In the current M&A environment, HomeAway is both the pursued and the pursuer. And all of this takes place as HomeAway becomes an even more attractive acquisition target because it is getting aggressive and ahead of schedule, expecting a majority of its listings to be bookable online within two years.
Editor’s Note: Skift is publishing a series of interviews with online travel CEOs talking about the Future of Travel Booking, and the evolving habits and device preferences of travel consumers. Check out all the interviews as they come out here.
HomeAway is merely trying to dominate the global vacation rental marketplace, but the large market cap companies, including Expedia, TripAdvisor, the Priceline Group, and Alibaba have set their sights on global domination of the entire travel marketplace.
That’s the view of HomeAway co-founder and CEO Brian Sharples, who tells Skift that vacation rentals “is the number two category in accommodations [and] then you have to suspect that some of those players are going to be eyeballing a consolidation there.”
“Well, I think these are interesting times for sure because you have a combination of a lot of M&A activity in the Internet sector in general and travel in specific,” Sharples says. “Coupled with that you have some very big market cap players like Expedia and TripAdvisor and Priceline and now, oh by the way, probably Alibaba that all have their mind set on global travel dominance.”
“But it is unlikely to think that one of those players wouldn’t want to get more aggressive and develop a competitive advantage in the space,” Sharples adds.
This indeed a very compelling moment in time for HomeAway as certain things are speeding up and others are slowing down, including HomeAway’s usually very aggressive merger and acquisition activities, which are at a lull in terms of agreeing to acquire something because “value expectations have gotten a little bit out of whack,” Sharples says.
On the other hand, Sharples says HomeAway is aggressively prodding vacation rental owners to enable online booking to the extent that he believes a majority of HomeAway’s listings will be online-bookable within two years — and that’s a much faster pace than the company previously expected.
Skift spoke with Shaprles about the future of travel booking in vacation rentals, its new Expedia distribution partnership, the rapid advance of mobile traffic, and the M&A climate. An edited portion of the interview follows:
Skift: I think over the years HomeAway has acquired about 30 companies. There hasn’t been much acquisition activity on your part so far this year. Are you guys exhausted? Why the change?
Brian Sharples: Well, we are always exhausted because of the business we are in, period [laughter]. With respect to M&A, we actually have a lot of activity under the hood. We have a very active M&A group and we are in discussions with lots of companies around the world. I think the issue right now is value expectations have gotten a little bit out of whack. We just don’t go around buying things that we like. We go around buying things that we like at a fair price. It is just a fact right now in the Internet world that people see things like Airbnb’s reported valuation and many other companies that have been bought at very high multiples.
This isn’t Airbnb’s case, but lots of companies that have low revenues are bought at ridiculous multiples. There are companies like Airbnb that may have revenues, but not profitability, trading at big multiples. There are a number of things that we are interested in, but we are definitely at a time right now where the expectation of the seller does not really appear to be in line with what the market is willing to pay.
And I say the market’s willing to pay because these companies aren’t getting sold to anyone else. Probably us and all of our competitors are looking at these things and nobody is willing to pull the trigger at what people want. M&A is a big part of our business. We use it mostly to expand around the world. That trend will continue. If there is a lull it is because of the valuations.
On the technology side we continue to look for transformational pieces of technology that can impact our business. We just made a new investment in a company called Hotspot, which is a company that manages all of the record-keeping and payment of state and local taxes for our owners. That is a big issue now with Airbnb and regulation. That’s transformational because it helps to ensure that our owners can very easily comply with local regulations, which is in our best interest.
Skift: When you talk about humongous valuations, OpenTable got a 46% premium, Concur just sold for $8.3 billion, and even Viator was acquired for $200 million. In addition to HomeAway looking at acquisitions, has this impacted how you feel about HomeAway’s future as an independent public company? Because everyone I talk to says sooner or later HomeAway’s going to get consolidated. Maybe sooner. So what is your view of this?
Sharples: Well, I think these are interesting times for sure because you have a combination of a lot of M&A activity in the Internet sector in general and travel in specific. Coupled with that you have some very big market cap players like Expedia and TripAdvisor and Priceline and now, oh by the way, probably Alibaba that all have their mind set on global travel dominance.
Which is different from HomeAway. We have our eyes set on global vacation rental dominance. But these guys [Expedia,TripAdvisor, Priceline, Alibaba] view themselves as kind of full-service. If you are a company that is the market leader in a category that’s significant if you look at accommodations, hotels is number one, vacation rentals is number two, maybe cruise is number three. This [vacation rentals] is the number two category in accommodations [and] then you have to suspect that some of those players are going to be eyeballing a consolidation there.
