In recent years, quarter after quarter, as the Priceline Group was thumping Expedia Inc. in terms of growth, you had to wonder sometimes how Expedia Inc. CEO Dara Khosrowshahi was hanging onto his job.
It would have been extremely interesting during this period to eavesdrop on the conversations between Khosrowshahi and controlling shareholder, Barry Diller, about the company’s performance.
But it’s a different story these days for Expedia Inc. and Khosrowshahi, too, as the company, after investing heavily in a multi-year project to build and integrate its brands into a global technology platform, and fueled by organic growth and a slew of acquisitions over the last two years, including Trivago, Wotif, Auto Escape Group, Travelocity, and soon-to-be Orbitz Worldwide, is in the midst of a turnaround.
In a Skift interview about Expedia Inc.’s comeback story, Khosrowshahi talks about some of the “tough days” of the past and how he and his team “walked through the fire together.”
Thanks to TripAdvisor and Steve Kaufer
“Listen, any time you’re the CEO of a public company, especially in a field as competitive as the travel field, your job is on the line every day,” Khosrowshahi said. “My job is on the line now.”
Khosrowshahi, who was appointed CEO of IAC Travel, which included Expedia, in 2004, talked candidly last week about one of the factors that contributed to Expedia Inc.’s viability during a rough period and Khosrowshahi’s tenure as CEO during that time.
“You know, having TripAdvisor as part of fold in those years really helped,” Khosrowshahi said. “We had this incredible rocket ship of a business in our fold and TripAdvisor’s growth allowed us, to some extent, to reinvest in the other parts of the business.”
IAC acquired TripAdvisor in 2004 and Expedia Inc. spun off TripAdvisor into a public company in late 2011.
“I guess I have [TripAdvisor CEO] Steve Kaufer to thank,” Khosrowshahi said. “Maybe he saved me my job. But having a portfolio, having different brands, allows you to invest in different parts of the business and TripAdvisor being a part of the family in those early years was a big part of where we are today.”
Expedia Inc. — and the Priceline Group — are now TripAdvisor’s largest customers, although the two online travel agencies compete with TripAdvisor, as well.
If Khosrowshahi was under pressure over the last few years, It would have been unfair to pin Expedia Inc.’s struggles primarily on him. One huge challenge the company had to deal with was transforming the disparate legacy technologies powering the plethora of brands under the Expedia Inc. umbrella, including Expedia.com, Hotels.com, Hotwire, Venere, eLong, and others, and integrating them into a cohesive platform.
That took a huge investment and several years, starting around 2010.
Khosrowshahi, who served as CFO of Diller’s IAC for seven years before taking on his current role, credits Diller, Expedia Inc.’s chairman and senior executive, for having the patience to look at the big picture.
“We did have some tough days and I think having a chairman and a control shareholder like Barry Diller — who’s solving for the long term, who’s not solving for the quarter, sometimes he’s not even solving for the year — he really understood what we were up to and was willing to be patient, and that really helped,” Khosrowshahi said. “I think if this company had a different chairman or a different controlling shareholder you know things might have been different.”
Indicative of that roller-coaster ride, Diller, Khosrowshahi and several other Expedia Inc. executives saw their cash bonuses lowered in 2013 because the company’s performance fell off from 2012.
Expedia and Priceline, Then and Now
To be sure, Expedia Inc., with $5.76 billion in 2014 revenue, is still a smaller company than the Priceline Group, which notched $8.4 billion in revenue last year. When it comes to market cap, there’s no comparison: Expedia Inc.’s market cap is a mere 18 percent of the Priceline Group’s $63.6 billion.
But from the charts below, covering 2010 to 2014, you can see how the Priceline Group over the last couple of years erased Expedia Inc.’s previous gross bookings edge while Expedia has closed the gap in hotel room night growth, an important metric given the centrality of their respective lodging businesses.
While the Priceline Group, from a larger base, edged Expedia Inc.’s room night growth, 28 percent versus 26 percent, respectively, in 2014, Expedia Inc. has some momentum. In the fourth quarter of 2014, boosted by contributions of 5 percentage points of growth from Travelocity and Wotif, Expedia Inc. saw its room night growth accelerate to 28 percent, up from 25 percent a year earlier.
Meanwhile, the Priceline Group’s 24 percent room night growth in the fourth quarter of 2014, which was slower than Expedia’s, represented a deceleration from 36.5 percent in the year-earlier period.
