Expedia Inc. CEO Dara Khosrowshahi says his company’s $3.9 billion acquisition of HomeAway makes good on a mistake he made when Expedia spun off TripAdvisor in 2011: He allowed Expedia’s acquisitions of vacation rental sites such as FlipKey in the U.S. and Holiday Lettings in the UK to get away with TripAdvisor’s exit.

In a Skift phone interview with Khosrowshahi and HomeAway CEO Brian Sharples from Austin, Texas [see a full transcript of the interview embedded below], some three hours after they announced that their companies were joining forces, Khosrowshahi said Expedia had been trying to build a competitor to HomeAway at the time but was “insanely jealous” of HomeAway’s supply, “the businesses Brian was bringing under HomeAway’s umbrella,” and was “pretty frustrated at the speed and the execution of the HomeAway team.”

“So I’m making up for that mistake now,” Khosrowshahi said.

Asked whether acquiring HomeAway saves Expedia years in trying to ramp up vacation rental supply on its own or through partnerships, Khosrowshahi said Expedia wouldn’t have been able build up the depth of HomeAway’s supply and that the acquisition accelerates Expedia Inc.’s path to adding alternative lodging such as vacation rentals.

Giving travelers the choice of hotels, vacation rentals and even urban apartments, which Expedia is working on, increases Expedia Inc.’s addressable market, Khosrowshahi said.

HomeAway entered into a distribution partnership a couple of years ago, but it was slow-going as far as giving the vacation rental site high-profile real estate/displays on Expedia.com. Khosrowshahi said that now that HomeAway would become “part of the family” and 100 percent of HomeAway’s revenue would be benefiting Expedia Inc. this means that Expedia can more aggressively integrate HomeAway’s listings.

He declined to detail the origins of the acquisition talks.

The Competitive Landscape

Plans call for HomeAway’s vacation rentals to appear on Expedia.com, Hotels.com, Travelocity, Orbitz and other Expedia brands. In turn, Expedia’s apartment listings in urban areas, which are not a current HomeAway strength, will show up in HomeAway’s global brands.

Expedia Inc. has been on an acquisition tear, having acquired Wotif, Travelocity, Orbitz Worldwide, Expedia’s AirAsia joint venture and now HomeAway since 2014.

Khosrowshahi and HomeAway’s Sharples, however, said they didn’t expect any antitrust issues related to the acquisition, although they will obviously cooperate with any governmental inquiries.

Khosrowshahi said vacation rentals are a different category than hotels, and Sharples pointed out that Expedia was the only member of the Big Three, along with Booking.com and TripAdvisor, that hadn’t been active in vacation rentals.

“There are big independent competitors out there, as well,” Sharples said, “We are pretty confident it will not be an issue.”

“We wouldn’t enter into this agreement unless we thought we could close it,” Khosrowshahi said.

Speaking of the competition, Khosrowshahi and Sharples agreed that competition between the Priceline, TripAdvisor, and Expedia families is going to persist despite the Expedia-HomeAway marriage.

Khosrowshahi said travel is a $1 trillion-plus category and the alternative lodging sector is worth $100 billion-plus, and that TripAdvisor and Booking.com have “strong roadmaps.”

He said Expedia becomes “a stronger competitor” although there is room for “multiple winners” in the category.

“I don’t think that changes going forward,” Khosrowshahi said.

All three players are going to survive, Sharples added.

What about the competition with Airbnb and its 2 million listings compared with Expedia-HomeAway’s 1.5 million hotels and vacation rentals?

Sharples said the comparison is about as relevant as comparing Walmart to Nordstrom because 90 percent of HomeAway’s vacation rentals are second homes while probably a similar percentage of Airbnb’s rentals are primary homes.

What About Expedia’s Core Hotel Business?

How are hotels going to view this $3.9 billion HomeAway deal given the fact that a lot of hoteliers are defensive about the sharing economy, although most — erroneously –downplay the competitive impact.

Both Khosrowshahi and Sharples said the deal increases Expedia’s addressable market and makes Expedia’s more relevant to travelers seeking hotel and lodging alternatives.

Separately, after all, Priceline Group CEO Darren Huston says whether traveling for business or leisure — or both — the lodging revolution starts with one customer.

Khosrowshahi said Expedia has found that adding supply to a destination betters conversion rates which, in turn, enables Expedia to increase demand, and all of this benefits hotels.

What about Sharples’ future under Expedia Inc? He says that he and his team are actually relieved about the prospect of not having to deal with all of the public company obligations that they’ve had to deal with in recent years.

