Similarly, if a Startup airline wants to challenge and wants to come into a new market, let's say London Heathrow to Alicante, the only way they’ll be able to get that traffic is through Google Flight search. So, while Ryanair might not be paying for it, the challenger will be, and that’s not a natural market.

There’s a number of things that are weaknesses in all the arguments here and certainly the pure capitalist would say the market will figure itself out and ultimately no monopolies last forever. That may be true, but Google is seeming to defy those odds and its growth continues, it’s ability to extend to other segments through fantastic engineering is second to none. There is a case that says, “These guys are breaking precedent and can continue for another couple of decades”

{audio:00:47:24} I want to circle back to Booking specifically, their management are moving towards this all-encompassing super app where they want to own the whole journey. What is your view on the impact of the Google Hotel product on Booking?

{audio:00:48:14} I don’t see the Google Hotels product as straightforward as the Google Flights one. I do think it provides a cost headwind to the aggregators, but I think they can manage that one pretty well. It’s the fragmentation both of supply and language diversity and customer support that will make it, not impossible but, too far outside of their wheelhouse. They’re not about to try and take that on.

If anything, all they’re going to be is more qualified and therefore slightly more expensive traffic for the Hotel OTA’s. But, I think that over time will result in more and more traffic being available to purchase by the OTA’s, at a higher cost, but it’s still a growth story for them, it’s not a threatening existential story for them in the same way that an OTA that relies on a flight funnel is threatened existentially. As an investor, I wouldn’t worry too much about the hotel side of things. I might not be right about that, but it's certainly not as clear cut from me, as big a threat as the flight one is.

{audio:00:49:46} I agree, I think there’s more to selling a hotel than there is a flight, which is traffic and price. There’s more to it and I think Booking.com specifically as a site, don’t underestimate how amazing that site is, it’s not a ‘good travel ecommerce site’, it’s Amazon level good, it’s spectacular: content, user reviews, personalization, plus the quality of the inventory in terms of price and availability, which is massively fragmented (it’s what I do every day) and they do a phenomenal job of that, better than anyone else.

So, Google Hotel Finder represents a threat to Booking.com in as much as Booking.com have been using quite an elaborate customer life cycle attribution model for the way that they interpret how much they can pay for clicks on Google. Google Hotel Finder can distort that, but I think, in the same way that Bobby and I were saying that Google Flights wasn’t that great when it started out, Google Hotel Finder is very good, but you’re probably getting a slightly better user experience from Booking.com today.
However, it’s the sort of traffic, for Booking.com, if the three blue links which Booking.com seem to dominate, if they continue to be affected by Google Hotel Finder, that can have an effect. It can have an effect on the ROI of Booking.com’s marketing spend. But from a user experience perspective, Booking.com is holding up against that. Not so for some of the other OTA’s in this space. For Booking.com, the work that they’ve done carries them a little bit further.

{audio:00:51:47} Can I just add in a little technicality that kind of marries the Google Flights thing with Google Hotels, or even just hotel ads. When Google power a flight search, when they intercept the flight search with Google Flights, what’s really happening there is they’re learning a lot more about the customers travel intent. If you apply that to hotels, now when Google send a customer to Booking.com or Expedia they know how many room nights are involved. They know if it’s one or seven room nights, whereas previously they didn’t have that. So, because they have the Flight Search, if you’re a Hotel OTA and they’re sending you a customer for a London hotel, they now know it’s for seven days versus it’s for one day, so that allows Google to charge more for that click than it would otherwise charge.

Google Flights has this beautiful side effect for Google of providing more highly qualified traffic that in turn can be monetized and all the benefit of that. Every cent of benefit goes to Google not to the aggregators or the hotels. Your slice of the cake is being eaten up more and more by a more highly qualified Google click. That’s also part of the rationale behind Hotel Finder, it’s about providing further qualification to the traffic, which in turn allows it to be more valuable to the OTA, which in turn allows Google to have increased revenue. This is all about customer and intent and customer insight that unfortunately the OTA’s can never have because they’re not at that position in the funnel.

