Acquired trains its lens on the "second or third best acquisition of all-time", Priceline's 2005 purchase of Booking.com. Our heroes are joined by friend-of-the-show and former Jetsetter & Room 77 CEO Drew Patterson to help understand how this little-known startup from The Netherlands grew into the largest travel company in the world, with nearly $8B in annual revenue. Was this deal even better than Instagram??? We debate, hotly.
Topics covered include:
The Carve Out:
Acquired trains its lens on the "second or third best acquisition of all-time", Priceline's 2005 purchase of Booking.com. Our heroes are joined by friend-of-the-show and former Jetsetter & Room 77 CEO Drew Patterson to help understand how this little-known startup from The Netherlands grew into the largest travel company in the world, with nearly $8B in annual revenue. Was this deal even better than Instagram??? We debate, hotly.
Topics covered include:
The Carve Out:
David: Drew, I think you might be our most prepared guest ever. This is great. Drew has printed out notes and pen and paper here. This is awesome.
Drew: I'm a big fan. I just want to blow my shot here.
David: Your shot at stardom. [music]
Ben: Welcome back to Episode 41 of Acquired, the podcast about technology acquisitions and IPOs. I'm Ben Gilbert.
David: I'm David Rosenthal.
Ben: And we are your hosts. Today, we are covering the 2005 Booking.com acquisition by the Priceline group. Now, this acquisition is legendary and there are tons and tons of sort of interesting nuances to understanding the industry. So we wanted to wait until we had a guest with deep travel experience and really industry domain knowledge to make sure that we did it right. So today, our guest and listener of the show is Drew Patterson, the CEO of Jetsetter and Room 77.
David: So yeah, we are lucky to have Drew who is a “grizzled travel industry veteran” to help us pack this one. So Drew started his career at Starwood Hotels where he managed distribution and pricing, and then jumped into the world of online travel at Kayak where he was VP of marketing from 2004 to 2009. He left to found Jetsetter – and thank you for doing that, by the way, because you guys booked Jenny and my honeymoon, so very much appreciated. And he was CEO there at Jetsetter until 2012 when he moved to the west coast and founded another travel company that was quickly acquired by Room 77 and he served as CEO there at Room 77 until the beginning of this year. So, thanks again, Drew, for coming on and sharing your travel industry knowledge.
Drew: Guys, great to be here. A long-time listener, first-time talker. Can’t believe I'm in this show.
David: We can’t either. We are ready to dive in.
Ben: We are. And listeners, if you listened to last week’s episode, you may know this but if not, we are skipping the bit about asking for reviews and letting you know about our Slack this time with an extremely important message. We are launching the annual Acquired survey and we’ll have it open for about a month. So whether you’re a first-time listener or a long-time fan, we would love to hear your thoughts and in fact this is so important to us that it’s actually more important than any reviews, any begging you to share with your friends, any of the normal stuff that we do because as you guys know, we often lament the lack of data available to podcasters and it's really important to us to learn more about who you are. Some of those reasons include, number one, we need your honest feedback about how to make the show better and based on some of the early responses we’ve already read, you guys have been fantastic at doing that, so please help us out, tell us more information. We’d like to understand who you are so we can better tailor the content and the guest to our audience. Then third, we’d like to learn more about who you are to share completely anonymously without any identifiable information with our sponsors to really help them paint a picture of who’s listening out there. So that's about all I have to say about that except that we are sweetening the deal by saying that we will be raffling off one pair of Apple AirPods. So if you’d like to be able to be eligible to win a pair of AirPods, click the link in the show notes. Go to Acquired.fm/survey. It will take about 5 to 10 minutes and we would really, really appreciate it.
Our sponsor for this episode is Silicon Valley Bank. This week I got a chance to talk to Shai Goldman. Now, Shai is the managing director at SVB out of their New York Office and was previously a partner at 500 Startups. We talked about the New York tech ecosystem where Shai plays a major role and I asked him for his take in Priceline since they’re a Connecticut-based company.
Shai: “I think the interesting thing about Priceline is they’ve made a lot of great bets in picking up smaller companies that generated significant impact to the topline revenue. So from what I understand, the majority of their current revenue has come from 4 or 5 acquisitions that they’ve done in the last sort of 5, 6, 7 years. So they’ve done an amazing job buying smaller companies and that sort of helped them grow and become a huge part of their revenue stream.”
Thanks, Shai and SVB for the sponsorship, and also for the perfect, perfect tee-up to our episode today. If you want to learn more about SVB or reach out to Shai specifically, you can click the link in the show notes or in the Slack. So David, are you ready to take us into the history and facts?
David: Let’s do it, as always. So many people, at least here in the US, I think aren’t totally aware of Booking.com because it’s very big in Europe but not as big here yet in the States, and they probably also don’t know that it’s actually owned by Priceline. And if people in the US think about Priceline, they often think about William Shatner and the Priceline negotiator which is definitely a big part of Priceline and internet history. But that's a story for another day. But today, we’re going to talk about how Priceline of which Booking is by far the majority of it, is actually the largest travel company in the world. And after SAP, I think it’s actually the second largest tech company that's ever been built in Europe and as a $91 billion market cap – that's billion with a B. So just for some reference, that's equivalent to three Airbnb’s and it’s bigger than Netflix. So it’s not a company that a lot of people know about but it is definitely top 10 most successful internet startups probably of all time.
Ben: Yeah. When I said legendary earlier, I mean that stems from when we first started doing the research for this and you just started seeing some of the high-level stats of what an enormous company this is and what a behemoth in the travel industry, I think to Americans and even some Americans in tech, we don’t know much about this company.
