A few weeks ago, Google joined the trillion-dollar club with Apple and Microsoft.
It is amazing to see Google´s dominance of global audience in terms of traffic and the way they are using their dominance to squeeze higher profits from their core ad business.
Last year at the Phocuswright conference, Chamath Palihapitiya spoke about Google having all the qualifications of a monopoly:
- They have incredible pricing power
- Meaningful network effects
- Control over customers
- Massive gross margins
- Highly profitable business that is repeatable and predictable
However, he does note that Google is currently in search of their next “act” of product to drive growth in the next 10-20 yrs. He also predicts that the large tech platforms will face regulatory scrutiny in the near future. The expectation is for the company to squeeze profitability from its top products while investing in the search of the next big thing.
In the travel space, Google has been in the spotlight during last year as it has made significant moves in air and hotel ad placing algorithms (more ads), which puts organic options a lot lower on the results page. Kayak CEO, Steve Hafner has noticed.
Here is a great article that goes into more detail but the reality is that Google is leveraging their gate-holder position to drive traffic, enhance competition between bidders and increase profitability.
The results of these actions are being felt throughout the travel space with Tripadvisor and Expedia losing significant value as a result. Expedia´s CEO and CFO were both ousted after disappointing results.
Booking, the largest OTA in the world has managed to fair well during this time. It may be because they are one of the largest spenders on Adwords or because of a better execution strategy, maybe a little of both. However, there is a sense that the trend from free search to paid will continue and those that do not shift their business accordingly will be steamrolled.
Google may very well be the largest travel company in the world given the revenues that they generate from travel company ads. Brad Gerstner from Altimiter estimates that it could be higher than 10Bn in Ebitda.
As this is happening in the travel sector, it makes me consider two things. The first is that any company (i.e. Reservamos for me) needs to have a clear customer acquisition / distribution strategy that is not reliant on Google, even if it is a longer / tougher path forward. The second is a realization that if Google can do this in travel, it can replicate it in a lot of other industries, which seems like a positive outlook for the company´s earnings (not so much for other companies looking to acquire customers at a lower cost).
Even if the company gets regulatory scrutiny and is broken up, my gut tells me that it will be accretive to shareholders. The fact is that their free customer products are best in class and difficult to switch out of, which generate enormous user demand and bring all those business advertisers to their door.
I’m sure there will be viable alternatives and opportunities in the future that compete against Google. I was amazed at the Zoho numbers when I saw them in this tweet. But for now, I would bet that Google continues to have a tight hold in the audience business worldwide, which allows them to extract enormous value from the markets they play in.
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