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Q&A with James McQuivey July 27, 1999 Online Travel: Turning Lookers into Web Bookers Forrester Research analyst James McQuivey forecasts how the online travel market and its top players will fare over the next few years One of the most heated battles in E-commerce today is the fight for share in the online travel market. Travelocity.com, Microsoft's Expedia, and Preview Travel are the leading competitors attacking the market with conventional pricing models, while Priceline.com has attracted a valuation of almost $15 billion with its patented "name your own price" business model. (See the July 27, 1999, Company Closeup: "Can Preview Survive the Web Travel Wars?") Forrester Research analyst James McQuivey says Travelocity, Expedia, and Yahoo! stand to be the online travel market leaders, and in a new report he predicts fast consolidation among smaller online travel players. He spoke with Business Week E-Business editor Timothy J. Mullaney. (Click on the image below for the audio version.) BW: First of all, how much have consumers taken to doing their travel shopping online? McQuivey: The first step that consumers have adopted in doing travel online is the research piece. That's obvious. There's been incredible demand on that side. In fact, when you add up all the people doing research on the Internet, about 24 million households out there -- which is two-thirds of the Net population -- are researching travel online. So that's the first thing that they've done. But a small group of them, 5 million of those households, have gone on to actually book. So there is a big gulf between researching and what we call looking, and the actual booking. BW: What will make these people move from lookers to bookers by 2003 as your report suggests? How much of that will be changed by the consumers and how much of that will result from innovation by the sites? McQuivey: Good question. There's really two different areas that need to change in order for more lookers to become bookers. And we're confident that both of them will change. One is in the consumer [base] itself. And based on our research, we think the largest obstacle is consumer hesitancy, No. 1, to make significant transactions online [of any kind]. So this is sort of because we are still in the early stage of the consumer's online use. They are still saying, "OK, I'm willing to research this travel, but I'm just not sure I want to push that button and commit $500 right now." But what we have seen is that [with] any consumer who stays online actively for more than about a year, that concern starts to wither, all by itself, with very little help from the outside. Usually it's because they see their friends do it, usually they have experience making smaller purchases, and as they do so, suddenly the idea of booking that $500 trip becomes easier to swallow. The second area that needs to change is in the Web sites themselves. Two of the big concerns that our users expressed was that they were getting inconsistent information across different sites. It confuses them. They're not sure exactly who to trust when everywhere they turn they get a different number. BW: Different fares? McQuivey: Different fares. You go to one site and it suggests the flight. The other site doesn't even suggest that flight. Yet it seems to fit the criteria that you entered. And so consumers are, in my opinion, very justifiably concerned about why they are getting different information and therefore are going to stay away from it until they see that resolve itself. BW: So they're not convinced they're getting the best deal. McQuivey: Exactly. They're convinced that somebody's holding something back on them. The other thing that they complained about was simply just the difficulty of use. Some of these sites you have to register for before you can start looking at fares. Others, you look at fares, and then when you go to book, it makes you go through a password protection stage. A lot of consumers already know that they can shop from other retailers without having to reenter their password all the time, and so they get a little concerned about the amount of their own energy that it takes to [book travel], and so suddenly they think, you know, calling the 1-800 number seems easier than this. I'm going to bail. BW: What can the sites do to address this inconsistent information and these problems with ease of use? McQuivey: Well, the inconsistency actually has a lot to do with some very core issues in the industry. Namely that there are three large global distribution systems that are serving up these fares. What happened is that these three different systems store and access the data in different ways. And so, yes, it's very likely that you can get information that differs. And also, each site that gives you results might chose to skew the results to serve their particular interests. So, airlines, [at their own sites] for example, might give you their results first before their competitor's results. So what the site needs to do is explain that. They need to say, "our information comes from this," so that the consumer doesn't feel that they're arbitrarily holding something back but that it is in fact a choice that the site has made. Most of the airlines sites for example nowadays allow you to choose: Do you want to see American Airlines flights first, or do you just want to have [all flights] sorted by price or schedule? So the consumer gets in control, and suddenly their fear that somebody is holding