David: Well, and that's why we have Drew here today. So I’ll start out with the history and facts, and Drew, please feel free to hop in at any point along the way. But the company was actually founded in Amsterdam in the Netherlands in late 1996 by Geert-Jan Bruinsma. And major apologies to all of our Dutch listeners and to Geert because I'm sure I just butchered that. But he had just graduated from college and this was late 1996 and felt kind of in his core that the internet was going to be a thing. So he decided rather than going to work for a company like most of his classmates, he was going to become an internet entrepreneur. But there was just one problem. He didn’t have an idea. So he starts casting about for an idea of what type of company he would start and apparently, according to this great, great oral history of online travel that the website Skift published that we’ll link to in the show notes. But according to an interview with him in this oral history, he was having dinner with some friends one night and they were talking about problems that they had and they realized that booking travel across Europe was actually a really hard thing in those days because you had to call up the hotels that you wanted to stay at on the phone and of course in Europe people speak all sorts of different languages. So if you didn’t speak French and you wanted to book a hotel in Paris, you were kind of out of luck. And he thinks to himself, “Well, I bet this is something that the internet can solve.” So he goes and starts doing some research and he thinks well there must be other folks out there that are already attacking this problem.
But it turns out that there were no major online travel companies at that point. Some of the hotels in the US had started having their own online booking system, so he went on The Hilton website. He actually looks at the code for Hilton.com and takes some “inspiration”, according to him, from how they managed their online booking system. But he pretty quickly codes up an MVP for a multihotel booking website.
Ben: David, if only there were someone to aggregate these disparate one-off hotels that had their ecommerce system.
David: If only. And he calls his little project Bookings.nl (NL for the Netherlands). And that is how Bookings.com was born and in the early days, unsurprisingly again, it was actually mostly Americans that used the site. Americans who were traveling to Europe and looking for a way to book online. Because in those days, it was only Americans that really had access to the consumer internet. There was AOL at the time, lots of common people in the US were online but in Europe, it was much more still of a kind of confined academia type thing and average Europeans didn’t have access to the internet in the same way. So ironic because Booking ends up becoming such a large company on the back of European customers but the initial customers were Americans.
Ben: Yeah, and it’s really easy to forget too sort of the roots of the internet in sort of American University and defense infrastructure, like of course it's not elsewhere in the world yet. It was brand new and it was invented in the US. It’s kind of shocking to imagine a world where people are playing around with websites. In the US, Amazon is being founded in the mid ‘90s but it hasn’t really made it everywhere else yet.
David: Yup. It was a different time. And also a different time, venture capital and in particular venture capital in Europe was a very, very different kind of proposition and Geert had a tough time getting funding so what he decided to do, and again, he talks about this oral history and I just love this, he needed funding so he decided that he was going to email everyone who he knew who had an email address because he figured if they had an email address, they at least knew something about the internet. That's a direct quote from him. I just love that. So he emails about 50 people and 18 of them end up investing. He raises about 50,000 euros to get going, hire some early employees, and they start to get off to the races. What they evolved into, and this is where we’re going to spend the bulk of this episode and I want to bring Drew in here, they really become one of the first online travel agencies. So the same general model as Expedia or Priceline or Orbitz or Travelocity here in the US. There are kind of three pieces to the business that they started. One, they need to acquire the travelers. Two, they need to acquire the hotels, the supplies, the supply and demand. Then three, they need to provide some form of customer service. So Drew, for our listeners who aren’t as familiar with the OTA world, how did all this evolve?
Drew: You got the basics of it, right? All these businesses really are a marketplace. It's about how they bring together a supply and demand. It’s interesting to think back to where this industry was as Booking.com was starting. We’re talking a little bit about who had email addresses and it was all AOL, it was MSN, it was all these kind of dial-up services. We forget it now but the real things that made the first generation of OTA businesses in the US were like [___ 00:12:04]. Do you remember these? It was like Travelocity got the deal on Yahoo and therefore Travelocity was by far in a way the leader in this category but actually, Travelocity managed to get a couple of those. It was AOL, it was Yahoo. I forget which the other ones were.
David: And of course, Expedia founded by Richard Barton up in Seattle was part of Microsoft in the early days so they had MSN of course.
Drew: Exactly. So they had that as a pretty healthy lock-in towards the demand. The other side is, exactly as you said, was how do you start to get then a supply base that fits with that? Again, early days, the internet, not that different like than a newspaper, right? What are all the kind of categories of interest and how do we start to fill them out, travel being one of those? And so what you saw with the first generation of these online travel agencies was they’re basically just a front end to the GDS system (the global distribution systems) which were used by travel agencies to make flight reservations, make hotel reservations and the like. So you had this kind of big supply base that was already in place. Travel agents always got commissions and this GDS has provided travel agents with rates and availability, the tools to go ahead and make a reservation on a consumer. Expedia and Travelocity and the like were front end that the average consumer could use.
David: That's one thing actually I hadn’t focused as much on. But could you talk a little bit more for our listeners about this whole GDS system? Because it existed before the internet, right?
Drew: Yeah. It goes back to I think it was 1973 when the first GDS was built. These were actually by-products of the airlines. So American Airlines, Bob Crandall famously realized they needed some computer system to tie all their travel agents together and that was the genesis for Sabre which is the very first GDS. And of course that then served as the underpinnings for all these online travel agencies for a long time.
Ben: Wow. The parallels to the real industry are amazing here where you look at the MLS systems existed long before you had Zillow but they’re sort of this – David, you mentioned Rich Barton, this Barton-style “data to the people” way where you can take these systems that should just be corrigible by the general public but have been locked up by a professionalized industry for a long time and it really makes you wonder like what else is out there that has private databases that are linking the industry together that really have the potential to be brought online.
David: Yeah. So for Booking and in Europe, obviously there’s the GDS in America. Did the GDS extend to European hotels as well?