Sharples said he doesn’t expect major changes in HomeAway’s management and he’s “staying to see it through.”

It’s been a long ride since HomeAway’s founding a decade ago, and Expedia’s acquisition of HomeAway is the beginning of the next stage.

Here’s an edited version of the full Skift interview with CEOs Dara Khosrowshahi of Expedia Inc. and Brian Sharples of HomeAway:

Skift: How did this process begin? When did you start talking about an acquisition?

Dara Khosrowshahi: We won’t comment on that specifically. Although it seems like a long time ago, not that long ago TripAdvisor was part of Expedia. And when TripAdvisor was part of Expedia, we actually tried to build out a competitor to HomeAway. We were looking at the category. We were insanely jealous of the supply that Brian was building and the businesses that he was bringing under the HomeAway umbrella, so we went out and acquired a number of vacation rental assets like FlipKey and HolidayLettings in the UK. We were pretty frustrated at the speed and the effectiveness of the execution of the HomeAway team. Now that vacation rental business went with TripAdvisor as part of the spin, so I’m making up for that mistake now.

Skift: Wait, I didn’t catch the whole thing. What was that mistake?

Khosrowshahi: Letting that vacation rental business go with TripAdvisor so I’ve got to make up for it. But no other details other than that.

Skift: Are there antitrust issues at all that will come into play given your appetite for acquisitions lately?

Khosrowshahi: No, we think that this is a totally different alternative lodging category so while we don’t think there are significant antitrust risks, we will certainly, I’m sure, work with the governmental entities to make sure that this business is clear. We wouldn’t be entering the agreement unless we felt that we could close it.

Brian Sharples: Every big online travel agency was in this business. Expedia was actually the one that was not. Priceline’s got a big business in the vacation rental space. Obviously TripAdvisor had it for a long time, and then there are big independent competitors out there as well, so we’re pretty confident that’s not going to be an issue.

Skift: What does this do to the competitive landscape? You used the figure in the call of about 1.5 million properties now, and I believe Booking.com has about 822,000. Do those numbers mean anything? People are tweeting at me like that these are meaningless figures, the supply edge that you have.

Sharples: Yes, I mean, it’s meaningless in a way because it’s tough to compare one number to another. For example, in the case of Airbnb, 90-plus percent of their supply is primary homes that people live in that they’re sharing with others, and in the case of HomeAway, 95 percent of what we have are second homes that are set up for vacation rental travelers so the fact that one has more than the other is about as relevant as trying to compare Wal-Mart and Nordstrom based on the number of SKUs they have. They’re completely different SKUs.

Skift: Dara was saying that adding vacation rentals to the various Expedia platforms is going to generate more demand even for hotels so that additional supply should benefit vacation rentals and hotels, right?

Khosrowshahi: Yes, the patterns we see is as we add generally add in more supply to a destination so the conversion of that destination increases. When the conversion of a destination increases, we’re able to market it more aggressively. So we have definitely found a nice formula in adding supply on a destination basis, and we do anticipate HomeAway being a positive factor there.

Sharples: I’d also think about it pretty simply in that Expedia is a travel store. People who are traveling walk into that store, and the more complete the product offering, the higher the probability you’re going to convert that customer to buy something. This is just rounding out the inventory of products in that store, and whatever the conversion rate is at Expedia today, then you’d expect by adding these products, you’re going to see overall higher conversion of a sale of whether it’s a car, an air package, or vacation rental, or a hotel.

Then there are many products that Expedia has that we don’t have at our store, and we’re going to look for ways to integrate those products into what we do, too, because look at a vacation rental trip. It’s typically four people. They’re typically all getting on a plane. They’re typically renting a car. They’re typically buying tickets to all kinds of things, and the online travel world was starting to get very integrated. You can now buy tickets to experiences through OTAs, and there’s revenue share and actually good money in all that stuff. Being part of a what is really, I think, the most diversified travel company in the world now is going to create, beyond just all the stuff we’re talking about in 2018 and $350 million EBITDA, I think long term it’s going to be just huge win for all of our travelers because they’ll be able to buy everything they need through our platform or Expedia’s or wherever we display this inventory.

Skift: I know you guys are focus on your own companies, but do you think this combination puts more pressure on Booking.com or TripAdvisor?

