HomeAway Deal Strengthens Expedia’s Strategic Position in Online Travel

In November 2015 Expedia Inc agreed to acquire HomeAway Inc for US$3.9 billion in cash and stock. This acquisition is expected to benefit HomeAway’s sales thanks to the technological and marketing support it will receive from Expedia and to its transition from a listing-based model to an online transactional marketplace, predicted to drive reservations and earnings in the next few years.

The acquisition strengthens Expedia’s position in online travel where it will be able to challenge The Priceline Group and Airbnb through a more diverse and competitive offer, expected to increase its conversions and sales.

Holiday rentals, a major disruptive force in travel

Over the past few years, holiday rentals have become an increasingly popular type of lodging for travellers, with their fast growth being one of the most disruptive forces in the travel industry. Their rising popularity is being driven not only by the value for money they offer, but also by the possibility for travellers to enjoy a more authentic experience, having the opportunity to discover the way of life of the destination they are visiting and live like locals. Technological developments, social media functionalities and the rise of online micro-entrepreneurs are other factors fuelling the sharp rise of holiday rentals.

Airbnb outpaces HomeAway growth

Growth in this sector was fuelled over the past 10 years by two main players: at first, HomeAway, and more recently, Airbnb, were behind the transformation of the traditional market of holiday rentals, previously run by property managers, into one of the most innovative categories of the online travel revolution.

HomeAway, founded in 2004 as CEH Holdings, was the first big global player in holiday rentals also thanks to important acquisitions, including, among several others, the UK company HomeAway in 2005, the US company VRBO in 2006, and the French player Homelidays in 2009.

However, HomeAway suffered, over the past few years, the fast rise of a new player, San Francisco-based company, Airbnb, founded in 2008. In particular, HomeAway was unable to keep up with Airbnb’s fast pace of innovation, including the possibility to book all properties online and its use of social media functionalities, with reviews in particular playing an important role in building trust between hosts and guests. As the incumbent player in this category, HomeAway suffered the constraints of pleasing the requests of its large existing base of home owners and managers. Therefore, the more innovative and flexible approach of Airbnb proved to be the winning formula of the last few years in holiday rentals and emerged as a key disruptor for the whole travel industry.

As a result, Airbnb’s estimated revenue growth was impressive over the 2009-2014 period, rising at a CAGR of 250%, although starting from a very low base, while HomeAway’s CAGR was still very strong but much lower than that of its main competitor, at 30%. Moreover, Airbnb’s estimated market valuation reached US$25.5 billion in 2015, although the company is not listed, versus the US$3.9 billion offered by Expedia to buy HomeAway.

HomeAway Inc and Airbnb Inc Revenues: 2009-2015

Homeaway-Airbnb

Source: Euromonitor International from company research

Note:  2015 data are forecasts, 2009-2014 data for HomeAway Inc are official figures from annual reports, 2009-2014 data for Airbnb Inc are estimates as the company is private and does not disclose official figures on revenues

Leading online travel players tap into holiday rental growth

The sharp rise in popularity and sales of the holiday rental category has attracted the attention of some of the leading players in online travel, including The Priceline Group and TripAdvisor. The Priceline Group has been steadily increasing the number of holiday rental listings of its OTAs (online travel agencies), and in particular of Booking.com. Moreover, in May 2014 it launched the website Villas.com, specialising in holiday rentals and directly competing with Airbnb. Holiday rentals on Booking.com and Villas.com are all instantly bookable, which represents an important plus for customers and is driving the sharp rise in sales generated by this category for The Priceline Group. Another peculiarity of holiday rentals distributed by The Priceline Group is that a large number of them are run by professional organisations rather than by individuals, although the line between the two categories is increasingly blurred due to the rise of micro-entrepreneurs owning just one or a small number of properties.

TripAdvisor has also become a major player in holiday rentals through its FlipKey and Holiday Lettings subsidiaries, and by leveraging the strength of its travel community in terms of both travellers and hosts. Reviews are obviously a strength of TripAdvisor’s holiday rentals. Contrarily to the offer of The Priceline Group, TripAdvisor’s offer includes rooms in shared apartments, adopting in this regard the Airbnb model.

Top Global Companies by Number of Holiday Rental Listings – November 2015

Company Number of Holiday Rental Listings
Airbnb Inc 2,000,000
HomeAway Inc 1,200,000
TripAdvisor Inc 630,000
The Priceline Group 380,000

Source: Euromonitor International from company sources

Among the largest global online travel companies, Expedia has so far had a less significant presence in this fast growing category. From 2009, the company started a partnership with HomeAway to include some of its listings on Expedia’s sites, but this never had a significant impact due to the issues with booking HomeAway properties online and to Expedia tending to favour its own hotel bookings over HomeAway’s holiday rentals in search results.

Expedia has now bridged this gap in holiday rentals through the acquisition of HomeAway. The size of HomeAway in terms of listings and the important synergies which will result from this acquisition, are expected to give a strong competitive advantage to Expedia in the online travel space.

Strong synergies to benefit HomeAway’s sales

Strong changes are to be expected in HomeAway’s business model following Expedia’s acquisition. Firstly, a strong push is very likely to make all of HomeAway’s listings bookable online, a process which is predicted to be completed by the end of 2016.