Drew: Yes. So an interesting point that kind of drives up the structure of the industry and I think part of what set Booking up for success over time. If you think about what kind of hotels were on the GDS, it was a certain kind of hotel. Like rough and tough, there are 500,000 hotels in the world. Of that population of 500,000 –
David: Which is crazy, by the way. I think a lot of people in the travel industry don’t realize that, like 500,000 hotels in the world, that's a lot.
Drew: It's a huge number. That’s why Trip Advisor would tell you they’ve got hotel reviews. So again, that's kind of the biggest sample of hotels. But the GDS only has about 75,000 hotels on it, varies a little bit from GDS to GDS. But the kinds of hotels that are generally on the GDS are, well, going back to our example, it’s the Hiltons of the world, it’s the Marriotts of the world. It’s the kind of hotels that get booked by travel agents which tend to be stayed in by business travelers or folks that historically accessed travel agents and so they were franchised and more sophisticated and had better technology. It wasn’t a 20-room pensione outside of room which is much more commonly used by the European traveler.
David: That really speaks to – we’ll get into this throughout the episode but the differentiation and the value that Booking was able to build while it was really hard in the beginning and we’ll get to they end up getting acquired by Priceline in 2005 for $133 million, I mean, nobody recognized the value here. But because they were able to build this proprietary longtail marketplace of supply, they really had something no one else could access. It reminds me in a lot of ways of the difference between Google and Yahoo. Like on Google, you could type a query on Google and they had access to the entire longtail of the internet whereas Yahoo with the directory model only had the head. So for people, Drew, like you were saying, you’re looking for something specific in Europe, it was Booking or nothing.
Drew: A hundred percent. I think that's a great analogy. Where that really becomes clear, I guess we’re kind of jumping ahead –
David: Oh, we always jump ahead here.
Drew: But if you think of like what’s the advantage of having the tail, it’s far greater relevancy. It's the things that you actually care about. The consequence of that is conversion rate. So again, not to get too far ahead of ourselves but the consequence of having all these kinds of longtail inventories, it’s far greater relevancy than those people who are relying on just the GDS might have enjoyed.
Ben: While we’re sort of on this topic of discussing that the OTA is basically a marketplace, Drew, before we kind of get into the future evolution here, could you do some sort of definitions for us of online travel agency versus travel aggregator versus metasearch, like how do these things interact and how are they different?
Drew: Sure. So the lines are a little blurry between them but in general terms, online travel agencies take reservations; they make bookings on behalf of the consumers and so they aggregate inventory from lots of different sources, generally directly from hotels, airlines, rental car companies and the like. Again, they will enable the consumer to make reservation. Whereas metasearch engines or aggregators are a layer of abstraction above that.
David: So it’s Kayak.
Drew: Exactly. Trivago. What like Trip Advisor has increasingly done, metasearch. What Google is doing today. They’re pulling rates and availability directly from suppliers, also from OTAs.
David: From OTAs themselves.
Drew: Showing you prices and to the consumers to decide what they want and then handing you off to an OTA or supplier to complete the transaction.
David: Got it. So let’s go back. We’ll kind of finish out the history and facts and then there’s a bunch more to dive into here. So a couple years go by, Booking starts to sort of slowly grow its supply base and its demand base in Europe, shifting as Europeans are coming online to actual European customers. One thing that's actually another side note that I would just want to put a pin in to come back to, on the demand side, we mentioned search engines, as search engines start to rise in prominence as kind of the front door to the internet, travel and in particular OTAs become one of, if not I think the biggest category of spend in terms of search engine advertising because the link between searching Google or whatever search engine for a villa in Rome and an online travel agency is you’re so far down the funnel, it’s a perfect type of advertising for these companies.
Drew: Yeah. Travel is a really nice use case for search advertising for a couple of reasons. The two biggies are, number one, it has high purchase value so they’re relatively large transactions; and number two, it’s a very close combination between search and transaction. So online searching for a home, online searching for a car. All these are completed online and so as a first case of direct response advertising, travel is a really big use case. And so again, you saw the OTAs as one of the biggest categories of spenders on Google.
David: So Booking is growing slowly. They end up merging in the year 2000 with another group also in the Netherlands, also called Booking, called Bookings Online, and that's when they changed the name to Booking.com. A couple of years go by and then in 2002, Expedia actually decides that they want to enter Europe from the US and they understand the European market is different, they need access to all this supply in Europe. And so they come over, they look at a bunch of players and they get very, very close to acquiring the new Booking.com. They do six months of diligence and then right at the end, right before they’re about to close the deal, the US Expedia board ends up rejecting the deal and vetoing it. The reason that they do so and this is the next kind of topic we want to dive into with Drew, is they’re really worried about Booking’s model which is different from the US OTAs, their business model. Booking uses the “agency” model whereas in the US, Expedia, Priceline, Travelocity and the like used the “merchant” model. So Drew, can you kind of help our listeners understand what the difference is between the two and why the US guys might have been so spooked by this?
Drew: It's funny looking at it today because it seems so obvious this agency model is great. But at the time the merchant model was highly desirable and leading to a lot of its success that the big players in the US had. So the big difference between the two, the merchant model is effectively a wholesale model. In the merchant model, the online travel agency contracts for wholesale rates with a supplier. So Expedia would go to Hilton and say, “We’ll pay you $100 for this room and we’re going to mark it up 20%, we’re going to sell it for $120.”
David: So this is the Amazon retail business analogy where Amazon is taking inventory on items, they’re setting the price and selling it.
Ben: In this scenario, the OTA actually holds the inventory risk, right?
