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The Priceline Purchase of Kayak and its
Implications for the Online Travel
Market.         
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(December 9, 2012)  
What Does the Future Hold for Priceline and the rest
of the online travel Industry?

Priceline made a splash last month with its purchase of
Kayak software. They paid $1.8 billion for the company in
stock and cash, which represented a significant purchase
premium of $250 million (16%)  over its recent market
price/capitalization. In this article we’ll take a look at why
they made the purchase and its significance to them and
the overall online travel industry.    

The online travel industry is an extremely large yet highly
diverse and fragmented industry. Total Online travel sales
are expected to reach $116 billion in 2012. Priceline’s
revenue is expected to be over $3.4 billion this year. The
Kayak purchase is expected to be completed in early
2013. They can then add Kayak’s topline revenue of $225
million to their income statement. They are still a small part
of this huge industry, despite their high profile. Kayak has
achieved revenue of just under $10 million in 2011, so
their income contribution relative to Priceline’s net income
of over $1 billion is negligible in the short run.

Yet there are some good reasons for the purchase of
Kayak. First, they will have access to Kayak’s sophisticated
“meta” search and other technology.  Second, it is better
suited to help Kayak expand into international markets
than they can themselves, creating more value for both.
Third, Kayak can piggyback on the marketing/advertising
machine of Priceline, making more efficient what was one
of their largest expenses. Fourth, Kayak is further along in
developing its mobile application. It has a better developed
application and is growing faster than Priceline in this
arena.  Fifth, and perhaps the most cynical interpretation,
they remove a fast growing threat that distributes sales to
its competitors as well as to itself.

categorizes a search of other online travel sites search
results. For instance, one might search for Las Vegas
flights on Expedia.com and compare these results with
those of Travelocity.com. Kayak can generate the results
for these sites automatically plus many others and then
rank them accordingly. So they are essentially a search of
the other online search engines/sites. They have built their
Kayak’s meta search technology essentially produces and
business as being a better source of the best deals
regardless of where they might originate. They make their
money by getting referral fees from those sites where they
ultimately send the business. Their second main source of
revenue is from various types of advertising on their site.  

Kayak has also been expanding its capabilities beyond
meta search, developing direct purchase buying similar to
the older Online Travel Agencies (OTA) like Priceline,
Expedia and others. This will allow it to develop a better
user interface and to develop more long standing
relationships with its suppliers. Priceline should be able to
provide significant help in this process since it is the
largest of the independent OTAs and has been successful
integrating different software companies before. This will
move Kayak from just a referral and distribution company
to more of a full service provider.

Of course, there were significant threats to Kayak and
Priceline. Kayak may be much better able to withstand
these threats now. Priceline is looking to grow and develop
more reach and capability any way it can. Two of their
biggest new threats are Google and Microsoft. This is in
addition to the older threats posed by other OTAs and the
vertical entry into their business by their suppliers, which
has been an ongoing developing threat.

Google is developing its own online booking capability.
This is a tremendous threat on its own for several reasons.
First, Google controls search. Second, it has the huge
resources to be a long term developer of a first class
interface.   

But a bigger possible threat from Google lies in its
ownership of ITA software, which it purchased in 2010. ITA
is the existing software and travel database company that
supplies the raw data to Kayak, Priceline and most other
ITAs. It is not there only source of information but it
remains the biggest piece in their arsenal. Since Google is
a potential competitor it is obviously detrimental to have to
rely on their company to provide your service. Kayak
currently has status quo contracts in place with ITA/Google
that extend several years in the future. However, over time
there is no telling how its link with the needed software may
be weakened or made be made less advantageous,
despite what Google may say to the contrary. The simple
fact that Google will be in the flight information and referral
business is threat enough.

Overall, this purchase appears to benefit both parties, and
will better position them for the future. Priceline has
certainly prospered in a very uncertain environment over
the past ten years.  It is clearly the leader in the crowded
OTA field. It intends that Kayak should remain as a
standalone company rather than a straight integration.
However, they both complement each other; they will help
each other develop and grow in needed areas, giving the
combination a better chance of continuing success in the
future.  
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