By Max StarkovBackground:
A recent analysis of Amazon’s ability to disrupt online travel agencies by Morgan Stanley was in the news with a number of opinion articles on the subject being published. “Online travel has proven immune to Amazon disruption so far. But as we have seen with other categories, that doesn’t mean Amazon won’t try again, and they should. Amazon’s focus on selection/service, pricing, and frictionless payment that drive conversion and stronger user economics also translate directly to travel,” said analyst Brian Nowak from Morgan Stanley.
Many hospitality industry experts chimed on the subject, with opinions ranging from complete dismissal to panicked predictions about doom and gloom for the very harmonious online travel marketplace.
This is not the first time it was predicted that Amazon would try to tackle the online travel space. Back in 2013-2015, Amazon attempted twice to enter the online travel space with its ill-conceived Amazon Local, which relied on flash sales, and its short-lived Amazon Destinations, relying on the merchant model and manual upload of inventory availability and pricing by hoteliers. Needless to say, neither of these attempts proved successful among travelers or hoteliers. In January 2015, an opinion article was published, “Should Hoteliers Be Concerned with Amazon Becoming the Next Mega OTA?”, in which it was concluded that they shouldn’t worry, at least for the time being.
Why hasn’t Amazon succeeded in conquering the online travel category?
Amazon is the largest online retailer in the world with a market capitalization of over $773 billion. Amazon has mastered online retailing, inventory management, online order fulfillment and logistics. From e-books to electronics and streaming video, Amazon excels in and “owns” every single retail category, except online travel retailing. Why is that?
- Business strategy to enter online travel: In both of its failed attempts to enter online travel retailing, Amazon tried to build an organic travel and hotel retailing product. This was the wrong approach due to the complexities (read: expensive and time-consuming) of gaining access to travel inventory, and lack of expertise in managing travel industry relationships. For example, Booking.com features over 1,703,622 properties and covers 129,117 destinations in 229 countries and territories worldwide. In 2014 and early 2015, when planning its Amazon Destinations launch, Amazon missed its chance to enter online travel retailing by acquiring one or more of the established OTAs like Expedia, Travelocity or Orbitz in North America and Wotif in APAC. As it turned out, building an OTA service from scratch was prohibitively expensive and impossible to scale in a reasonable time.
- Complex travel inventory management, pricing and distribution technology: Amazon underestimated the complexity of travel and hospitality technology which consists of many moving parts: old legacy systems that are poorly functioning, co-existing with next-gen apps and promising AI and blockchain implementations. In hospitality alone, where do you start? Deep integrations/two-way APIs are needed with legacy systems like PMS, CRS, Hotel Switches, GDS and Channel Managers in order to build real-time hotel inventory availability and pricing connectivity with hotels. Just building an OTA-type CRS with RMS, digital and video content, personalization capabilities, and fully interfaced with the numerous legacy systems in travel, would cost Amazon billions of dollars and take several years.
- Perishable travel inventory: Despite all of its retailing prowess and innovation, Amazon has no idea how to manage ultra-perishable inventory, such as that of travel inventory. Unlike books or socks, you cannot store travel inventory in a highly efficient automated warehouses. Once the gate closes, those 15 empty airline seats are gone forever. At the stroke of midnight, the 50 empty hotel rooms are gone forever. Expertise to manage this type of inventory cannot be achieved overnight. There should be revenue managers and online distribution experts in each of the travel categories: air, hotel, car rental, vacation rental and attractions. There is a lack of such experts in the travel industry as it is before the entry of Amazon.
These reasons for failure are as valid today as they were back in 2015. Today, compared to 2014 and early 2015, the global online travel marketplace has evolved significantly, and after the wave of OTA consolidations over the past several years, is ruled by a virtual triopoly: Booking.com, Expedia and Ctrip.
In order to successfully establish itself as an online travel player, Amazon needs to not only successfully overcome its deficiencies as described above, but also tackle new barriers to entry.
Global Hotel Supply:
Gaining access to travel and particularly hotel inventory is a major barrier to entry in online travel. Brian Nowak from Morgan Stanley estimates Booking Holdings and Expedia spend roughly $620 million each on their hotel supply annually, however, this number does not include “sunk costs” in the form of deeply rooted industry relationships, global offices and highly trained travel and hospitality sales and relationship management personnel. Hospitality is a relationship industry and is very hostile to new entrants and vendors. Booking.com alone has over 200 global offices in 70 countries worldwide with more than 17,000 employees, many of them serving as area relationship managers/liaisons with and revenue management consultants to the properties.
The Morgan Stanley analysis correctly identifies that Amazon has built a reputation for low prices and reliable service, both providing Amazon with tremendous competitive advantage. The low-price advantage would not have the same impact for Amazon as it does in traditional retail. The reason is that Rate/Price Parity is the law of the land in travel. Would the stellar customer service Amazon is known for be sufficient to attract travel bookers to the site even though they would find exactly the same rates as other OTAs and travel supplier sites? Without better pricing, Amazon needs to come up with a better value proposition compared to that of the OTAs.
Global Advertising Costs:
The OTA triopoly spends in excess of $10 billion on advertising annually. The Morgan Stanley analysis correctly estimates that Amazon’s advertising spend per transaction could be meaningfully lower than Booking.com and Expedia thanks to Amazon’s proven ability to drive repeat traffic on its platform, boasting over 300 million global customers. However, in order to compete with the mega OTAs, Amazon needs to invest heavily in the geo markets it wants to enter.
Should hoteliers welcome or be concerned with Amazon disrupting online travel?
Some hoteliers would welcome another major OTA player like Amazon to increase competition and lessen dependency on two and in some markets, on a single OTA. Others would be fearful that a giant online player such as Amazon, with its established reputation for low cost and reliable service, and its “sticky” loyalty membership and online retailing capabilities, would further erode the OTA vs. direct booking status quo and affect customer ownership in a negative way.
Overall, hoteliers should NOT be concerned by an organic entry of Amazon into the online travel space. As mentioned above, it would take Amazon unsurmountable efforts and resources to build an OTA type of retail travel product from scratch.
However, if Amazon decides to buy an existing OTA player and build a global travel retail empire on this new acquisition’s platform, then hoteliers should be concerned. For example, Expedia could be one such acquisition target. In today’s world, with $17.4 billion market capitalization, Expedia is on the smaller size, especially compared to Booking Holdings’ market cap of $105 billion.
Amazon knows how to drastically improve website user experience and conversions, how to upsell and cross-sell, and how to be efficient at low margins. By integrating its retail offerings into Expedia’s fabric, Amazon could potentially change the online travel consumer marketplace.
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