Expedia has decided that TripAdvisor, the online ratings site, is strong enough to stand alone and said that it said it hoped to split into two public companies, Expedia and TripAdvisor, by the third quarter of 2011.
TripAdvisor now attracts more than 40 million visitors a month across 29 countries and the move is an indication of the brand's strength as an equal player next to Expedia. The move was welcomed by analysts as a method for Expedia to unlock value in addition to creating two more manageable companies after the rapid expansion of the wider group in recent years.
The reason for the timing of the decision was not made clear, although it was rumoured that Google's recent acquisition of travel software group ITA and likely move into Expedia's territory had encouraged the company to strengthen its position. It is thought that the deal could value TripAdvisor at up to $4bn and the announcement was backed by a 14% increase in Expedia's share price.
Justin Post, Bank of America Merrill Lynch, said in a note: "We think the most likely reason for the split is that management is impatient with the stock and sees an opportunity ahead for TripAdvisor to be more aggressive in the second half of hotel recovery cycle as ad rates improve (although Expedia's growth is less certain)."
Concerns were raised by other analysts around the two proposed companies' business models, with Ingrid Chung of Goldman Sachs commenting that Expedia "would lose the natural hedge on advertising costs" from TripAdvisor, while TripAdvisor was "heavily reliant on Expedia with roughly 35% of revenue and earnings from Expedia, by our estimates".
To be in a position to benefit from the expected rise in advertising rates as the sector recovers, TripAdvisor must hold consumer interest, which, as user numbers continue to increase, it looks set to do. However, with the site relying on user-driven content, it is vulnerable to the vagaries of fashion – which can be troubling, just ask the people behind MySpace.
While the reviews remain useful, and credible, there will be a place for it amongst consumers eager for an opinion other than that supplied by those employed by the hotel they are investigating. The site has faced a series of accusations from those within the hospitality sector (in the main those who have suffered bad reviews) that it does not police the site properly.
Kwikchex, which is preparing a group legal action against the group in the UK, has estimated that there were at least 27,000 legally defamatory comments on the website, with "several million reviews" that were out of date by more than 18 months and more than 100,000 businesses listed on the site that were closed.
In addition to a possible threat from Google, Expedia, soon-to-be TripAdvisor's sister, rather than parent company, is facing competition in Europe from Opodo, which was acquired by AXA and Permira in February. The private equity groups are planning to combine it with Permira's Spanish group, eDreams and AXA's French agency GoVoyages. It had been reported that Expedia had considered a bid for the group itself, something which it may regret not pursuing.
For TripAdvisor, the direct threat may come from Facebook. Having seen off MySpace, the social networking site is eager to justify its valuation – estimated at anything between $50bn and $100bn. The site had advertising revenues of $2bn in 2010, which are expected to double again this year. It is reported that, in February, more than one-third of US online display ads appeared on Facebook.
This is competition for TripAdvisor not only in terms of sharing the advertising pot, but also in terms of its not-so-unique selling point of user-generated reviews. While reviews by other consumers carry more credibility than the hotel companies' own reviews, content created by consumers which the user knows personally are seen as of significantly higher value again. Once Facebook finds a way to monetise this – and it has started exploring the hospitality possibilities with its Places function – it will be a threat to TripAdvisor.
HA Perspective: As TripAdvisor continues to come under attack from groups of hospitality operators and their lawyers, one advantage of any spin-off is that, if the heat gets too much, Expedia will be able to get out of the kitchen without damaging its own name. It has decided TripAdvisor is strong enough to stand alone, but it may also see it sink alone.