{audio:00:53:41} Let's say I’m booking a holiday going via Google Flights, seven nights in Rhodes and then look to book a hotel. Most of those independent hotels, which Booking.com has the inventory of, who is really competing with Booking.com for that click?

{audio:00:54:08} Anyone that wants to, the hotel direct can compete, but that’s a mess, obviously. The point is if Google can say, “Hey, I’ve got a hotel customer for a seven day stay,” if you’re a digital marketer in any hotel company or any hotel aggregator, you’re saying, “Well, a seven day stay, I’ve got $150-200 worth of margin that I can spend and still maintain a positive ROI on that transaction.”

It’s increasing the value of the auction. No-one can compete with Booking.com in the end because they’re just better at it. They’ve got 43 languages that they support, you might be able to compete in English, but your conversion funnel will fall into the graveyard otherwise. It is simply Google again taking advantage of their position, in a smart way. I would do it if I was Google. But, all of the value is coming to Google and nobody else. It’s just creating more heat in the auction and expanding the value of the auction in Google’s favor.

{audio:00:55:27} The independent hotels can’t afford to pay the CPC because they haven’t got the conversion rates that Booking.com have got, whereas the airlines are more consolidated therefore they can afford to bid up that?

{audio:00:55:42} There’s no independent hotel that can survive competing against the strengths of the larger aggregators, it doesn’t work.

{audio:00:55:54} You mention how the value in the ecosystem is accruing to Google. There is a view, particularly in the US, that as long as Google don’t take more of the value and they shift the value around, for example from the OTA’s to the inventory, either the airlines or the hotels, that that’s fine?

{audio:00:57:17} It’s not though really. It’s more about the margin, the hotel supplier has a certain cost of distribution that they can afford. Let’s say its 20% of the room night, the aggregator has a certain amount of margin that they can afford and remain in a comfortable margin position. Then there’s Google, that doesn’t have any margin rationale whatsoever, every penny is gross revenue so there isn’t a margin per-say.

As Google expand the value of the click and the cost of the click more, it allows the aggregator to spend more and still maintain a positive margin. Don’t forget the key thing here is that it’s an auction, it means that anybody can push right up to a zero ROI to grow. Ultimately in the natural marketplace an auction ends up with the zero-sum game, ultimately somebody is going to go lower, lower and lower and therefore the value goes over to Google which the regulator or competition commission has no problem with.
But what really happens is that the aggregators are now going to a smaller and smaller margin and that’s only going to result in a higher and higher commission request of hotels. The way that works is that the aggregators also have an auction model because the hotel is pay to play and the wider the commission or the wider the net return that they provide the aggregator, the better the positioning they get on the display.

The hotel suppliers can also spend up to their maximum margin and beyond that to acquire traffic. At some point, all of that reaches a point where nobody is making any money and therefore prices have to get higher on the consumer side for hotels to be able to purchase traffic, for aggregators to be able to afford to send that customer to that hotel and ultimately all of that pressure has to go into higher priced hotels.

{audio:00:59:41} So the consumer does actually lose in the end?

{audio:00:59:45} Yes, and that’s the key point. You could apply that to flights as well, but in flights it will be much quicker.

{audio:00:59:58} If I could invite you both for your concluding thoughts on the story for the ecosystem over the next few years and the role for regulators to play in promoting healthy competition.

{audio:01:00:28} I’ll kick off. There are a number of points, but I’ll try to keep it concise. Firstly, from an investment point of view, it’s now at the point where Google’s activity is constraining investability on any consumer side business in the travel tech space, that’s a fact.

