What Priceline’s purchase of Kayak means: Brand power and big mobile push

At a travel conference a handful of years ago, Priceline CEO Jeffery Boyd disparaged the value proposition of metasearch in travel, but today Priceline agreed to buy Kayak for $1.8 billion.

In years past, even Kayak CEO Steve Hafner flippantly scoffed at metasearch as a low-margin, tough business, but much has changed as Kayak is now a public company, making healthy profits, and it soon will be gobbled up by Priceline.

It was clear from a Priceline call with analysts late this afternoon, that Priceline sees its pending acquisition of Kayak as a great financial proposition in its own right, as well as a way to bring on board a stellar technical/mobile team to share expertise with Priceline’s team, and the converse, as well.

Boyd said Priceline views the acquisition of Kayak as a “significant” financial opportunity for the Priceline Group, and it believes it has the resources and expertise to help Kayak grow its international business, where the going has been somewhat slow.

Boyd said he expects Kayak, after the deal closes next year, to be a “meaningful contributor” to the Priceline Group’s growth rate and profit. Kayak reported its third quarter earnings today.

OTA Priceline gets into meta and advertising

The deal marks the first time that Priceline has entered the metasearch, travel planning and advertising business, all of which it has historically seen as a distraction to its core business of getting consumers to consummate bookings and transactions.

Kayak will be operated as a separate brand, much in the way that the group’s Priceline.com, Booking.com, Agoda, and CarRentals.com are operated, with each unit’s management having considerable independence.

In that regard, Boyd said Kayak co-founders Hafner and CTO Paul English will stay on after the acquisition.

Boyd said the acquisition will benefit Kayak and Priceline’s other businesses, which will participate in Kayak metasearch. Priceline traditionally has been very slow to get involved as a metasearch participant, and unlike Expedia, which had a metasearch offering at TripAdvisor before spinning it off, Priceline doesn’t have a metasearch product — until now.

Kayak and Priceline are headquartered about 1.5 miles from one another in Norwalk, Connecticut, and Boyd also cited Kayak’s “great shop in the Boston area,” where the tech group is located.

He said Kayak and Priceline won’t launch shared platforms, but there will be “lots of cross-pollination” regarding technology and best practices.

Mobile, mobile, mobile

Both Kayak and Priceline have shown great expertise in mobile, and they have been ardent early-adopters.

In Kayak’s third quarter financial results today, its numbers indicate that its mobile revenue rose to $3.5 million, about a 63% leap in terms of revenue per thousand queries.

And, while the two companies’ technology teams can share best practices in mobile, they also can pass along expertise in website conversion and search engine marketing practices, where Priceline and, more specifically, Booking.com, have shown special prowess.

What will Orbitz and Expedia do?

One potentially problematic dynamic is that online travel agencies, such as Orbitz and Expedia, which market themselves heavily through Kayak, will now essentially be paying Priceline for that privilege.

Boyd addressed that issue, saying he doesn’t believe the acquisition should dissuade advertisers from participating in Kayak because Kayak is a great resource for consumers and delivers an attractive return on investment for advertisers.

Another interesting twist is that Priceline is one of Google’s largest marketing customers, and Kayak was a vociferous opponent of Google’s acquisition of ITA Software. Priceline took a much more neutral stance toward Google’s acquisition of ITA, saying it wouldn’t be a problem as long as Google continued to provide great leads to Priceline.

Dealing with distractions

The major portion of Priceline’s current business is in hotels — in fact, other than Priceline.com, none of its other businesses even offer airline tickets.

The same is true of Kayak. Although 86% of the queries on Kayak’s websites and mobile offerings were searches for airline tickets in 2011, just 25% of distribution revenue came from air.

Boyd indicated that observers shouldn’t view the acquisition as an attempt by Priceline to get further into the airline side of the ledger, although it will have to deal with the ups and downs of Kayak’s air business.

In its history, Priceline has steadfastly declined to get into the advertising business, which it traditionally saw as a distraction from the matters at hand — hotel transactions.

But, the acquisition of Kayak does indeed get Priceline into the advertising game, a new business line.

“Priceline had previously addressed that it was having issues in terms of marketing efficiencies,” Dan Kurnos, a Benchmark Co, analyst, told Reuters. “This certainly represents an investment for them in the paid-search, or the advertising channel, which is not an area where they’ve historically had a lot of exposure.”