As of November 2015, HomeAway’s business model is different from that of Airbnb, as all of Airbnb’s properties are bookable online, which makes the company a total travel intermediary, while it is still not possible to book around half of HomeAway’s listings online. As a result, HomeAway currently only acts as a travel intermediary for some of its properties, while, for the remainder, it acts as an advertising platform, charging subscription fees to its clients.

The move to make all HomeAway properties bookable online is expected to enhance the monetization of its bookings, which is estimated at an average of about 3% of total bookings generated vs an estimated 12% for Airbnb. The introduction of a 6% commission charge to be paid by guests, to be added to the 10% commission paid by hosts adopting the pay-per-booking model, will ensure higher monetization of bookings and profitability for the company.

Moreover, when all HomeAway’s listings will be bookable online it will be possible to integrate them in the online travel booking platform powering the OTA (online travel agency) brands of Expedia Inc, which will generate other strong synergies.

Another change is expected to concern new listings added to the HomeAway/Expedia holiday rental offer in the next few years. HomeAway’s offer traditionally mainly includes second homes in holiday resorts, with urban properties generating only an estimated 7% of gross bookings in 2014. New properties which will be targeted by the new Expedia/HomeAway holiday rental giant are likely to increasingly concern cities, directly challenging Airbnb on this front, also thanks to the distribution power of Expedia’s OTA brands, generating very significant bookings in cities, with many of these customers potentially interested in holiday rentals.

Finally, HomeAway will be able to benefit from Expedia’s strength in terms of technological innovation and capability in converting visitors into sales, as well as of larger marketing investments.

Expedia’s strategic positioning significantly strengthened

As a result of these expected changes, HomeAway’s gross bookings and revenues are forecast to record a strong performance in the next few years challenging Airbnb, which had outpaced it in terms of both bookings and revenue growth over the past few years.

However, benefits for Expedia Inc will not stop with HomeAway’s higher sales and profitability. HomeAway’s vast portfolio of mainly second homes in holiday resorts will strengthen its online travel offer with quite a unique inventory of products. This will provide Expedia’s OTA brands with a competitive edge over other online travel players. This will also put Expedia Inc in a position to challenge The Priceline Group and Airbnb Inc (two companies with a higher market capitalisation/valuation) in the OTA and holiday rental categories.

Market Capitalisation/Valuation of Leading Global Online Travel Players: 27 November 2015

Company Market Capitalisation/Valuation (US$ billion)
The Priceline Group 62.0
Airbnb Inc* 25.5
Expedia Inc 16.1
Ctrip.com International Ltd 14.6
TripAdvisor Inc 11.9

Source: Nasdaq official stock quotes, financial sources for Airbnb
Note: *Airbnb is a private company and its market valuation is an estimate made by financial sources on the basis of its latest private-funding round of June 2015

A complete and diversified online travel offer

The HomeAway deal is, for Expedia Inc, the last in a long series of acquisitions which followed the controversial spin off of TripAdvisor in 2011 and have significantly strengthened its position in the online travel space.

An area where Expedia falls behind The Priceline Group is the profitable hotel bookings category, where The Priceline Group has a clear advantage, which assures it strong leadership among OTAs in terms of revenue, earnings and market capitalisation. Moreover, Expedia has not entered online restaurant bookings, an area which has seen significant acquisitions by The Priceline Group and TripAdvisor in recent years.

On the other hand, Expedia is the leading online travel agency in terms of gross bookings, with its position being strengthened in 2015 by the Orbitz and expected HomeAway acquisitions, but also by organic growth, which – also thanks to the strong US dollar favouring operations in the US over those in international markets – for the first time has surpassed that of its arch-rival, The Priceline Group. In the OTA category in particular, Expedia has a dominant position in the US thanks to its Orbitz and Travelocity acquisitions, a leading position in the Americas, thanks to its investment in Latin American player Decolar, and a leading position in Australasia, thanks to the acquisition of Wotif in 2014.

Expedia Inc and The Priceline Group Gross Travel Bookings: 2009-2015

Expedia-Priceline-Gross-Travel-Bookings-to-2015

Source: Companies’ annual reports, Euromonitor International estimates
Note: 2015 data are forecasts including Expedia Inc’s acquisition of Orbitz Worldwide Inc and expected acquisition of HomeAway Inc 

Moreover, Expedia owns a majority share of the largest global hotel metasearch engine, Trivago, which gives it a leading position in this fast growing and strategic area and also strengthens its position in Europe. Through the HomeAway acquisition, Expedia Inc will become one of the two leading global players in the fast growing holiday rental category, in which it is going to challenge Airbnb in the next few years in terms of technology and innovation. Expedia is also investing in the promising in-destination travel services category, through organic growth of its Expedia Local Experts (ELE) division.

Finally, the company is investing in the strategic mobile channel and in personalised marketing in order to strengthen the performance of its global online travel platforms. Driven by current trends, which are seeing steady growth in online and mobile travel bookings, and by a consolidation process in the industry favouring major players, growth for the leading online travel companies is expected to continue to be healthy in the next few years, with the new, stronger Expedia being one of the main drivers of this growth.