Drew: No. This is why it’s such a great model. As an OTA, I don’t take any inventory risk. I'm just going to agree to what my net rate will be. If I don’t sell the room, it’s not my problem; it’s your problem. I can mark it up at that point in time as much as I wanted. So again, you had instances where one of the leading practitioners of this at the time was HRN which went on to become Hotels.com. But there are instances where they would have for New York City like on sold out nights, they would contract for a $300 rate at a Holiday Inn and they would sell it for $900 because it was the only inventory left in the city. It was like these guys are bandits, I mean, brilliant entrepreneurs.
David: Wow. If you can make this work, this is even better business model like it has the best of being a retailer and that you get to set the price and essentially control the inventory. But also, the best of a marketplace where you don’t take any risk on the inventory.
Drew: Exactly. One even better than that which is it has a negative working capital cycle. Because I collect money from the consumer when I sell this and then I remit funds to the hotel 30 days after you stay and if it’s a two-month average booking window, I'm holding everyone’s cash for 90 days.
David: Okay, so that's the merchant model. That's what Expedia and the US guys have. Now, Booking has the agency model. What’s that?
Drew: So the agency model was the kind of traditional travel agency model. That meant that they were going to take a commission, that commission was going to be paid not by the consumer. There wasn’t any kind of markup. But the supplier/the hotelier, in most cases, would pay them a commission based on what they sold and they would pay the commission after the booking took place. So if you don’t show up or there’s cancellation, again I don’t get my commission against it, and the commission rates tend to be much lower. Booking.com started at 5%. Typical industry commissions were about 10%, if you compare that to the merchant model which was 25% to 30% margins at the time.
David: And negative working capital.
Drew: And negative working capitals, exactly.
David: So you can see why you’re the Expedia board and you say, “This doesn’t seem like the right model here. These crazy Booking guys started by this college student, they have no idea what they’re doing.”
Drew: And to have some sympathy for them at the time, right? They were on top of the world. Travelocity had been the leading player, Expedia displaced them. Expedia recognized I think one of the interesting things about OTAs, when you look at their economics, what drives their business, it’s really the hotel business that drives their profitability. It’s a much more profitable piece of business than flights. Expedia recognized that early. Bought a company called Travelscape which was one of these kind of early merchant businesses. Then turned around and bought HRN which became Hotels.com which as it happened was powering the hotel business on Travelocity. So it’s kind of a master stroke. They completely undermined their competitor and they identified what the most profitable and exciting part of the business is and they controlled it all.
David: This is like when Google bought Overture.
David: This is great.
Drew: And now you want me to turn around and go buy something in Europe that's much less attractive?
David: So the Expedia board looks at all this and says, “We’ve got the golden goose here. We’ve got the best business model.” People say Google is the best business model of all time. “This might be even better. Why would we want to do the agency model?” But in the long run, of course, it’s the agency model that really wins here. What was it about that in the long run that ended up being better?
Drew: So the agency model ultimately was superior in part because it was a better consumer proposition. The merchant model wasn’t so great for the consumer because I had to pay you upfront as opposed to the agency model where I could cancel if I wanted to, I had a lot more flexibility. It also wasn’t so great for the supplier from the standpoint of a hotelier – I don’t really like this merchant model thing where I'm paying you 30%, you have more control over setting price, you’re keeping cash, not me. So that wasn’t great. But again, in fairness to Expedia board, they kind of looked at the world more like we’re in a dominant position, why do we need to move away from this? And I think what they failed to realize was just the size and magnitude of this market and just the power and potential of how quickly this was going to grow. That in combination with what we were talking earlier: the potential for ad words. A really kind of cost effective tool that would allow a business, an online travel agency to scale pretty quickly. And where those things came together was, again, going back to the point we’re making earlier was the longtail because this agency model made it really easy for Booking.com to clean up the longtail very cost effectively and very quickly. It was the much lighter weight approach in contracting, got a lot more hotels on board quickly. They didn’t have to go out and negotiate for net rates with an individual hotel. You can just fill out Geert’s form, send it back and away you go.
David: I forgot to put it in our notes but also in the Oral History with Geert, when he started, the way he onboarded hotels is he sent them postcards essentially with like a form to fill out on the card if they wanted to be included in the marketplace and then they just mailed it back to them.
Drew: Ecommerce at its best.
David: Yeah. Ecommerce at its best. MVP, bootstrapping.
Drew: The dirty secret behind the merchant model was for the longest time, I mean literally up until probably five years ago, like a huge chunk of reservations were delivered by fax machine. Well, maybe it was 10 years ago.
David: A lot of these hotels might not have had internet connections. So it was kind of like the early days of the food marketing Grubhub and Seamless. Those were all orders delivered by fax machine too.
Drew: Yeah, totally.
Ben: Internet. Let alone having Wi-Fi marked on your Booking.com reservation. One point I want to make here before we move on is that there’s an incredible similarity to the ebook market here. When we talked with Brad Stone, I don’t think we discussed this on the show since we were talking about the Uber-Didi deal, but he talked so much in The Everything Store about the struggle that Amazon went through with ebook pricing and the wholesale versus the agency model there where Amazon kind of prefers this wholesale model where they can pay a fixed price for something and then they have all the pricing control and can mark it up and down however they want and they have incredibly sophisticated variable pricing to do that. But the sort of I think it was the European, some kind of EU book consortium that really had a lot of power in this industry and forced them to use the agency model and it was a big concession they had to make when going to market.
David: That must have been a big piece that ultimately led to the development of marketplace within Amazon.
Ben: Got to be.
David: Which is why Amazon is what it is today. Power of marketplaces.
Ben: It is. That's truly one of my favorite things about this show is like seeing the patterns between different industries. They evolve at different speeds, they evolve with different waves of technology but at the end of the day, there’s really only so many business models and there’s really only a finite number of ways that different players in the industry can interact with each other and we kind of see the same playbook roll out over and over again.
