Out of Nest, TripAdvisor Soars Past Expedia; Former Subsidiary’s Success Shows How Swiftly Currents Can Shift Online. Expedia relies on bookings. TripAdvisor depends on ads. But both are vying to be travelers’ first stop online

August 7, 2013, 7:46 p.m. ET

Out of Nest, TripAdvisor Soars Past Expedia

Former Subsidiary’s Success Shows How Swiftly Currents Can Shift Online

DREW FITZGERALD

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Expedia relies on bookings. TripAdvisor depends on ads. But both are vying to be travelers’ first stop online. Children often outgrow their parents by their teens. TripAdvisor Inc. TRIP -1.63% did it in less than 20 months. That milestone was crossed after Expedia Inc. EXPE -0.33% executives spent months warning analysts and investors that aggressive marketing tactics from old rivals like Priceline.com Inc. PCLN -0.83% could hurt profits this year. But a more painful and unexpected sting came last month from an old ally: TripAdvisor, the former subsidiary that still feeds Expedia many of its customers.A year and a half after being spun off by Expedia and with a newly independent board, TripAdvisor redesigned its website to show shoppers more hotel options right there among its traveler reviews, rather than referring them to sites like Expedia’s via pop-up windows, as it had in the past.

Expedia reacted late to the shift, and its sales suffered this spring partly as a result. TripAdvisor, meanwhile, booked its fourth-straight quarter of better-than-expected earnings.

The former subsidiary’s success shows how swiftly currents can shift online, where travelers are increasingly planning their trips on sites that aggregate offerings from a number of different online sources.

The shift is evident in the two companies’ stock market value. At $6.9 billion, Expedia is now worth about 40% less than TripAdvisor, which is valued at more than $11 billion.

It is also evident in data from Google GOOG -0.66% —a company that competes with TripAdvisor for travel searches. Queries for “Tripadvisor” now surpass those for “Expedia” by nearly 50%. Less than two years ago, Expedia garnered twice as many searches as its then-subsidiary.

Big online travel companies are hedging their bets against the trend to aggregation, which the industry insiders call “metasearch.” Expedia itself paid about $620 million for a majority stake in Europe-focused aggregator Trivago in March. Two months later, Priceline bought online aggregator Kayak Software Corp. for $1.8 billion.

Priceline, which reports earnings Thursday, continues to post growth in its core business of booking travelers’ trips online and owns two of the brands that Expedia executives singled out last month as competitive challenges. TripAdvisor’s latest results also suggested that Priceline handled the shift to its new price-quote aggregation system more smoothly.

Founded in 2000, TripAdvisor first crossed paths with Expedia after media investorBarry Diller‘s IAC/InterActiveCorp. IACI -0.72% acquired it in 2004 and folded the curator of hotel reviews into IAC’s broader travel business. A year later, IAC spun off its travel websites under the Expedia name. Expedia, in turn, split off TripAdvisor in December 2011.

Separating Expedia’s booking business from its online media arm would allow both businesses to maximize their potential, executives said at the time. The split certainly delivered the goods to investors, creating about $10 billion of combined value in less than 20 months.

Mr. Diller was among those investors. He owns 4% of Expedia’s stock and chairs its board. He stepped down from TripAdvisor’s board in April, citing the heavy workload of juggling several corporate director seats. Mr. Diller said he is pleased with TripAdvisor’s success, even if the two travel sites sometimes compete for users’ attention.

“I do believe that these two businesses, Expedia and TripAdvisor, will become more competitive over time,” Mr. Diller said in an interview.

Expedia’s empire of brands, which includes Hotels.com, Hotwire.com and Trivago, still generates five times more revenue than TripAdvisor. The Bellevue, Wash., company employs more than 12,000 workers compared with TripAdvisor’s 1,500.

Expedia’s business model also relies on commissions for booking lodging and transportation. That differs from TripAdvisor’s advertising-dependent strategy. TripAdvisor uses its catalog of more than 100 million traveler reviews to attract users, and gets paid by other travel sites for ad placements and referrals.

Yet both companies are vying to be travelers’ first stop online.

“We have competitors that are in our portfolio,” said Mark Okerstrom, Expedia’s chief financial officer. “This is a pretty common phenomenon in the travel space.”

TripAdvisor rattled the sector earlier this summer by overhauling the way it displays hotel listings, allowing customers to see all the rates offered by online agents like Expedia, Priceline and Travelocity in one list on its site. The switch to “metasearch” let customers find the lowest prices on a single screen without having to click on several links to find each rate, cutting down on pop-ups.

Users reacted predictably, cutting the frequency with which they clicked those pop-up links by about two-thirds. TripAdvisor earns most of its revenue from those lucrative referrals, yet the company said it made up for some of the shortfall by having bookers bid for top spots in search results, driving up the fees it could charge them. Second-quarter earnings soared 26%, though the changes showed up online with less than a month left in the period.

Expedia had a harder time adapting to the shift. Executives at both companies suggested that Expedia bid too little for some of the most prominent listings on the screen—a miscalculation the former parent company is working on correcting—and bookings growth slowed to 13% from 19% six months earlier.

TripAdvisor finished revamping its website in June, and executives from both companies said it would take time for partners like Expedia to adjust to the new way of doing business.

“Some partners were a little faster on the uptake than others,” TripAdvisor Chief Executive Stephen Kaufner said during a conference call with analysts in July. “Maybe Expedia wasn’t in as top a position as they had been across all of our markets—not to say that they won’t reclaim that position.”

Expedia is working to adapt to its former subsidiary’s new Web environment.

All TripAdvisor partners are “getting plenty of data right now,” CEO Mr. Kaufner said. “The onus is on them to find new ways to consume it and analyze it.”

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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