City Insider: Give me TripAdvisor over the new-breed dotcoms

City Insider: Give me TripAdvisor over the new-breed dotcoms

City Insider - FT journalist David Stevenson on the travel industry

You’ve probably noticed by now that Wall Street is in the grip of a (second) fad for preposterous-sounding dotcoms. The "cloud" is the latest fashion accessory for investment bankers and there’s even – god forbid  - a new stockmarket index that tracks all thing cloud-related.

Effectively, this leaves the wrong bunch of companies garnering all the attention while the only company I’d actually want to invest in remains quite some way from filing a US stockmarket listing.

That company is a spin-out from the internet travel giant Expedia and is better known as TripAdvisor (and is currently in the news after snapping up social travel platform WhereIveBeen.com).

Yes, the user review leviathan is to become a standalone company with its own P&L and New York listing – and not a month too soon in my book, as it will be an incomparably more interesting investment than the lamentable LinkedIn.

And that market listing will come at an ideal moment. Looking through parent company Expedia’s most recent quarterly filing, it’s now obvious that massive structural changes are afoot in the world of low cost, internet travel, changes that the likes of Thomas Cook and Tui Travel would do well to learn from.

The transformation that is currently under way – and its mutation into a separate listing for TripAdvisor – is summed up in a very simple graphic hidden deep within one of Expedia’s presentations to analysts.

The graphic, which should be hung on the wall of every travel industry CTO, is called Expedia’s Virtuous Cycle. It aims to show how the online travel sector needs to develop. We start where all good businesses start – with cashflow to invest in. We then work out how to build a compelling supplier and advertising channel. After that we move on to ‘better supplier economics’ before arriving ‘improved traveller experience’ and ‘more travellers’.

But we haven't quite finished our journey. We now need to build in user generated content, which will in turn power more ad content which will - you guessed it - provide cash flow to invest in. The cycle begins again.

For most players in the sector the ‘more travellers’ bit is the endpoint. As Thomas Cook starts to roll out its Expedia-beating platform I’m sure there will have been much anguished talk about better supplier economics, much debate about channels and a general desire to improve the experience and recruit more customers.

But all this will amount to nothing unless the user is engaged to generate content. Users increasingly make their purchase decisions on those terms - virtually everything I buy online is now based on aggregate user ratings.

What Expedia teaches us is that user generated content is increasingly the alpha and omega of the internet experience – primarily because growth in the traditional channels is cooling down.

Take a look at Expedia’s revenue and P&L statement. In the US (where internet penetration is now at 53%) revenue and profits growth is close to flat or 5% at best. That bears repeating: in the world’s most advanced online travel market, a leading player like Expedia is struggling to grow top-line revenues, and in some segments its profits are slipping backwards.

Clearly those numbers can in part be explained by the fact that Expedia has saturated the US market – it’s also true that smaller, perhaps nimbler outfits such as Travelzoo are faring better. But the point is still valid – internet travel growth rates in countries like the US and the UK will slow down very significantly from here on in, forcing the giants to focus their attentions south and east.

The problem is that these emerging markets don’t generate the kind of cashflow that Expedia can pull in from its very profitable hotels business. Hence it needs to differentiate its online travel experience, and that's where TripAdvisor comes in.

As I’ve said many times in this column, the key word in 'user generated content' is 'content' - that's where the future of the online travel business lies, and not in piling '’em high and selling 'em cheap.

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