David: Are you making an apologist argument for venture capitalists, Ben?
Drew: You might think.
David: We’re not self-serving on Acquired at all. So back to the history and facts. All this happens, Expedia ends up passing, leaves Booking and Geert at the altar. Then Geert makes a decision which probably when he talks about this made the right sense for him at the time, they’ve just had this deal fall through, he ends up selling Booking.com not to Priceline but to an investor group. So a major European investor group, a consortium comes in and acquires a majority stake in Booking. This is in 2002-2003. Then over the next couple of years, there’s kind of one guy sort of in the US that starts to see what we were just talking about with the power of the agency model and starts to wonder about the future of how long kind of the music can keep playing with the merchant model, and that guy’s name is Glenn Fogel who is now the CEO of the Priceline group which includes Booking, of course. But at the time, he was Priceline which was just Priceline, the Priceline group also includes Kayak and Open Table now, perhaps future shows. But at the time, Glenn was the head of M&A for Priceline and he comes over to Europe and he starts digging and realizes this dynamic with the agency model that it really does align interests better and incentives between the travelers and the hotels. And not only that, but people in Europe also travel a lot more than they do in the US because we’re workaholics here, we don’t take as much vacation so you’ve got kind of a better product model, a more active customer base, and he starts to argue within Priceline that they should really start acquiring some of these companies.
So the first acquisition that they make led by Glenn is actually not Booking but a company in the UK in Cambridge, England called Active Hotels, which is very similar to Booking, was larger in the UK than on the continent. They acquire that in 2004 for 165 million. Then later in the summer of 2005, they do finally acquire Booking for 133 million, as we mentioned. They merge it with Active Hotels in the UK and they keep the Booking.com name, so they combine the entity as Booking.com. When they do that, in total, they now have 18,000 properties across all of Europe, 18,000 hotels on the system which is way, way more than any other online travel agency in the whole world. So Priceline, this is kind of a master stroke, they build through acquisition the largest online travel agency in the world with sub 200 million deals. Kind of amazing.
Ben: Yeah. So question for Drew is, do you think that they needed to do the acquisitions to do this, to sort of like bring that agency model into the Priceline group or could they have taken their existing supply and demand since they already had some scale and really reinvent that and kind of copy that model themselves.
Drew: I think it’s tough to see and I guess it particularly plays out when you look at sort of subsequent history. I think it’s tough to see Priceline doing this on their own. In part, I think you have to look at the context for Priceline to make this acquisition, why they’re able to do it. Priceline made efforts to go to market in Europe. Again, remember this is 2004, this is kind of the depths of the dot com buzz. Priceline had been one of the biggest success stories of web 1.0 like we all remember William Shatner, Delta made a billion dollars getting warrants in Priceline, selling them at the top of the market, looked like a genius. And Priceline had moved in to “Name Your Own Price”. Dog food, name your own price. Groceries, name your own price. It was just like all over the place.
David: There’s a great history or partial history of Priceline in the internet bubble in the book eBoys which is about the early days of Benchmark, the venture capital firm. They were the venture investors behind Priceline and the initial Priceline, it was crazy. Drew, like you said, it evolved into travel because that was the only thing that made sense that they did, but originally, it was name your own price for anything.
Drew: So these guys didn’t look like masters of the universe at the time. They looked like yesterday’s news who were trying to figure out a plan B. Priceline had actually tried to go into Europe. I heard the story once that they hired like a former marketer from Burger King to make Priceline “Name Your Own Price” a big deal in Europe and totally flopped. So you could imagine Glenn sitting in Priceline but like no, no, we need to go back to Europe and we need to get big in travel. It wasn’t like they were coming from a position of strength where they had both the capabilities and position to do this. I think, again, it’s absolutely to Glenn’s credit to recognize what they did. A common position for a lot of the US companies. Travelocity tried to go into Europe. Expedia tried to go into Europe. A lot of these companies had tried to go into Europe and really struggled. I think one of the reasons for that, and again, we kind of touched on it briefly earlier, it’s the cultural issues. For big US companies, the US was this kind of dominant formative experience. Everyone speaks the same language. You have national advertising. You are building a single monolithic brand that serves across the US as a market. Europe doesn’t really work that way. UK is a different market than France, than Germany, than Spain, than Italy, than the Dutch. They all have their own languages, they all have their own domains like they all have their own marketing channels. You have your own country managers. It’s a much more complex and nuanced way to serve in the market.
You can see why some of the US travel companies really struggled as they tried to build this on their own, and why, from the standpoint of somebody like Glenn, the thought of hiring some Dutch who probably speaks a bunch of different languages, know how to work all these different cultures, go let them do their thing.
David: Well, and to their thing they did. Another kind of theme that we see on this show a lot is Glenn and the Priceline group left them alone to do their thing and so they acquire them in 2005, they complete the merger within Priceline of Active Hotels and Booking.com. In 2005, they do collectively 18.7 million room nights booked, or sorry, that was in 2006 after the merger. And that grows from 18.7 then over the next 10 years such that last year, 2016, they did over half a billion room nights. So that's over 40% growth per year for 10 years and the financial zones now are just pretty staggering. I mean Priceline, the company, the group as a whole did 10.7 billion dollars in revenue in 2016 and of that, Booking.com which again, remember they paid a combined, what is that, 290 million dollars for Active and Booking. They did 7.8 billion dollars of that. Pretty incredible.
Ben: Amazing they break that out too because I think while they’re separate properties, Drew, do you know if they cross-pollinate the supply between the frontends for Priceline.com and for Booking.com?