Now we can’t run the business that way and so what we are doing today is saying, look, another way for everyone to benefit from HomeAway is for us to partner with them. We got aggressive about building our distribution platform because it may just turn out that the industry evolves in a way that we are distributing inventory through a variety of platforms; we are also selling to the hardcore vacation rental consumer, and the world goes on.
But it is unlikely to think that one of those players wouldn’t want to get more aggressive and develop a competitive advantage in the space. We are doing nothing to make that happen because we love running an independent company and we are growing, etc. But, as a public company, as you know, if someone comes in with a premium that’s big enough then our fiduciary duty to our shareholders is to give that serious consideration.
Skift: And some of those big market cap players have holes in their portfolios. All the more.
Sharples: And some of them are raising a lot of money right now.
Skift: With all of the selling of notes and things like that?
Sharples: Yes, convertibles and whatnot.
Sharples: We did some of that too.
Skift: You raised money after the Stayz acquisition, didn’t you?
Sharples: We did. We have about $800 million in cash at the moment.
Skift: HomeAway recently announced its first major online travel agency distribution partnership with Expedia, and I noticed that Expedia customers will see vacation rentals mixed in when they search for stays of several days or more on Expedia.com. I guess I was expecting to see a vacation rentals tab. What does this say about the future of travel booking when it comes to vacation rentals, hotels and other sorts of lodging types?
Sharples: I think the answer is we’ll see. Based on our research, we believe that about a third of families going on vacation think about vacation rentals top of mind. Some subset of those people know about vacation rentals and they may choose Google or HomeAway as a starting place, but for the most part, around the world, they do end up on a HomeAway site if that’s their intent. The point of the partnership if people don’t think of vacation rentals top of mind, when vacation rentals are put in front of them they might consider it as an alternative.
I can tell you based on the testing we’ve done with Expedia, we have found that if you take a classic hotel traveler for the right type of stay and put a vacation rental in front of them, and allow them to see the prices and the details, we do get conversion on some percentage of those folks. I think the future of the category is that will see a higher level of penetration of vacations taken in vacation homes because in addition to the people who have already decided that is a good option, the online travel agencies will start to help us to start to introduce the category to new people who have never considered it in the past.
Now, how big that is going to be long term, nobody knows. If today roughly 20% of people taking vacations do so in vacation homes, then my guess is that by introducing this into more traditional hotel channels, this will probably over the next three to five years get that number to at least a third, which would be fantastic.
Skift: I am not expecting you to name names, but do you already have any big distribution partnerships like the one with Expedia already lined up?
Sharples: At the moment, the Expedia partnership is a pretty big undertaking for us and so we have been exclusively working on that with them. However, there isn’t an exclusiveness that prevents us from working others. In order to get the Expedia partnership to the point where it is today we did have to build a generic distribution platform that will work with OTAs, it will work for travel agents, it will work for destination marketing organizations within different regions.
Our business development folks are in discussions with a number of well-known players around the world in those different categories. My expectation is that we are going to take a pretty measured approach to launching new partnerships because right now we are trying to get this to work with Expedia in the U.S. There are certainly other regions around the world that you may see announcements on in the coming quarters.
Skift: HomeAway has had its pay-per-booking commission model — as opposed to the commission-free subscription model — in place for around a year at this point. Have you figured out on your sites and in your apps how you will prioritize the displays of commission-based properties versus subscription-based properties, and what does your answer mean for the user experience on your sites and apps?
Sharples: We built a fairly sophisticated marketplace management engine that we had ready at launch about nine months ago. And that’s been working well for us. What that engine does it allows us to meter the movement of pay per booking listings on our site depending on the impact it has on performance with subscription listings. We have a base of customers who pay us up-front and those are subscribing customers. In our contract with them if they are paying us in advance to be on our site then we have to deliver them a certain level of performance.
We have a very good mathematical sense of how much performance we need to deliver to certain types of customers who pay us certain amounts of money in certain geographies around the world. What we don’t want to do in our pay-per-booking listings is damage our subscription business. What we have been experimenting with over the last nine months is looking at how much exposure do we give to pay-per-booking listings without having that impact. And when we see a negative impact we pull back, and this is market by market, and we see no impact we move forward aggressively.
Since we launched pay-per-booking, slowly but surely we have been getting less timid with how we surface pay per booking listings on our site. But on average their exposure is still very, very low. So it is coming up slowly but surely, but it is still very low. Part of our job at HomeAway is to also understand that there are a finite number of people coming to our sites and the best way to be able to give more exposure to pay per booking listings is going to be to book traffic at the top of the funnel.
