June 18, 2017 12:00 pm JST
Multinationals in Asia

Expedia plays the Asian card

Online travel giant investing in technology, regional partners to grab customers

TOMOMI KIKUCHI, Nikkei staff writer

Expedia knows that Asians love mobile devices, and it is developing its regional business model accordingly. (Photo by Nozomu Ogawa)

SINGAPORE -- Dressed casually in a pair of jeans and black jacket, Dara Khosrowshahi spoke with a friendly smile, but with determination in his eyes. "The U.S. used to be the driver of our global strategy and other areas would follow. But Asia is now driving our strategy."

The chief executive of Expedia Inc., the world's largest online travel agency, was recently in Singapore for the opening of the company's first innovation lab in Asia. "Our target is to at least double our share of the online travel marketplace in Asia[-Pacific]. I think we are on our way," he told the Nikkei Asian Review.

Since it first went online 20 years ago, Expedia has changed the way people plan their travel. Launched by a small division of Microsoft, Expedia now runs more than 200 travel booking websites in over 75 countries around the world, offering 385,000 accommodation options and access to nearly 500 airlines. As the pioneer of online travel agencies, the company has made booking trips faster and more convenient than ever. According to Phocuswright, a travel industry research firm, Expedia in 2016 took a 35% share of the global online travel agency market in terms of gross bookings.

To put distance between itself and American rival Priceline Group, which controls 33% of the global market, Expedia in 2014 began a $6 billion splurge, acquiring reservation websites Orbitz, Travelocity and Wotif as well as Texas-based vacation rental service HomeAway.

The new acquisitions have helped Expedia diversify its revenue streams. Sales from online bookings -- mostly commission fees from hotels and airlines -- made up 80% of revenue in 2016, down from 88% in 2014. But acquisition and integration expenses pushed down Expedia's bottom line, with net profit declining 63% in 2016.

Investors are smiling now. Expedia's share price has risen around 30% since the start of the year, reflecting hopes that the company will trounce the competition. Analysts have mostly been positive, with U.S.-based brokerage Cantor Fitzgerald reiterating its "buy" rating in a recent report.

Expedia's portfolio reads like a who's who of travel websites, including Hotels.com, Trivago and Australia's lastminute.com. These brands serve a vast, global customer base, making Expedia hugely attractive for hotels trying to lure guests from outside their domestic markets. And the company's sheer size gives it better bargaining leverage and more capital for technology. In 2016, its tech spending reached $1.2 billion, up 49% on the year. "Expedia's position as a leading travel company in terms of technological innovation is a distinct advantage," notes Wouter Geerts, senior travel analyst at market research company Euromonitor International.

Despite satisfied investors, Khosrowshahi is still casting about for more ways to grow, with the company now "aggressively investing" to capture a larger piece of the fast growing Asian travel market. According to a recent report by the United Nations World Tourism Organization, the number of outbound travelers from China increased 6% in 2016. They spent 12% more -- $261 billion -- than they did in 2015, continuing the trend of double-digit growth since 2004.

Meanwhile, tourists from Vietnam coughed up 28% more, those from India increased their spending by 16% and their fellow travelers from Thailand anted up an additional 11%.

Expedia has good reason to focus on Asia, a region without a dominant player. With the exception of China and its own bag of domestic operators, the markets are a mix of local and global players. No single company occupies over 23% market share in any major Southeast Asian country, according to Euromonitor.

'Mobile or nothing in Asia'

The CEO says there are two keys to winning in Asia: knowing Asian consumers and adopting a mobile-first attitude. Tech-savvy, selfie-snapping Asians comprise the world's largest number of smartphone users. According to the GSMA trade group, the number of mobile subscribers in the Asia-Pacific region is expected to reach 2.7 billion this year, making up over half the global figure.

Expedia is already serving many of them. Expedia runs its own Expedia-branded websites in 14 Asia-Pacific markets including Australia, China, Thailand and Singapore, most of which have larger traffic volumes coming from mobile. Globally, the figure is 45%.

A survey conducted by digital marketing technology company Criteo shows that 39% of 1,100 respondents in India, Singapore, Australia, Taiwan, Vietnam and Indonesia primarily use smartphones for booking travel, and 38% book while on the go. "It's mobile or nothing in Asia," Khosrowshahi said.

The company's new Expedia Innovation Lab is where it gets to know Asians better and tailor technology to them. Inside a small office in its regional headquarters in Singapore, the company conducts tests using sensor technology to understand how Asians feel when shopping on Expedia.

 

Sensor pads applied to a subject's face detect reactions as they browse the Expedia website on a PC. An engineer observes on a display in another room, watching eye movement along with a graphical display of facial muscle movement. A jump in the graph indicates a change of emotion, such as frustration over a fully booked hotel, or excitement over a breakfast photo.