Drew: No, they don’t. They have their own supply teams. I think of the things that has defined Priceline’s management strategy is the group has let the businesses do their thing. So again, today, Priceline is Kayak, Agoda, Booking.com, the core Priceline brand, car rentals, and Open Table.
David: They have a car rentals business too, yeah.
Drew: But each of those businesses has been largely left to fend for itself and make decisions that are right for its business. They don’t really do a whole lot of kind of corporate level cross-pollination and especially at this point in time, so more recently they’ve done a little bit more but certainly through these incredibly explosive years of growth, each of the businesses are run autonomously.
David: And so that kind of wraps up the history and facts here, but one just sort of fun side note in doing the research that Drew, I had wanted to ask your thoughts on, what’s really crazy to me, this is such a big market. Again, Priceline group, when we said at the top of the show, $90 billion market cap, that's three Airbnb’s and more than Netflix. And it’s not like Expedia is a small company either or any of these other companies. But the industry is so small people-wise, like it’s a total cabal and like reading the Skift Oral History and all of these folks who are the major players bounce between company to company. I mean, even you, you’ve been at Jetsetter, you’ve been at Room 77. It’s all such a small world. Why is this not flooded with entrepreneurs?
Drew: Gosh. A great, great question. In part I would say there was a moment where it was flooded with a lot of entrepreneurs. There’s a lot of company formation that led to these businesses. So if you look at take Expedia today, Expedia is the sum of Expedia plus Travelocity plus Orbitz plus Wotif. Travelocity was a combination of Preview Travel and Travelocity.
David: And Hotwire is in there too.
Drew: Yeah. Hotwire is in the mix. So you have a ton of businesses that were built that ultimately have consolidated to a relatively limited number of two platforms, Expedia and Priceline. I guess you can look at Ctrip, it’s the third one in Asia, maybe Trip Advisor.
Ben: Yeah. And I think also the amount of required connectivity between all these different entities is kind of a high technical bar to get started and I think that these businesses, kind of aggregation theory in play here, are scale businesses so that in order to provide a lot of people have new ideas for how to make the travel booking experience better and the trip planning experience better, and I think it’s almost become a trope that like if you go to a startup weekend, you’re going to see somebody pitching a better way to plan trips and do something in that space, but it seems like it’s just really hard to execute as the bar has gotten higher and higher with these established businesses.
Drew: For sure. I certainly see a number of entrepreneurs want to pitch ideas for better startups. The question is, what does better mean this category? I think Booking has been the illustration that better, as Booking defined it, is higher converting. One confuses consumer satisfaction with business model efficacy. If you can find a way to get more clicks or more bookings out of a given visitor, you’ve got a better mouse trap, but that's a less sexy idea than helping people plan better honeymoons.
David: One thing on this front on innovation and entrepreneurship in the entrepreneurialism and the travel industry I want to come back to maybe in tech themes is, of course, Airbnb, which is a wholly different approach to this industry but is nonetheless still the travel industry. But first, with that teaser, do you want to jump into acquisition category?
Ben: Yeah, let’s do it. So for me, I have this down as business line. For new listeners of the show, we define that as people, technology, product, business line, asset, or other because we leave ourselves the right to do whatever the hell we want on this show.
David: It's our show.
Ben: Yeah. So in this one, a lot of times we define a product as like, hey, this is a new product you can sell to your existing customers like an Apple would come out with an iPhone after coming out with an iPod. This for me is really something where it’s a new marketplace with new supply, new demand, a new business model and it’s completely separately broken out on the balance sheet. They bought a new business here and they happen to learn a lot from it and really make it the cornerstone of the company and grow from there. But they bought a wholly separate line of business and they kept it pretty separate.
David: Yup. I don’t have much to argue with there. I mean, literally they report it as a separate business line in their financials, so it’s kind of hard to argue with that.
Ben: I figure that's an easy one for me to jump in on.
Drew: I got nothing here.
David: No argument, if our resident grizzled industry veteran agrees. So, moving on. What would have happened otherwise? This is interesting.
Ben: Yeah. What if Expedia had pulled the trigger? That's sort of the obvious one, right? I don’t know. Drew, what do you think about that?
Drew: With deference to my friends at Expedia, I'm not sure they would have done as good a job managing this business as Priceline did.
David: And the good job was just leaving it alone, right?
Drew: Exactly. I mean, this is effectively a VC play. I guess a better question is, why was Glenn Fogel the one who sniffed out this deal? Where are all the great Silicon Valley greatest challengers?
David: Yeah. Greatest VC investor of all time.
Ben: Who was the intermediary that they sold it to? Was it a private equity firm?
David: No. I think I could be wrong in this but I think it actually was a group of private individuals, private investors in Europe that Geert knew.
Ben: Yeah. I mean, it seems like the opportunity talks for them is the real story here. Why let it go? But I think this might be a good time... Drew, when we were preparing for this episode, you mentioned sort of a difference between Expedia’s M&A strategy and Priceline’s M&A strategy, and that Priceline sort of took these risks on early kind of sub-scale businesses that they saw potential in and Expedia tends to buy more established things that have a very reasonable growth trajectory from there that they can add to their portfolio. Does it seem like I'm getting that right? Now I’d love to hear your thoughts on that.
Drew: Yeah. I think that definitely characterized a lot of the deals that made Priceline successful – Active, Booking, Agoda. And again, you saw the strategy we just talked about from Priceline, of buying these businesses and effectively being largely a passive investor, holding them accountable for growth, giving them capital to continue to grow, but not taking too active a role in the management and integration of those businesses. Expedia, by contrast, has built a single dominated scale platform and we should give Expedia its due here. It’s an almost $20 billion business. They do $350 million room nights that Priceline did last year, so it’s a real formidable player in this category. But their approach has been different. They bought Travelocity, they bought Orbitz. They bought Wotif in Australia. They bought these players and their strategy has largely been to say we have a tech platform that is incredibly mature, we put huge investments in and we now want to start to get scale out of it. So they buy effectively these store fronts, replace them with superior economics, superior technology, see some gains in terms of productivity in both clickthrough rate and their ability to monetize it, but have taken a much more active role in the management of the businesses.
