Google Travel: Debating Potential Abuse of Market Power

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?

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?”

Could you take us through some key milestones over the last decade in Google’s evolution in this vertical?

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.

Alex, on the OTA side, how have you experienced this from your side of the industry?

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.

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.