something back on them dissipates. BW: What about ease of use? McQuivey: Ease of use is simply an issue of user interface design. This is not unique to the travel business. That's why we're confident that this will eventually be addressed. If you compared CDNow a year ago to CDNow today, it's much easier to buy there than it was a year ago. The same thing is true of the travel sites. But because travel has to serve up so much information, it's just a little bit harder to do so in an easy and straightforward manner. But they are already making pretty significant inroads into that. They don't require you to necessarily know the airport code or to know that September 16th is a Thursday. They help walk you through some of those things now, so that you don't feel hit with bricks when you come in and they ask you for all of this information. BW: Who is using these sites most heavily? How will that change over time? And what does that mean both online travel agents and their bricks-and-mortar competitors must do to appeal to this market as it evolves? McQuivey: People who book travel online are not necessarily doing so because they love computers, although many of them do. There is a stronger relationship between their travel sophistication and the likelihood that they'll use the Internet for travel. Now what it means is simply this: If you do a lot of travel in the real world, you're going to be very inclined to start using the Internet to research and book travel, simply because the Internet brings so much convenience to your travel habits. And so what that means is that the traditional travel agent client, which is that sophisticated traveler, is now starting to say: "Now look, even though I continue to use travel agents in the real world from time to time, I can use the Internet for things that are easy enough for me to book by myself or for things that I have to book at the last minute on a weekend when my travel agency is closed." So we are actually finding that the heaviest users of the Internet for travel are also the most likely to use travel agencies. BW: How much of the travel market will the Internet account for by 2003, which is the outer limit of your recent report? Will it change the fundamentally fragmented nature of the travel agency business and concentrate power on the Web in the way that offline competitors have never been able to accomplish? McQuivey: The question of how much of this business is going to the Web by 2003 is tricky. Because if you simply look at it in dollar revenues, which we have projected to be about $29.5 billion, it's really only 11% or 12% of the total domestic travel revenues for leisure travel. And so what happens is, you say, "only 11% to 12%," people start to relax and think, "Oh good, we don't have to worry about the Internet."       So when you asked if the Web will allow us to consolidate travel in opposition to the fragmentary travel world in the offline world, I don't think that can happen within this 2003 time frame, simply because it is such a small percentage of the overall market. But what it does over the next four or five years is clearly send a signal to the offline travel world that in fact that type of consolidation is coming and that they need to prepare for it. BW: What preparations should they make? McQuivey: Well, No. 1: If you're an offline travel agency, you better get online seriously. A lot of them have stayed far away. If you look in on our rankings, you'll find that Carlson Travel [and] Liberty Travel don't even show up in our rankings. We couldn't even ask consumers about them because their Web sites are so recently developed that they haven't built up enough consumer use yet for us to measure. They don't even make the Media Metrix Top 500.       So they need to at least turn some attention this way, even though it's going to scare their franchise travel agencies out there in the country. They need to go out there in a big way. For the online travel agencies, they're in a unique position in our view. We really think that they're doing a good job, and based on our consumer responses, they're amassing the most concentration of power, booking power, in their consumer base. And so to me that means that they actually have a potential now to reach backward into the real world and possibly do partnerships with real-world travel agencies who are struggling to find a way to fit into the Web, or just decide that they want to own this once and for all.       What happens though is that creates a conflict with online portals like Yahoo!, who scored very favorably in our reviews simply because they attract so many people. That they're going to look at this and say: "Hey, if this travel market is going to continue exploding and we are in the lead, we want to own that consumer instead of consistently hand them off to Travelocity and Travel Navigator.com and the other sites that are benefiting from all of the revenue we are serving up." BW: OK, in recent years a lot has been made of how the airlines in particular are pushing travel agents around, cutting commissions and in effect telling the travel agents what the airlines will pay. If the online agencies capture more of the market, what does that do to bargaining leverage in that relationship and what does that do to some of the travel agency business models? McQuivey: Actually, online travel agencies have been under more pressure from the airlines than the offline travel agencies. The logic goes like this: The airlines have said, "Look, you can service the customer cheaper on the Internet, more cheaply than a travel agency in the real world can. Therefore we're going to give you a smaller commission." Now what's interesting is, they did that a few years ago and in the process scared normal traditional travel agencies completely out of the market, which left the market into the hands of Preview Travel, Expedia, and Travelocity, who were willing to live with the lower commission.       