Expedia Inc. Gross Bookings and Room Night Growth, 2010-2014
|Year||Gross Bookings||Percent Change||Hotel Room Nights||Percent Change|
Priceline Group Gross Bookings and Room Night Growth, 2010-2014
|Year||Gross Bookiings||Percent Change||Hotel Room Nights||Percent Change|
Source: Financial reports
Priceline Group CEO Darren Huston has been outspoken in articulating what he believes are the differences between the acquisition strategies of his company and Expedia Inc.’s, arguing that the Priceline Group is acquiring “premium” brands such as Kayak and OpenTable while Expedia Inc., with the exception of the fast-growing Trivago, has been investing in subpar brands such as Travelocity and Orbitz Worldwide.
Another point-counterpoint in the two companies’ strategies is that Expedia Inc. is willing to invest in Trivago and eLong in China at a loss while the Priceline Group will only invest in Kayak on a profitable basis.
In its essence, Huston’s message is that a lot of Expedia Inc.’s growth is inorganic through acquisition and is not sustainable.
Two Roads Diverged in a Yellow Wood
Asked about the criticism and divergent strategies, Khosrowshahi said both companies may be right and both may succeed, albeit through different strategies.
“I think time will tell,” Khosrowshahi said. “They seem to be different, interesting strategies. Our strategy to some extent is borne out by the platform that we built that allows you to bring in different brands, provide a different experience but still continue to innovate at a very fast pace. This was the capability that we built that we think is different from a capability that other players have.”
“The fact is that we could both be right,” he said. “This is a huge travel market. It’s over $1.3 trillion dollars and our sales and Priceline’s are still a relatively small portion of this market. You could completely see two companies that are pursuing two different strategies that ultimately succeed. I don’t think it’s either/or.”
Expedia Inc. took majority control of Germany-based Trivago in 2013 and in a manner that has parallels to TripAdvisor’s performance when it was an Expedia Inc. brand, Trivago, which Khosrowshahi cites as “by far the fastest-growing travel media brand on a global basis,” is spurring growth. In 2014, Trivago’s revenue grew 68 percent to $410 million.
Khosrowshahi rejects the notion that Expedia Inc.’s growth is fueled solely through acquisition.
“To be clear, the organic growth of the company is very healthy,” he said. “You look at the Expedia brand, you look at the Hotels.com brand, and others in the group, they are growing organically very strongly. But part of my job and part of the board’s job is also allocating capital effectively. My job is to increase share growth over the long term, the cash flow per share growth and part of that is organic growth. We’re absolutely growing organically at rates that are very high and you want to allocate capital in a smart way to optimize that growth.”
Khosrowshahi argues that Expedia Inc.’s strategy is built around balanced growth.
“In the past couple of years we’ve been one of the most aggressive buyers back of stock,” Khosrowshahi said. “Over the past couple of years, we’ve been more focused on allocating capital and some external opportunities. Our view is that you want to have balanced growth, you want to have organic growth but you absolutely should use your capital to improve that growth and that’s our strategy going forward.”
It’s Not Widgets
I interviewed Khosrowshahi at Expedia headquarters in Bellevue, Washington in 2005, not too long after he took up the CEO post. At the time he talked about his passion for the travel business.
“It’s a fun business,” Khosrowshahi said at the time. “I am not selling widgets here.”
In the context of 2005, he was referring to physical widgets, not the digital variety.
After about a decade as CEO, Khosrowshahi said last week he’s never been more excited about the company’s prospects.
And that’s after considerable bumps along the way.
“There are a lot of folks on this team who have been through the tough times and now I’d say times are better, and when you’ve walked through the fire together you get closer as a team and I think this team is closer than we ever have been,” Khosrowshahi said. “We’re very aligned but we’re not satisfied for a minute. We’re very energized and we think we can keep growing the company and I think we can keep moving at a really fast pace.”
Singles and Doubles
Khosrowshahi unsurprisingly likes Expedia Inc.’s position although he acknowledges the challenges of competing against the Priceline Group and its Booking.com unit.
Asked whether Expedia Inc. has bitten into the Priceline Group’s scale advantage, Khosrowshahi said: “Listen, they’re still bigger than we are and they’re a good deal bigger than we are at least in the hotel space. I think in the air space we certainly have excellent scale and really Expedia.com is the only global full service online travel agency there and I think we’re in a good space competitively.”
Expedia is looking to pile up some victories even if they won’t appear to look dramatic.
“That said we have to earn our stripes every day,” Khosrowshahi said. “This is an incredibly competitive marketplace. Margins keep coming down so the players who can succeed are the players who can essentially do more requests. We’ve been one of those players and I think we’ll continue to be competitive. This is a game of inches for us. We’re a company now that is operating at a very fast cadence — we don’t need to have homeruns in order to win. We can win with lots and lots of singles and doubles and we think that’s a good place to be and we have to continue that.”