Priceline.com Inc. (PCLN:US) has boosted annual ad spending to more than $1 billion for the first time, extending its lead over Expedia Inc. (EXPE:US) in the hotel-booking market and stepping up a rivalry that’s benefiting Google Inc. (GOOG:US)
Even as social-networking services Facebook Inc. (FB:US) and Twitter Inc. capture a widening share of the Web-advertising market, the top online travel agents still choose to place most of their ads on search sites, where consumers can quickly compare prices and complete a transaction in a matter of clicks.
“One of the secrets to Priceline’s success has been its ability to manage search campaigns,” Mark Mahaney, an analyst at RBC Capital Markets in San Francisco, said in an interview. “There is a major new marketing war going on between Priceline and Expedia, and Google is the beneficiary.”
Priceline, fueled by its Amsterdam-based Booking.com unit, has more than tripled spending on Internet advertising to $1.27 billion in the past three years. About 90 percent of that goes to Google, according to Mahaney. The surge in search spending coupled with rapid global expansion has helped Priceline grow faster than Expedia, which is racing to catch its larger rival.
Mahaney recommends buying Priceline and Google shares and rates Expedia a hold. Based on his estimate, Priceline spent about $1.14 billion with Google in 2012, accounting for 2.6 percent of the search company’s ad revenue. While Google doesn’t disclose spending by specific customers, the company said on its fourth-quarter earnings call that the top 25 advertisers are paying more than $150 million a year, on average.
Unlike Priceline, Expedia doesn’t break out online and offline ad spending. The company’s total ad budget jumped 40 percent in the past three years to $870 million in 2012. Expedia spent 22 percent of last year’s revenue on advertising, compared with 25 percent for Priceline.
Both companies have focused on hotels in recent years as consolidation and dwindling margins in the airline industry crimped profits for online agents. Priceline bought (PCLN:US) Booking.com in 2005 and Bangkok-based Agoda.com two years later. Expedia’s growth has been spurred in part by its Hotels.com unit.
They’re chasing sales in the U.S. and European online hotel bookings market. Revenue from the two regions combined will jump 16 percent to $79 billion next year from $68 billion in 2012, according to researcher PhoCusWright Inc.
Investors have favored Priceline. The stock (PCLN:US) jumped more than sixfold in the past five years for the second-best performance in the Standard & Poor’s 500 Index. With a market capitalization of about $36 billion, Priceline is four times as valuable as Expedia, which has more than tripled.
Priceline slipped less than 1 percent to $722.04 at the close in New York. Expedia fell a penny to $64.97.
A Google search for the word “hotel” or “accommodation” and any major city or tourist destination reveals the extent of Priceline’s investments in search-engine marketing, or SEM. As of yesterday, Priceline’s Booking.com is the first paid result if that search included of the five biggest cities in Western Europe. In the U.S., Booking.com or Expedia show up first in searches on New York, San Francisco, Miami, Las Vegas and Disney World. Booking.com or Agoda is first when searching Asian cities Tokyo, Seoul, Beijing and Jakarta.
Brian Ek, a spokesman for Priceline, said the company doesn’t comment on its search strategies, because they’re “proprietary for competitive reasons.” Kristy Nicholas, a spokeswoman for Expedia, said search is one of many important channels used to lure consumers to its various sites.
Within search, travel-related inquiries rose one spot last year to become the second-most-lucrative topic, surpassing shopping, according to WordStream Inc., a developer of search- marketing software. Finance kept the top spot.
Other big travel advertisers include TripAdvisor Inc. (TRIP:US), the travel-research company spun out of Expedia, and Orbitz Worldwide Inc. (OWW:US) Priceline trumps them all in terms of online ad spending. The Norwalk, Connecticut-based company spent 97 percent of its ad budget online, even though its name is associated with 15 years of television commercials featuring actor William Shatner. The company isn’t abandoning offline ads. Booking started running television commercials in January to build its U.S. brand.
The bulk of the dollars will still flow to Google, said David Steinberg, chief executive officer of XL Marketing Corp., a New York-based digital-marketing company.
With $43.7 billion (GOOG:US) in ad revenue last year, Google accounted for almost half of the $88.6 billion global digital- advertising market, according to ZenithOptimedia.
“From an ad perspective in the travel space, there’s no place to get closer to the transaction than Google,” Steinberg said. “You’re literally at the transaction.”
Just as Google is attracting more spending from online travel agents, it’s also becoming a bigger competitor. Google introduced a service in 2011 called Hotel Finder that lets users search for accommodations on Google, in some cases bypassing Web providers. Google also purchased (GOOG:US) ITA Software Inc. in 2011, letting it provide flight prices and itineraries.
“We see opportunities to improve the search experience for users searching for travel information on Google,” the Mountain View, California-based company said in an e-mailed statement. “We work to continue having productive partnerships with as many online travel companies and industry players as possible.”
In their annual reports, both Expedia and Priceline list Google as a competitor and spell out as a risk the search engine’s ability to promote its own products in results.
Recognizing that threat, Priceline agreed last year to acquire travel search engine Kayak Software Corp. for $1.8 billion. Expedia, based in Bellevue, Washington, agreed to buy a majority stake in Germany’s Trivago for about $630 million, and in January led a $30 million investment in startup travel-search site Room 77 Inc.
Brian Sharples, a Kayak board member, is mimicking Priceline’s search strategy at HomeAway Inc. (AWAY:US), the vacation- rental company he co-founded in 2005. Sharples said his Austin, Texas-based company has been spending about $10 million in offline advertising, including a controversial Super Bowl commercial in 2011, and is bringing all of that online.
HomeAway will dedicate more than $20 million to Google ads this year, representing at least 6 percent of its revenue, based on the company’s forecast. Booking.com’s ability to convert Web searchers into customers was the inspiration, Sharples said.
“It’s worked brilliantly for them,” he said. “They spent so much on SEM that they were all over everyone’s computers all over Europe and they built a brand in the process.”
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