And now we are looking at a market that has been largely shaped by that early decision on the part of the airlines. Now the result is exactly as you suggest, that now we're left with really two, possibly three, dominant online travel agencies who will collectively over the next few years gather enough power that they can go back to the airlines in force and say: "Look, you know you created a market where there's only two or three of us that are strong. Now we have the strength to come back to you and insist on better commissions." So yeah, it's not in the 2003 time frame, but I think that fear should be struck in the hearts of airlines already. BW: OK, two of the top three online travel agencies, Expedia and Travelocity, are associated with top offline brands, while Preview Travel has had to build up its name without the help of a comparable partner. How important is that advantage, given that Preview has fallen to the number three position among the non-portal online agencies? McQuivey: Evidently a portal relationship is extremely important, but I would caution concluding that that's what's happened here, because Preview Travel actually had some very attractive relationships. They have a relationship with Excite, one with AOL, and a few portals a little lower down in the portal space. And so evidently it's not just the strength of the portal that makes for a strong online travel agency. Now, having said that, if you go back and look at our rankings, you'll realize that the top portals in fact are affiliated with the top online travel agencies. So there is some portal effect, but it's not a given that your portal relationships will make you strong, I guess.       Now in Preview Travel's case, they've very aggressively gone after a leisure travel profile. That has been their market approach, and they've innovated in terms of booking cruises and tour packages, and evidently that hasn't resonated strongly enough with consumers to where they have recognized that they're going to have their leisure travel needs met more effectively on Preview than they do on Expedia and Travelocity. At this point, to me, that's an open question. Preview Travel has the possibility of continuing to push that segmentation and try to position themselves as the leisure travel agency online. But that window's probably closing over the next year, and if they can't gain that momentum in that time frame, portal relationships alone won't save them. BW: So if that's not it, then how does one go about building the brands? I mean, you look at Travelocity, and you see their association with Sabre [Group], which appears to be very potent. What are the elements of branding these sites and gaining the sort of critical audience advantage that seems to drive the critical mass here? McQuivey: A very good question, because every single one of these top players has such a different profile. Travelocity did begin in its roots as the child of Sabre. It continues to be a Sabre company and because of that was tied very closely with American Airlines. American Airlines also happens to be one of our top three airlines for attracting [online] bookers. So not only did Travelocity benefit from its relationship with Yahoo! but it benefits from its relationship with American Airlines, and maybe it's that one-two punch that makes them the leader. Expedia has simply been able ride primarily on its portal relationship and on its Microsoft brand. Microsoft is very effective at bringing lots of people into its car buying service, its travel service, its home buying service. You can't really avoid doing a good job in attracting people if you are under the MSN family. So I guess from previous travel experience, it has been purely: How much money do they have to spend to try and keep up with those guys? They have had to spend considerable amounts of money, and to my mind I am frankly surprised that they haven't scored higher in our ranking than they did given the amount of money that they've spent. To my mind, spending that money on a brand is generally effective. BW: OK, among the major players, tell us about similarities and differences in their business models. How much do these similarities or differences account for the difference in traction that the different companies have been able to get in the marketplace? McQuivey: I already alluded to the fact that Preview Travel has tried to go for a leisure brand. Leisure booking is where most of the margin is, but it's also where a lot of the cheapskates are, people who want to take their family on a vacation for as little as possible. So they have innovated in the direction of leisure, and as I already said, it hasn't been shown to give them an advantage. Where Travelocity and Expedia both have done very well is in attracting people who are hard-core business travelers.....But fundamentally their business models are very, very similar. It's just that Preview Travel had to go public in order to get the funding it needed to market itself. They're therefore the only public entity out there. Whereas Expedia and Travelocity have had funding from their parent