Khosrowshahi: I’m not sure if more pressure is an accurate characterization. Listen, the overall travel category’s a $1 trillion-plus category. The alternative-lodging category is $100 billion plus, so I think there’s room here for multiple winners. I do think that Expedia Inc. as a company becomes a tougher competitor, but Booking.com and TripAdvisor I think have very strong roadmaps ahead of them. And I think that you’ve seen historically over the past five years, all three companies have been pretty successful. I don’t see that changing going forward.

Sharples: Everyone’s going to find their niche. They just have to be big niches. I mean, right now Booking.com is very focused on hotel-like vacation rental inventory, and they’ve got a lot of it, and where most of their bookings come from is in a segment that actually we don’t even run on our platforms today because we don’t do multi-unit the same way they do. It doesn’t mean we can’t, but we don’t today. Just as Airbnb is very much focused on urban apartments, and people in primary residences. HomeAway is very focused on whole houses in the vacation rental market.

I think TripAdvisor is a company that certainly is going to need to define what its niche is, but part of TripAdvisor’s niche is they sit at the top of the funnel, and a lot of people go to TRIP just to research on where they’re going, and therefore, they’re able to soak in a lot of demand for accommodations and other things just because they’re at the top of the funnel, and that’s an advantage that they have. I think all of the companies are going to survive to a great extent in this business. We have a very specific territory we not only want to defend but we just have a huge revenue upside opportunity and that’s what we’re going to be focused on over the next three years.

Skift: Dara, do you view this acquisition as saving you a couple of years of either trying to build up this sort of supply yourself or partnering to do it as you previously started to do with HomeAway? Is that how you view it?

Khosrowshahi: Frankly I don’t think that we would’ve been able to build the kind of supply that HomeAway has built. I think that we’re on track to build out urban inventory, apartments kind of a inventory. But the inventories that HomeAway’s built in the vacation category and the resorts, the kind of whole homes category is unique, and that is inventory that wasn’t necessarily addressable to us, so I think this accelerates our path to adding alternative lodging as part of our offering. I think it increases addressable homes for us. We’ve got hundreds of millions of customers coming onto our sites looking for places to stay and our addressable market just increased, which is why HomeAway was such an attractive target for us.

Skift: What happens to the HomeAway team and Brian? Are you there for the next number of years? What is the agreement?

Sharples: I’m still here, and I’m excited. We’ve got a lot to do in this space, and we don’t expect any major changes with the team here. The only thing is we’ll be rationalizing our public company costs where that might overlap, but one of the reasons we liked this deal with Expedia is that they want us to operate as a mostly independent company, and we can tap their resources and expertise. And so to tell you the truth, Dennis, is there are lots of though things about running a public company, especially when you’re trying to execute a strategy that involves a lot of change, and so it’s going to be in some ways a relief for the team to be able to operate under the Expedia umbrella.
We’re now going to be Expedia shareholders. Everybody here knows that we can have a huge impact on their stock price, and we also believe they have a great strategy as a business. Expedia still has one of the lowest multiples in travel, so there’s a lot of upside in that company as well. We’re just excited to be part of it, and I’m staying to see it through.

Skift: Great.

Khosrowshahi: I’m pitching Brian tonight on trading jobs with me. We’ll see how it goes. [Laughter]

Sharples: The master of sabbatical.

Skift: Do you plan on integrating HomeAway inventory in sort of the same manner that you did when you were testing the partnership with consumers who are looking for stays of five days, seven days, or whatever, all of a sudden seeing vacation rentals surface? But they wouldn’t surface for people looking for two- or three-night stays.

Khosrowshahi: Listen, we’re going to be testing and learning the approach for HomeAway. We saw certainly potential in our tests with HomeAway. I do think that the optimal space is the long stays etc. because it really matches up supply and demand. I do think that now that HomeAway’s part of the family, and we can essentially recognize 100 percent of the revenue with Expedia Inc., the opportunity to test more aggressively certainly surfaces.

Skift: What reaction are you getting from hotels?

Khosrowshahi: We haven’t talked to hotel partners yet, but I do believe that they want more demand, and I think that this deal has the potential of making the Expedia brands more relevant to travelers, which will bring more demand not only to our hotel partners. But also now this new category we think is going to grow very, very fast going forward.

For further details, here’s the transcript of the November 4, 2015 Expedia-HomeAway conference call with financial analysts announcing the merger.

Photo Credit: Brian Sharples, HomeAway CEO (left), at a Fortune event, and Dara Khosrowshahi, Expedia CEO at last year's Phocuswright Conference. Phocuswright and Fortune Brainstorm TECH / Flickr