Secondly, regulation is the only cure because the industry cannot cure this itself, the industry has proven that it’s unable to react to Google’s moves other than to slowly suffer from a thousand cuts. The industry cannot solve this itself and the natural evolution of the industry also won’t solve this. You move onto, finally, regulation and antitrust and if that is a cure, how does it happen? My conclusion is that regulation is the only solution and it’s a necessary solution. Secondly, regulation needs to understand the flow all the way from the top all the way down to the consumer and as I’ve just summarized, ultimately, this does lead to higher consumer prices. Those higher consumer prices are driven by higher cost base to suppliers, both in hotel and flights, which is caused by increased charges of distribution and advertising to the aggregators. In summary, regulation needs to happen and it needs to come quickly.

{audio:01:01:59} I won’t add to Bobby’s points, but I have less faith in regulation. I do think that some things that we can look at are the failure of Thomas Cook. It was ugly news, no one comes off well when such a big company goes. I have less faith in regulators and politicians. What I think is more likely to happen, should we see a major airline fail, in the same way that things fail now and people go, “It’s not my fault it was Brexit” and then a huge wave of politics and news and current affairs is thrown at Brexit, things are attributed back to Brexit, fairly or unfairly. What we probably need to see is some kind of disaster in the ecosystem where someone says, “It wasn’t Brexit, but it could have been Google”. That may spur things further along, if we see an airline go down somewhere regionally and leave thousands of people with no holidays or children sleeping on airport floors and someone goes, “It’s not our fault, our flights had got too expensive because of Google.” That’s the kind of event that may motivate things.

The other thing I want to add is, we’ve just started seeing the effect on the OTA’s and on TripAdvisor and their valuations. They’re big movers of people and I think we’re going to see more news in that space and if Booking.com or Expedia starts paying less taxes or if anyone perceives that these businesses are at risk, that may motivate regulators at the same time as well. I think they’re still very healthy businesses with incredible EBITDA numbers. The point is, post Thomas Cook, nobody in the travel industry is ever going to listen to the “too big to fail” argument ever again. If a rolling stone starts gathering moss towards Expedia for example and Google is frequently blamed for anything, we may see some more attention from the regulators but I think events need to happen before they take the kind of approach that Bobby is talking about.

{audio:01:04:43} Have you noticed any kind of substantial shift in the extent to which the industry is mobilizing to present a case on Google or to shape regulators views in approach to this situation?

{audio:01:04:59} I’ve heard one noise that gives me hope from Barry Diller, Chairman of IAC now and interim CEO of Expedia. He openly stated last year some time that his belief is that Google needs to be broken up. This is a really strong leader that is going to come in that is highly personally incentivized to make the change happen. Somebody like him could very well lead the charge in the United States to make change happen.
I certainly don’t think he’s going to lie down and try to continue to be a ‘taker’ of advertising and arbitrage. I think he will bring in a CEO with a mandate to take on this issue. So we’ll see.

{audio:01:05:54} He’s just a big Democrat contributor as opposed to a Republican. I don’t know if that’s good or bad. Chelsea Clinton is on his board.

{audio:01:06:05} The thing is, he’s a real brawler, he has access to Government. He’s the one that loses out the most if this doesn’t change.

Google Travel: Debating Potential Abuse of Market Power

Key milestones in Google’s bid to build up its market position in the travel vertical

Positioning of Google’s search business and Google’s Travel Apps positioned within the travel ecosystem vs Online Travel Agents (OTAs) like Expedia (EXPE) and Booking (BKNG)

The nature of the main strategic threat Google poses to OTAs

Extent to which Google’s commercial strategy in search, Android and through its apps may constitute an abuse of market power

Potential avenues for effective remedial regulatory action against Google’s abuse of market power

Google Travel: Debating Potential Abuse of Market Power

Former CTO, CarTrawler

inpractise.com/articles/goof-travel-anticomp

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Executive Bio

Bobby Healy

Former CTO, CarTrawler

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Google Travel: Debating Potential Abuse of Market Power(December 11, 2019)

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