Expedia turns to HomeAway as direct-booking campaigns dent earnings

Expedia missed its quarterly projections once again, but this time it may have more to do with spending than the weather. Photo credit: Getty/RonBailey (Expedia's Q4 2017 earnings call shows signs that hotel companies' campaign for direct bookings is working, and the OTA may no longer hold the market in the palm of its hands.)

Expedia’s Q4 earnings missed projections as its stranglehold on the online hotel bookings landscape may be in jeopardy over the effectiveness of hotel direct-booking campaigns, though Expedia CEO Mark Okerstrom is reluctant to admit as much. 

Expedia reported $10.05 billion in revenue for the 2017 fiscal year, missing analyst projections of $10.11 billion. Expedia’s bookings increased 14 percent, or $2.4 billion, reaching $19.8 billion, but the company missed its forecasted revenue goal of $2.36 billion, recording $2.32 billion.

The company's revenue per room night also decreased 3 percent while average daily rates grew 2 percent, which Alan Pickerill, Expedia’s EVP and COO, attributed to comparisons with a strong Q4 2016, weather-related booking refunds and lower commission rates in contracts.

Expedia also posted a 15-percent increase in room nights, which is less than the company anticipated in Q3. Trivago, which was troubled by a 22-percent growth deceleration in Q3 2017, managed to grow revenue on a standalone basis by 18 percent in Q4, with roughly half its growth driven by foreign exchange. Okerstrom said Trivago stands to face “extremely tough revenue and profitability comps through the first half or 2018.” 

The biggest contributor to Expedia missing its quarterly projections was its decision to ramp up spending as it plans for the future. Expedia will be spending $170 million alone on improving its cloud-based operations, technology and content. This investment will result in improvements to all of Expedia's online business, but it also represents a significant ramp-up in spend for HomeAway as the home-sharing brand becomes a frontrunner for the OTA.

"As we invest aggressively in supply, we also expect to utilize higher cost performance-based channels to drive demand across our global growth brands, causing sales and marketing expense to grow faster than revenue," Okerstrom said.

Another, more subtle contributing factor to the OTA's lower-than-expected Q4 performance might be attributed to the effectiveness of hotel companies' direct-booking campaigns. During last year’s Expedia Partner Conference, Okerstrom stated that he didn’t blame hotels for trying to drive direct bookings through marketing campaigns. After all, Expedia is constantly fighting to win customers from Google. However, whenever he is prompted to comment on the effect these direct-booking campaigns have had on Expedia’s bottom line, he maintains the OTA has seen “no direct impact” from them, a line he used in the company’s Q3 2017 earnings call and again yesterday during Expedia’s Q4 call.

“In terms of the hotels direct-booking campaigns, again we still do not see an impact on our business, and we look at this in a million different ways,” Okerstrom said during the Q4 call.

What he did concede, however, was that Expedia’s customers were searching for more independent hotels, citing pricing competitiveness, name brands appearing lower in Expedia’s sort order and the OTA’s brand-agnostic audience as contributing factors. Most telling is that Okerstrom said this may be the new normal.

“Perhaps it's working for the hotel chains. It seems to [be] working fine for us, and maybe we hit a new equilibrium,” Okerstrom said.

Directly Limiting

Hotel companies' push for direct bookings may have had its initial detractors, but a 2017 report from Kalibri Labs, which analyzed the early days of the campaign, showed room night growth from May through Dec. 2016 was up 7.8 percent across 12,000 surveyed hotels, while net revenue for these properties also rose 9.3 percent. 

This data are not the only relevant facts to consider when looking at the impact of direct bookings. During Expedia's Q4 call, Okerstrom said the company's sort order for online searches is pushing bookings toward independent hotels. This could be attributed to Expedia's customers preferring to book by price. If independent hotels are appearing higher on Expedia’s searches, then it stands to reason that the better rates for branded hotels will be found through branded booking channels.

Cindy Estis Green, CEO and co-founder of Kalibri Labs, said in the company's 2017 report that brands are also less likely to include extras that would improve the travel experience on OTA bookings. These extras include the opportunity for guests to choose their own room when booking, access to free Wi-Fi and other perks. Overall, this makes it more difficult for OTAs to create a seamless experience for travelers, and gates the optimal travel experience behind a direct booking. 

With this strategy, hotels may have found a method to retain power over the hotel experience through online bookings, wrenching some of the control over online bookings from the OTAs’ grasp. 

A Year of Change

While Expedia isn't in any trouble, it does seem like it may have a few difficult months ahead of it. According to Okerstrom, the company is “now firmly in execution mode,” which means a lot more additional spending than what was previously expected in 2018. 

For the most part, Expedia's aforementioned $170-million investment in its cloud infrastructure will be used to expand HomeAway’s presence in the alternative lodging ecosystem. In Q4 2017, HomeAway grew room nights by 30 percent, and in 2017 the brand recorded on-platform gross bookings of $8.7 billion, up 46 percent from 2017.

"The biggest thing the HomeAway team is focused on, right now, is... creating reasons for people to book on [the] platform," Okerstrom said, "They've developed some incredible technology around their marketplace feeds, the revenue management platform, [and] they've rolled out lots of great reasons for property owners and managers to actually use the platform."

It makes sense for Expedia to go after home sharing, but whatever gains it makes this year may be challenged by competition from Airbnb now that the company has begun offering third-party hotel distribution. Hotels listed on Airbnb’s service will be charged a paltry 3 to 5 percent on bookings, a fraction of Expedia’s fees.

Okerstrom doesn’t see it that way, however, and during the Q4 call he said there is enough room in the home-sharing industry right now for everyone to share.

“As we've said a number of times, it is just a massive market,” Okerstrom said. “We think ourselves and other competitors in the marketplace can grow very well for a long period of time.”