Does This Tech Giant's Strategy Spell Trouble for Travel?

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Google (NAS: GOOG) has a history of taking a service people used to pay good money for, and simply offering it up for free. The Android mobile operating system, and the popular Google Maps service, are just two of the most prominent products Google gives away just to drive traffic. A recent string of acquisitions indicates that Google might have the same treatment in mind for the online travel agency (OTA) business. Investors in traditional OTAs should be worried.

In 2010, Google snapped up the development team behind Ruba.com, a photography-based travel community. Later that year, it bought ITA Software, which specializes in the search and display of airfares. Shortly thereafter, Google launched Google Flights, competing directly with traditional OTAs.

Ominously for the OTAs, Google Flights allows users to select a travel plan armed with Google's information, and then go directly to the airlines' reservation systems. This leaves out incumbents, like Expedia (NAS: EXPE) and Priceline.com (NAS: PCLN) , which typically earn revenue by either taking a commission from hotels for each booking, or charging a markup to consumers.


Location, location, location. . .
Google strengthened its location-based commerce portfolio in 2011 by buying up influential reviewing company Zagat Survey. Zagat profitably sold subscriptions to its restaurant, hotel, and entertainment reviews, but Google integrated Zagat ratings into its Google+ Local service, and gave away the reviews for free -- with a catch. To read full reviews, users had to sign up for a Google+ account. After its recent acquisition of venerated travel guidebook publisher Frommer's, Google is expected to implement the same system: Join the Google+ community, get free access to the goodies you used to have to pay for.

Google's build-up of locality-based services should alarm businesses like Yelp (NYS: YELP) and TripAdvisor (NAS: TRIP) . All three services aim to enlist community members to provide free reviews of local businesses and attractions, distribute this aggregated knowledge for free, and make money by serving up ads to users. Network effects are critical here: The more users contributing free content, the more readers the site will attract, and the more value the site offers to advertisers. If Google can offer premium reviews and advice for free, it can use this to generate a stronger and more engaged community, potentially leapfrogging the incumbents in the social/local space.

Cutting out the middleman
Google's resources in local review, as well as its Google Transit capabilities, were incorporated into the launch of its own Hotel Finder service in 2011. With Hotel Finder, users can easily search for lodging with certain ratings near venues, and in a given proximity to other locations via public transit. Hotel Finder users can book hotels through OTAs but, similar to Google Flight, Hotel Finder also allows customers to book directly from hotels themselves. Right now, hotels bid for this privilege, as bypassing OTAs provides significant cost savings. If Google chooses to allow users to book directly from hotels without a fee to either, however, OTAs would find themselves charging a premium for no added value -- not a pretty position to be in.

Hurdles remain for Google, and the demise of OTAs is not imminent. Users of Google Flight, for example, have complained that Google's flight results are limited compared to competitors. In the highly fragmented hotel industry, companies like Priceline have a major network advantage, due to the large number of customer relations they already have. But overcoming these problems should only be a matter of time for a behemoth like Google.

The question for long-term investors in the OTA space is whether these businesses make sense as standalone enterprises. Is searching for transportation and hotel information really so different from searching for any other kind of information, that there's some compelling reason why Google wouldn't be able to do it better? There's little question that, given the immense resources of Google's brand, network, engineering know-how, and vast cash reserves, Google could connect travelers to travel service providers just as well, if not better, than current OTAs and advisors. If Google chooses to do so for free -- taking their compensation in the form of more data gathered, and more eyeballs looking at ads -- neither customers, nor service providers, will have any incentive to allow intermediary OTAs to take a cut. If it makes sense for Google to offer a service for free, I wouldn't want to be in the business of selling that service.

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The article Does This Tech Giant's Strategy Spell Trouble for Travel? originally appeared on Fool.com.

Daniel Ferryowns shares of Google. The Motley Fool owns shares of Priceline.com and Tripadvisor.Motley Fool newsletter serviceshave recommended buying shares of Priceline.com, Google, and Tripadvisor. The Motley Fool has adisclosure policy. We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. Try any of our Foolish newsletter servicesfree for 30 days.

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