Ben: And then another question is, did Booking need a capital infusion from Priceline? Or what if on their own they just sort of continually reinvested their profits in the business and sort of this aggressive Amazon-style way? Is there any way they could have grown to be the scale that they are today? Or would they have sort of lost out in the arms race of competition?
Drew: It sure seems to me like Booking could have done this on its own. Booking didn’t need Priceline to achieve the scale that it did. I think again it’s testament to Glenn’s judgment and acumen in finding the company and seeing the opportunity here. But I think that’s an opportunity that was available to any financial investor.
David: Yeah. At the same, I think this might be a good lead in to tech themes. We’re always just trying to get into tech themes on this show.
Ben: Rename the show.
David: Yeah, “tech themes”. I think that will be pretty boring. This is the thing about marketplaces though and, well –
Drew: You’d have to have more than one tech theme.
David: Yeah. I'm just going to dive in. I mean, to me, this is such a wonderful illustration of everything that is both incredibly challenging and incredibly beautiful about marketplaces which is they’re a total slog to get started. I mean, thinking about those early days bringing all this very fragmented, very disparate supply all across Europe a supply of hotels onto the Booking.com platform and Geert sending up postcards to everybody. You can totally see why Expedia would look at that and say like, “Ugh. That seems hard, and the business model doesn’t seem as good as ours.” But then the thing is, once you get to a certain scale point, and I think this is the value of capital and building marketplaces, is accelerating to get to that scale point, then it tips and then it’s just the defensibility. We’re talking about why you haven’t seen more major companies built in travel online. The defensibility is so great in Booking, like because everybody is on it, on both sides of the marketplace there is no incentive for either side to go anywhere else because the experience isn’t going to be as good.
Ben: Yup, and it really is an argument for consolidation too. We’ve said this before but one of the reasons why we set out to do this show is understand when M&A works and when it doesn’t so that when we’re involved in the early stages of companies, like we can try and figure out how do we steer the ship if the goal is to get acquired by one of these bigger companies, like where can we nicely fit. And it sure seems like marketplace businesses are so well-suited, like whether you combine the business lines or not, you could look at Zillow and Trulia, or more recently and here locally, Rover and DogVacay. When you take a lot of supply and a lot of demand and the exact same value prop, a very similar value prop, and you can consolidate a lot of things onto a single platform and bring these things together, it seems like you take that flywheel that’s already spinning so well, yeah.
David: Drew, you had a counterpoint though.
Drew: Oh, I was going to say I think there is certainly pressure. If you talk to hoteliers, suppliers in the world, they’re not stoked about this marketplace. There’s no hotelier in the world who’s like “OTAs were a good thing.” You can have some sympathy for them. If you look at the stock chart of Hilton versus Priceline over this period of time, you can see why they might not be so excited.
David: Well, I totally get that from Hilton and Marriott’s perspective. But what about the 20-room villa in Romania who had no way of acquiring customers otherwise?
Ben: Or the dog sitter who wasn’t yet dog sitting or the Airbnber who wasn’t yet utilizing that spare bedroom. Maybe I'm making an argument for unlocking value that was previously unlocked due to a lack of ability to find customers in the sharing economy. It’s certainly not as true if you’re commoditizing suppliers who are already running a business.
Drew: You guys are bringing a great point. Another way of framing this is this discussion we’re having around OTAs shows let’s say the challenges of the business model, these kind of legacy hotel brands. Because the perspective of Marriott looks really different than the perspective even of a Marriott franchisee who actually owns their hotel. The Marriott franchisee says “I used to have to pay,” and it’s just a slight digression, you know, the way hotel economics work by and large of the brands is you have a brand like Marriott that is a franchiser and it sells to somebody who owns real estate rights called The Hotel of Marriott and then generates some demand. They’ll take a franchise fee on that, roughly between 6 and 15 percent based on their business. But they’re taking that on al the reservations that happen out of that hotel, not just the ones that got generated by Marriott. And over time, those costs have gone up to the point where may hotel owners are saying, “Wait a minute. It costs as much money to sell through Marriott, my own ‘direct channel’ as it does to go to an OTA.”
David: And Marriott.com is probably not doing much for me these days.
David: Interesting. Well, I feel like this is still on the marketplaces tech themes, I'm going to take some more air time. Let’s come back to Airbnb now and then HomeAway and others. To my mind, what they and Airbnb far more successfully than anyone else has done is taken this marketplace innovation and unlocked just a huge new amount of supply with it and brought many of the advantages that we were talking about earlier in the show that were I think mostly enjoyed by the demand side by consumers and the OTA model, as you were saying, even with the agency model, a lot of supply is like “ugh”, mixed feelings at best about it. But Airbnb has brought this innovation to a whole new set of supply as well where if I own a home that has an extra bedroom, I'm just thrilled that Airbnb gets me an extra thousand dollars a month, right?
Drew: Totally. I think that's Airbnb’s real innovations category. It's just amazing about that business. But to me, the thing that's truly distinguishing about it is the way they created this whole new class supply, and supply that was really exciting. Like if I go stay in New York, I’d much rather stay in a cool apartment in the East Village.
David: Than the $900 night.
Drew: And near a restaurant and have a kitchen than getting stuck in Time Square. Airbnb made all that possible in a way that wasn’t true in the past.
David: Or the $900 a night Holiday Inn.
Drew: That's right.
