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Earlier this week we launched our largest project yet, The Definitive Oral History of Online Travel.
In nearly 40,000 words founders, CEOs, other executives and insiders tell a story in their own words about the creation of Internet giants such as Expedia, Priceline, Orbitz, TripAdvisor, and more. Not everything fit in the big story so we are publishing standalone stories that offer deeper insight into information we collected during the three-month research process.
In Spring 2003, Arthur Kosten and Kees Koolen of Bookings B.V. were feeling bullish about their prospects because their company had just acquired a fast-growing hotel-reservations site, Bookings.nl, from its founder, Geert-Jan Bruinsma.
Koolen, who would become CEO of Booking.com in 2008 under Priceline Group ownership, and Kosten, who was CMO in 2003, were feeling on top of the world when they flew from Europe to attend the PhoCusWright executive conference in Orlando November 17 to 18, 2003.
But the conference quickly — although temporarily — shattered their optimism because they learned that Bookings’ business model, which had travelers paying at the hotel, was totally backward and retro.
As part of The Definitive Oral History of Online Travel, which Skift published earlier this week, Kosten recounted how all the buzz at the conference was how the prepay, merchant model for hotels and dynamic packaging would take over the online travel world.
“We hardly were aware of the difference between the agency [pay at the hotel] and the [prepay] merchant model,” Kosten says. “We never heard about these terms. When we purchased Bookings.nl, three of us went to PhoCusWright in Orlando, probably 2003, I guess. And we were deeply impressed with all these very famous people, Barry Diller [current chairman of Expedia and IAC] etc. Jeff Boyd [currently Priceline Group chairman and interim CEO] was speaking there, and a lot of these famous people that we knew from occasional posts were there.”
The Death of the Agency Model Was Highly Overrated
“The whole theme of that conference was about dynamic packaging and the death of the agency model. We’d never heard about dynamic packaging and actually we’d never heard about the phrase, the agency model. We were operating it but we just hadn’t heard the term before.”
Dynamic packaging gave consumers the ability to mix and match flights, hotels and car rentals in one purchase, usually offering a discount when compared with what it would cost to purchase each element separately.
After two to three hours of hearing from the online travel industry intelligentsia about the attractiveness of the merchant model, Kosten says he was getting worried and starting to think that perhaps Bookings B.V. had “no future.”
“We said, ‘Hey, these guys are all saying that the agency model seems to be like the model of the company that we just bought.’ We were super in big debt, we had really high mortgages, and during that conference, literally, all the smart people told us, ‘You just bought a company that is like the past. The future will be dynamic packaging.’”
That’s when Kosten and Koolen took a walk around the conference hotel.
“I remember that we walked around that building and Kees literally said to me at some point, ‘You know? This is the biggest Marriott in the world, it’s 4,000 rooms. Have you seen all their staff? We fill this hotel every single day. We did 4,000 room nights the other day and we fill it every single day with just 50 people [working at Booking]. We must be doing something well. We’re growing really fast, we have customers who love it. We’ve seen people love our product more than all these people in the room that are talking about the dynamic packaging model so maybe we shouldn’t listen too much to them.’ So literally, it had been my last travel conference ever.”
Let’s Focus On Our Business and Ignore the Noise
Kosten, who is currently a technology investor based in the Netherlands, and Koolen, who is based in Stockholm and Amsterdam and is the founding partner of EQT Ventures, decided to block out the noise and continue in their own direction.
“Basically, we said, OK, either these guys are nuts or we are nuts but let’s work with our customers and make the thing grow,” Kosten says.” If these guys are talking about all these things that we don’t understand, and that doesn’t match the stuff that we see in our business going on, we’ll better simply just focus on our business, make it a great business, and we’ll take it from there.”
And the rest is history: the Priceline Group acquired Active Hotels of the UK in 2004 and Bookings B.V. of the Netherlands in 2005 and turned them into Booking.com, which has hardly looked back ever since.
As Kosten detailed in the oral history — and Expedia Inc. CEO Dara Khosrowshahi confirmed — Expedia, which was part of Barry Diller’s IAC at the time, took a hard look at acquiring Bookings B.V. before the Priceline Group did but Expedia decided not to pull the trigger. [Likewise, Expedia didn’t acquire TripAdvisor either at the time but IAC subsequently did in 2004.]
Expedia Chose Not To Acquire Bookings B.V.
Dara Khosrowshahi, who was CFO of IAC at the time, became CEO of IAC Travel and later CEO of a spun-off Expedia Inc., discussed in the Skift oral history how the high profit margins of the merchant model distracted Expedia from the allures of what would become Booking.com.
“I think the Expedia team had taken a look at Booking.com and Active [Hotels] and again [like they did when considering acquiring TripAdvisor] had passed,” Khosrowshahi says. “And, I think it was because we were attached to the merchant model and we were attached to high margins at the time. And I think in hindsight that blinded us.
“I think companies get very comfortable sometimes that their way is the only way and hats off to Glenn [Fogel, Priceline’s M&A guy] and team for recognizing Booking and the potential there. And there’s another deal that’s been a homerun on the Internet. It has been the Priceline purchase of Booking.com. It’s been absolutely extraordinary.”
The merchant model, which Bob Diener and David Litman’s Hotel Reservations Network brought in force to online travel [see the oral history], is still widely used in the online travel industry and is very successful. Although Booking.com uses the agency model, even sister companies such as Priceline.com and Agoda within the Priceline Group are still practitioners of the merchant, or wholesale, business model.
Still, Booking.com rode the agency model, which is attractive for its lack of complexity in forging online travel agency-hotel relationships and consumer-friendliness, into the growth engine of a $68 billion business.
They did so by ignoring the trendiness of the crowds and sticking to their own beliefs and vision.