In the internet era, middlemen companies like Expedia Group (NASDAQ:EXPE) are increasingly in trouble as more and more companies are able to bypass them and reach customers directly. Earlier this week, yours truly detailed the growing problem as it applies to online travel agent Booking Holdings (NASDAQ:BKNG). The problem won’t impact owners of EXPE stock quite as much since it’s also the majority owner of Trivago (NASDAQ:TRVG), a venue that has placed itself between the middlemen and would-be travelers.
In other words, Expedia has its frontline presence that rival Booking.com doesn’t have.
Don’t think for a minute Expedia isn’t facing its own inherent problems of being a middleman, however, as consumers and companies are increasingly capable of working directly with one another and circumventing online price-raising travel agents.
Expedia Group is just running into that headwind from a different direction.
Pushback Against Expedia
The tension has been palpable for months, but came to a head in early February. United Continental’s (NASDAQ:UAL) United Airlines was reportedly considering removing its airfare data from Expedia’s websites due to a dispute between the two parties. If the two companies can’t come to a resolution by the time the currently contract ends on September 30th, as of October 1st, United Airlines flights will not be bookable through Expedia.
The crux of the argument was the amount of money United pays Expedia.
It’s only a microcosm of the growing degree of pushback Expedia has been facing for a while now, however, as hotels, airlines and car rental companies are increasingly unclear as to the value Expedia and other sites like it bring to the table.
Case in point: In mid-2017, Hyatt Hotels (NYSE:H), tired of paying between 15% and 25% of their room revenue to online travel agents, made a similar threat
Hyatt and Expedia were able to reach terms both sides could live with a few months later. Though details of that deal were not disclosed, presumably, Hyatt’s net costs for access to Expedia’s customers were lowered. Even so, the fact that Hyatt Hotels continues to tweak its ‘World of Hyatt’ loyalty program suggests it’s still ultimately looking to circumvent travel agents by becoming its own agent of sorts.
Equilibrium?
It’s possible none of the involved parties new what to make of the rise of online travel booking, and as a result too much control was ceded to the middlemen — and away from hotels, airlines, rental companies and other travel services.
The industry may have since found the right balance that proves equitable to all involved. In Expedia CEO Mark Okerstrom’s words offered up a year ago, “maybe we’ve hit a new equilibrium.” This suggested online travel agents and the companies they represent had finally figured out what’s fair in terms of pricing.
If the current impasse with United Airlines is any indication, Okerstrom spoke too soon.
In the meantime, the deeper focus on smaller and independent hotel groups that have less pricing and marketing power has already been met with some resistance. Australian entrepreneur Dick Smith is one such operator, lamenting late last year that Booking.com was “exploiting and extorting” hotel and motel owners. Fellow motel owners Mark Henderson pulled no punches when he said “They’re ripping us off.”
As travel industry research outfit Skift’s senior analyst Rebecca Stone noted a year ago “…we question the sustainability of [fronting for more independent hotels] long term. Direct booking campaigns and an increasingly competitive distribution landscape continue to push commission rates down for everyone, and the major chains are enticing independents with soft brands and the benefits of global distribution and loyalty programs.”
It’s all a collective existential threat, even if not an immediate threat, to Expedia and the value of EXPE stock. Though it once served a clear purpose by fulfilling a role others couldn’t, Expedia’s role as a travel agent has become at least somewhat obsolete.
Bottom Line for EXPE Stock
As was the case for Booking Holdings shareholders, owners of EXPE stock won’t likely see this headwind take a specific, measurable toll in any given quarter. It’s a slow-burn kind of headache that creates a dull pain which never truly gets diagnosed and never really goes away.
Nevertheless, it’s still there, and still a reason for concern. As time passes, hotels of all sizes — major chains and tiny operators — will figure out ways to eliminate middlemen that don’t provide cost-effective marketing. Ditto for airlines.
Bottom line? Like Booking.com, Expedia must start demonstrating clear value to its customers. Not even its majority ownership in Trivago can provide cover forever since, when the middlemen fail, a middlemen aggregator will fail as well.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities. You can learn more about James at his site, jamesbrumley.com, or follow him on Twitter, at @jbrumley.
