While some may disagree, we believe that Google is not becoming an online travel agency. It certainly could do so, but its travel business is already massive and highly profitable. We estimate it will generate around $14 billion in revenue in 2017, and will grow at over 20 percent per year for the foreseeable future.
There’s no doubt that the Priceline Group is a juggernaut, but Skift Research calculates that Google’s travel business could be worth as much as $100 billion — and that would make it larger than Priceline with its $90 billion market cap.
At $100 billion, Google’s travel business contributes about 15 percent to Google’s $650 billion market cap.
We’ll first walk you through how we arrived at these estimates based on financial disclosures covering the first half of 2017, and then we’ll also go into detail about full-year 2016.
For the first six months of 2017, Priceline’s performance-advertising spend was up 23.5 percent compared with the year-earlier period. Expedia does not disclose quarterly ad spend specifically, but direct marketing costs increased 28 percent, and that would be a good approximation of its growth rate. This suggests that 2017 digital ad spend for Priceline is on pace for $4.3 billion, and Expedia for $2.9 billion.
Running through a comparable growth path for Airbnb; metasearch engines such as Kayak and Trivago, and suppliers, including hotels and airlines, 2017 travel spend on Google will likely jump 25 percent, generating close to $14 billion in revenue for Google. For context, Google revenue as a whole has grown 23 percent in constant currency during the first two quarters of the year.
Given a margin profile that is likely higher than Priceline’s and digital ad spend growing more than 20 percent per year, the value of Google’s travel business would warrant a similar price-to-sales multiple as Priceline. Using 2016 results as a measure, Priceline trades at more than 8x revenue. Based on 2017 expected revenue, it trades at 7x.
Using a 7x multiple on our estimated 2017 numbers for Google, the Google travel business could be worth as much as $100 billion or 15 percent of Google’s $650 billion market cap. This would be comparable to — but larger than — Priceline’s current value of $91 billion. We emphasize that using a simple price to sales multiple is more illustrative than definitive, but clearly with potentially $14 billion in travel revenue, Google is already, and has been for many years, a leader in the travel industry.
What the 2016 Numbers Tell Us
Priceline broke down its online and offline advertising in its 2016 filings. Recently, it changed this to performance advertising versus brand advertising such as TV. The performance metric serves as a proxy for online spend as historic numbers are similar for online and performance.
Expedia discloses its ad spend in the footnotes of its financials; this is a subset of the total marketing costs on the income statement. While Priceline spent 92 percent of its advertising budget online, we assume 85 percent for Expedia with its exposure to Trivago’s television push.
Combined, Priceline and Expedia likely spent $5.8 billion on digital advertising in 2016.
Priceline and Expedia 2016 Ad Spend
|2016 Year-End (U.S.$ Millions)||Total Ad Spend||% of Gross Profit||Digital Ad Spend Estimate||% of Gross Profit||Revenue|
Source: Company Filings, Skift Estimates
Next, we attempt to estimate how much of this digital advertising was spent on Google. In our recent Research Report, A Deep Dive Into Priceline’s Competitive Position in Travel 2017, we found that Priceline and Expedia spent around 26 percent of their digital spend on non-Google metasearch (Kayak, TripAdvisor, and Trivago).
Assuming that a few percentage points of spend is on Facebook and a few is on other channels, we can estimate that around 70 percent of Expedia and Priceline digital ad spend went to Google. This would amount to just over $4 billion in 2016; this includes both AdWords and the much smaller metasearch part of Google.
What About the Rest of the Travel Industry?
On the digital side, Ctrip would spend very little on Google with most of the search engine marketing budget going to Baidu. We estimate that metasearch companies spend in the $600-700 million range on Google. For Airbnb, assuming $1.7 billion in 2016 revenue, 30 percent of sales going to digital advertising, and 70 percent of that going to Google gets to a total of $357 million for Airbnb Google spend.
Adding meta and Airbnb ($1 billion) plus the online travel agencies amounts to just over $5 billion in Google spend in 2016. This includes AdWords and Google metasearch.
To calculate the rest of the industry, we need to use a more top-down approach based on potential market share of spend. We believe that the combination of Priceline, Expedia, metasearch companies, and Airbnb account for 40 to 50 percent of travel ad spend on Google with smaller digital players and suppliers (hotels, airlines, tours and activities etc.) making up the balance.
At the mid-point (45 percent share), the implied travel industry spend on Google would be $11.2 billion in 2016. This is slightly higher than Priceline’s 2016 revenue and well above Expedia’s. As we noted above, we estimated based on the first half of 2017 numbers, Google 2017 revenue from travel would come in around $14 billion.
OTA, Meta and Airbnb Share 2016
|Share of Digital Spend||Implied Industry Spend on Google (U.S.$ Millions)|
Source: Skift Estimates
How Valuable Is the Google Travel Business?
Our estimate of $11.2 billion in Google travel revenue in 2016 would mean that travel accounted for 13 percent of Google’s total Google Segment revenue and 12 percent of the company total (includes the so-called other bets part of the business).
Google’s total Google segment operating margin is in the low 30s, but the core AdWords business is likely much higher (meta would likely be in the 25 percent range).
Given a margin profile that is likely above Priceline and digital ad spend growing more than 20 percent per year, the value of the travel business would warrant a similar price-to-sales multiple as Priceline; off of 2016 results, Priceline trades at over 8x revenue.
As mentioned earlier, using a 7x multiple on our estimated 2017 numbers for Google, the Google travel business could be worth as much as $100 billion or 15 percent of Google’s $650 billion market cap.
Online travel companies would like to diversify away from Google, but no other digital marketing tool offers the same commercial intent of a Google search.
Facebook, with its dynamic retargeting capabilities, will see meaningful growth in spend from the online travel agencies but this is from a very low starting point versus where Google is now. While Facebook has an advantage on its inspirational and visual appeal over a Google search, it still has a similar challenge as television. It is a more of a push advertising model where the online travel agency is essentially convincing a consumer to take an action versus on Google, where the consumer was actively seeking something.
What About Hotels and Airlines?
For the suppliers, it tends to be more about protecting the brand and narrow search terms. For example, Marriott will bid on search terms containing the word Marriott and its different brands. At the same time, it would bid on a term like “luxury hotel on 59th street and 5th avenue” while leaving “hotels in NYC” for the online travel agencies and metasearch platforms to fight over.
Hotels like that Facebook can serve as both a branding tool (like television) and an actual booking facilitator (like Google). Additionally, dynamic retargeting helps all suppliers focus on smaller portions of the population versus television. This keeps ad campaign costs down, increases conversion, and leads to stronger return on investment.
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Photo credit: Google is likely to generate $14 billion in revenue in 2016 in travel, largely from AdWords, as in the Booking.com advertisement shown here. Skift