companies that has allowed them to operate, probably in the red by my estimation. BW: One would imagine. OK, what determines which sites a looker uses and what separates a looker from a booker? McQuivey: What's really phenomenal about the difference between lookers and bookers is that there's really only two or three key differences. The No. 1 difference is that lookers tend to go to the portals first to look around, to consider their alternatives, and do research on destinations. The other big difference is that the lookers go to fewer total sites. So even though they look around at several different portals, they may only go to a total of 11 different travel sites in a year. Whereas a booker is much more comfortable going to more sites and on average goes to about 14 different travel sites in a year. And the difference is accounted for almost entirely by the number of direct suppliers that a booker likes to visit. The key being this: Bookers are comfortable going to Southwest, to American Airlines, to Hertz Rent-A-Car, to Hyatt Resorts directly to book and make reservations. That's something that lookers right now aren't interested in doing as much. BW: Now if that all is true and this market becomes very price-visible, then how does anyone establish any margin? McQuivey: That's a good question, especially when people are being "pricelined" all over the place and auctions are coming in. Not only will there be price transparency across different portal sites or agencies, there's actually going to be price pressure downward from these auctions, and Priceline in particular. So as this downward pressure comes in, where will the margin be? Well, unfortunately the only answer to that is probably increased transaction efficiency and customer retention. BW: OK, now tell me about Priceline. Priceline seems like the wild card in all this because their pricing model is so completely different. Over time, is Priceline going to be a bigger company than Expedia, Travelocity, and Preview combined, or is the inconvenience that's built into that model a limiting force? McQuivey: To my mind Priceline has always been and should always continue to be an escape valve for pressure in the system that isn't being satisfied elsewhere. In other words, it's not the first place you should or will turn to book a regular travel fare. It's only to be used when you can't get something that you know is possible, that you know there's a published fare out there but no one is able to deliver it to you, and you're willing to trade the inconvenience of flying at odd hours and maybe going through small airports for the price that you wish you could have. And so it will never be a consumer's first choice for that reason. But it's nice to have that escape valve to let that steam go out that way if it needs to. It's much more important that the woman in Chicago whose sister had a baby in London a month ahead of schedule and she wants to make that trip out to visit her but at the last minute can't afford the $2,000 fare that American wants to charge her -- she can go to Priceline, submit her request for $600, and probably get on that plane. BW: OK, so if Priceline is not as big a deal, and then not as big, really big for consumers perhaps as some of the other sites, what about for investors? Certainly a very, very aggressive valuation has been attached to Priceline. Is it going to live up to that? McQuivey: Well, I am hesitant to say that any Internet-related company is going to live up to valuations, even with the recent skepticism that's entered the market in the past few months. I personally think that for Priceline to expand beyond this escape-valve status that I've given it, it will have to change its business model to include other ways to get products. But what would the point of that be, because their primary brand is built around their current business model? So, I would comfortably say they can continue to exist doing what they do now for quite a long time. But will they grow to eclipse these other companies? No, I don't believe so. BW: OK, bottom line, how important is this for consumers, for business travelers, and for investors? McQuivey: Bottom line, this is extremely important for consumers. Consumers are going to have more options, more control of information, and ultimately more levelheaded sensible pricing. For business travelers we still have a little bit of time before the bottom line hits. American Express and other business-focused travel agencies are still trying to figure out the integration, but eventually it will hit the business travel world and actually make business travel easier to arrange and to track and to change at the last minute than it is for many people today. For investors, unfortunately there's not a lot of profit that's going to be turned in these markets anytime soon, because it's still quite a bit of a land grab. We have 19 million households that are doing research now, that are looking but not booking. Until they all book, which will occur over the next five years, don't expect there to be a lot of profit on which to bet your investment. _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ BACK TO TOP					PREVIOUS Q&As Consultants Martha Rogers and Don Peppers Consultants John Parkinson, Adrian Slywotzky, and Glover Ferguson on Intranets Amazon.com's Jeff Bezos eBay's Meg Whitman MIT's Michael Dertouzos Authors Jerre Stead and James Belasco Diamond Technology's Mel Bergstein Motorola's Les Shroyer Author Clayton Christensen Venture capitalist John Doerr