The more traffic we bring to the top the more we can get aggressive with pay per booking without affecting subscription. So that’s why you see the company a couple of quarters ago starting to talk about really ramping up our marketing activities for the next one to three years because we want to support both of those businesses fully and in order to that we are going to have to get more and more aggressive to get people to come into our funnel, to get to know our brand and even to do some increased Web marketing, as well.
Skift: How has that increased Web marketing been going?
Sharples: Good. We’ve just been testing it in pockets. We are in test and learn mode right now, but I think we have no doubt that by allocating resources to marketing we are going to do a better job up at the top of the funnel. As you may know we just brought in a new CMO. He has literally been here for two weeks.
Most of the activities we are engaged in at the moment are sort of pre-CMO. It will probably take the balance of this year to get a solid strategy under a new regime in place for how we are going to spend money going forward, but I certainly expect that whatever we are doing today, which is very positive, is going to be a lot more positive in the future as we really have a tremendous leader for that business.
Skift: What is the status of online booking for vacation rentals today and where is it heading? Isn’t there a substantial portion of the vacation rental by owner segment that would rather keep bookings offline?
Sharples: Yes, there is no question. It certainly would be better for trust and safety reasons for travelers if all properties on our site could be booked online. We certainly have the incentive to push that as hard as we can. The headwind against it is our owners have been doing things offline for many years. Our owners, for the most part, don’t really represent new people who just decided yesterday to start renting. The core of our base are people who have been doing this for a very long time across Europe, across the U.S. Our site has always delivered a lot of money to these folks. They have figured out their offline ways of collecting cash and doing things and it works for them. And they make lots of money. And they are super happy.
Here we are HomeAway coming and telling them, look, for the good of the industry, to develop more trust in the category, to bring more travelers in who you’ve never seen before, you need to move to a world of ecommmerce. They are simply sitting there and saying, well I don’t know why I need all that. I’m very satisfied. As a company, we’re having to work pretty hard to get people through that transition but it is now starting to accelerate dramatically because one of the weapons we have in our arsenal to push ecommerce are things like search position.
We are able, for example, to sort people who we think provide what is a better consumer experience higher in search results. In addition to the fact that consumers really like commerce-enabled listings and they are higher in sort, the people who do that perform better. We then can take those metrics and feed them back to the people who don’t and now we have real data that show that people who adopt ecommerce on our platforms and online payments really do get better performance.
I think for people who are in business to make money that speaks volumes. We are starting to see a pretty dramatic acceleration. We have always said in answer to the question when do you think the vast majority of listings on your site will be ecommerce-enabled, we have always said in the past certainly in a three- to five-year timeframe. I’m willing to say at this point that I think we are going to see it happen more aggressively than that. As a company, we’ve decided to be more aggressive about moving people that way. My belief now is that within two years you are going to see the vast majority of listings on our site to be payment-enabled, ecommerice-enabled, online-bookable properties.
And that’s because of a whole range of programs, activities and policies we’re putting in place on our side and the fact that the adoption curve is really starting to bend upwards. So the experience with respect to HomeAway I think is going to change very dramatically in the next couple of years.
Skift: Do you think vacation rentals will ever get to the point where lots of people are booking them on smartphones? What are you doing — and is it a priority — to make smartphone bookings of vacation rentals easier?
Sharples: I don’t think it is going to be status quo. I think it is going to change and we as a company have adopted the mentality that at this point that we have to be a mobile-first company. The growth numbers on mobile are too hard to ignore. The form factors are getting bigger so we are going to have the iPhone 6 and 6 Plus out in the market. And I think the whole issue on smartphone conversion really comes down to size of the form factor and to some extent speed of network.
The form factors are getting bigger, the networks are getting faster. If you take a worldwide view on this you just have to assume that I would say probably within two years that more than half our traffic will be mobile. We are investing very heavily right now in mobile. On a percentage growth basis it’s probably the fastest growing group we have in our development organization.
The other piece on mobile that we are over-the-moon excited about is the ability to manage the traveler experience through mobile because we know that 95% of our travelers are out there with smartphones so we do have now an industry-leading app, our Glad app, that we are starting to put in the marketplace. Travelers download it when they book a vacation with us and that app helps them manage everything about their trip: pre-stay, how to get to the property, how to get key codes, how to operate the televisions, restaurant recommendations, and in the future probably deals on things that happen in local markets.
Historically HomeAway was all about putting buyers and sellers together and we are fast transitioning into a company that’s trying to create a travel experience that delights our customers. And I think mobile is going to be a huge part of that because we can put a concierge in the pocket which is even better than being in a hotel and having to walk downstairs and talk to somebody.
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Photo Credit: HomeAway co-founder and CEO Brian Sharples. HomeAway