The goal is to understand users' needs, wants and frustrations regarding online travel booking. The test will soon be conducted with subjects using a smartphone. Expedia plans on performing the same tests in other Asian markets such as South Korea and Japan.

To drive its Asia-first mobile strategy, the company wants to nearly double its engineering staff within the next five years to 10,000, with a "significant portion" hired locally, according to Khosrowshahi. The company is also employing cloud services in the region to speed connection times for Asians, who want services to be "super, super fast."

The CEO thinks new technology will drastically change the way people travel, emphasizing that the three Ms -- mobile, messaging and machine learning -- can transform Expedia into a palm-size personal travel coordinator. "You can start creating contextual products and interaction with consumers on [an] individual basis," he said.

In other words, Expedia could add functions that provides real-time travel information on mobile. For example, it could a detect user's location at an airport and send notifications regarding baggage pickup areas and boarding gates. Or, after learning a user's travel habits, it could suggest dining options. Expedia is rolling out features via Amazon's intelligent personal assistant feature Alexa in the U.S., and will begin testing in Asia this year.

Riding the tiger

As Expedia doubles its market share of the Asia-Pacific online travel industry from its current 5% over the next five years, Khosrowshahi expects the region to account for "well over a third" of the company's total bookings. This will increase the gross number of bookings from its non-U.S. businesses from the current 36% to two-thirds.

But investing in technologies is not enough to succeed in Asia. The company needs to beef up Asian-specific services through partnerships and possibly acquisitions.

Outside Asia, Expedia is known for expanding through aggressive M&As. Since Khosrowshahi took over in 2005, the company has acquired a number of online travel-related companies, including those for car rentals, travel search engines and rail booking services. "Acquisitions and strategic alliances are playing a central role in Expedia's development," noted Geerts.

But given Asia's diversity, Expedia can't win by simply employing successful models from its home market, which is why Khosrowshahi is keen on strategic alliances in Asia.

Expedia has already made a powerful one with budget carrier AirAsia. The two company's AirAsiaExpedia Travel venture, which operates travel booking website AirAsiaGo, was formed in 2011, making Expedia the official third-party online distributor for the airline. This allows Expedia to bundle AirAsia flights with hotel stays for significant savings.

A rough road to a better future

Expanding in Asia is not easy. In fact, Expedia hasn't been shopping much in the region. Chetan Kapoor of Phocuswright points out that most of the local travel websites in Southeast Asia are still at the customer acquisition phase and are offering massive discounts. Profits have yet to materialize, which may be deterring companies like Expedia.

"Asia Pacific is... a region where Expedia has yet to achieve a strong market share, especially after the sale of eLong in 2015," notes Geerts. In 2015, Expedia sold its majority stake in Chinese online travel agent eLong to Ctrip, the largest online travel company in China. ELong's poor performance had been hurting Expedia's bottom line.

Although Expedia struck a partnership agreement with Ctrip, its footprint in China has been limited so far -- especially given that Expedia's largest rival, Priceline Group, owns around 9% of Ctrip. Expedia launched its own Expedia China website the same year it divested from eLong, but its market share remains is tiny.

Priceline also has a stronger foothold in Southeast Asia's emerging economies, thanks to the acquisition of Singapore-based online hotel booking service Agoda in 2007. While Expedia has a larger market share in developed markets such as Japan, Malaysia and Singapore, Priceline is winning in Indonesia, Vietnam, Thailand and the Philippines, according to Euromonitor International.

Meanwhile, as local ventures start to flourish, competition is no longer just among western players. In Indonesia, for example, Traveloka and Tiket.com are the country's two largest online travel agencies. Since last year, China's Ctrip has started expanding abroad, acquiring Scotland-based flight search engine Skyscanner and taking a minority stake in India's largest online travel agent MakeMyTrip.

The industry is seeing new entrants from peripheral industries, too. Airbnb is swiping guests from the hotel industry, and travel review site TripAdvisor is adding instant booking features. Piling on is Google, which is enhancing its travel-related services and could roll out direct booking functions. This could prove a huge disruption to Expedia and others.

Nonetheless, the CEO remains optimistic about what's in store for his company over the next few years, especially in Asia. Turning his cadre of bright young engineers loose onto the region's growing numbers of middle class travelers and smartphone users will combine to lay the foundation for a new travel business model.

Said Khosrowshahi: "The combination will allow Expedia to [go] back to where we came from: a travel agent who knew us, who knew our family, what kind of hotels we like. ... I think that is going to be pretty darn exciting."

Asia300

AirAsia Bhd.

Malaysia

Market(Ticker): KLS(5099)
Sector:
Industry:
Transportation
Airlines
Market cap(USD): 2,773.91M
Shares: 3,341.97M

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