David: Geez. Brutal. To me, this acquisition and this whole industry really just is such a good example and pure example of the power and dynamics of marketplaces. That's what I got for tech themes.
Drew: One of the things I was thinking about, and as I kind of tried to put this together and we prepared for this, was what it would take to challenge Booking.com. If you think building this marketplace is about gathering enough demand to make this whole thing work, could you compete with them? So again, today, Booking.com has the advantage of having done this for, what, 20 years. They today generate half a billion room nights and they spend $3.5 billion per year on marketing. Because somebody else could do that. Could you begin to compete with them to generate that level of demand? I guess the potential for the person who I was able to identify who looks like they’re at least making a run at it is Trivago. Today, Trivago is spending I think $800 million a year.
Ben: And they’re Expedia-owned, right?
Drew: Expedia I think has a 40% stake in Trivago. The founder is still part of it. But yeah, it’s part of the Expedia portfolio. But taking the same playbook in the sense of can we get enough demand here to make this a platform that gets some lock-in? But the follow-up question, if you wanted to go spend $3.5 billion a year on marketing, could you do it?
Ben: Absolutely. This is one tech theme I was thinking about too. After talking to sort of a former Expedia marketing person, this person was mentioning that Trivago is like absolutely exceptional at digital marketing and really understanding exactly when to be bidding on Google, understanding exactly how high value that traffic is, how high value that keyword is, it's super high fidelity, and instrumenting it all the way from placing the ad all the way through the end of the transaction and continuing to track that lifetime customer value over time. It seems like the way that you kind of win on this is better and better digital marketing. I think there was actually a lot of articles back around the time of this acquisition that Booking had sort of been incredibly successful because of their mastery of being able to buy keywords on Google, and there’s definitely an opportunity to do better than that now as Google’s tools get more and more sophisticated for this, and I think that it goes to show that Google really does take a tax on e-commerce broadly and with this as an enormous category, like I’d love to see travel as a revenue driver for Google and I think one way that Airbnb is disrupting here and I wonder if somebody else can disrupt in the hotel world rather than just in the kind of specialized Airbnb world is, can you acquire demands of travelers and retain them as your customers without them going back to Google and you having to reacquire them? And Google being the central source of where people go to search for travel stuff all the time.
Drew: I think there’s no doubt that Airbnb has played that role so far and I think to your point a moment ago, David, the fact that they have this unique access to supply has allowed them to take that kind of position. There’s a question of can you do it in the hotels particularly given the fact that it’s relatively commoditized. That hotel inventory now shows up on lots of different channels. But I think one other thing to understand and it’s worth thinking about the consequences for why it works for Booking.com is what allows them to spend that level of scale. Same for Trivago. What allows them to spend at that level of scale isn’t simply the instrumentation or the fact they have $3.5 billion to spend. It’s that they get the conversion. The reason because all these guys look at “what’s my ROI?” And again, part of that is spend, but really, the biggest driver and also commission rate, what’s my take rate around the individual transaction, but the thing that has the greatest delta, the thing that really drives performance, is when somebody came to the site, do they buy? Booking.com’s innovation wasn’t that it looked better. I mean, frankly, you look at it and it’s like, gosh, why are there so many things flashing? The thing is flashing because that’s what gets me to buy.
David: I feel like this is such a powerful concept. Bill Gurley actually has a whole blog post about this about conversion. Especially for marketplace businesses, it is the biggest lever that you have. I mean, we learned this lesson at Rover in that the product that you’re building when you’re at a marketplace company is essentially the matching of supply and demand and the consummation of that match and so your job is to maximize the rate of consummation of that match. And if you don’t realize that, you can start investing in all sorts of things that are not going to be driving your business.
Drew: I guess going back to why did Expedia miss this, in 2002 it wasn’t obvious that this was a marketplace. In 2002 you had big portal tendency deals that drove a lot of traffic. I signed a $10 million deal with Yahoo or with AOL saying I'm going to get this spot and it’s going to be true for the next year. And I'm relatively indifferent, not indifferent but have less pressure around what the performance of any individual session was.
David: Right. because you were just getting that stream of clicks no matter what and you weren’t paying on a variable basis for, right? Got it. Interesting. So, one thing. Actually, Ben, were there any other tech themes you want to cover?
Ben: Yeah, I got one quick one before we move into grading.
David: Great, do that.
Ben: Selfishly, one of the things we do at Pioneer Square Labs is look around at other business models and try and figure out like can this be done in a new space. Something that I think that I've been paying a lot of attention to recently is as this generation shifts toward a more on-demand, less committal life, this agency model makes a ton of sense. The idea that “yeah, I’ll book that stuff” but like if I don’t want to go, I get a refund. My credit card doesn’t get charge until I stay in that hotel. And there’s policies of 24 hour or 48 hours, whatever it’s going to be. But like, you’re afforded a bunch of flexibility and you can sort of plan ahead and then like if you don’t want to do it, you don’t want to do it. So I think a super interesting lens to think about new company creation is what else can you take that people are like hamstrung into committing to right now and all them much more flexibility and change the business model dynamics within the industry to allow them that. Because as we’ve talked about before, the best consumer experience will continue to win.
Ben: That's what I got for tech themes.
David: Well, if we had some answers, we could start some companies.
Drew: Can I challenge this slightly in this case, Ben?
Drew: I don’t think the best consumer experience is what won here. At the very least we need to think broadly about what best consumer experience is. Because it wasn’t like Booking.com had the most attractive, best design website in the sense of UX. Lots of people would say it’s not that attractive. But it was best in the sense that it delivered the most conversions. And the reason it delivered the most conversions was it had the most best inventory.
Ben: Which at least to me, that’s the consumer experience. Like you’re able to get what you want and I think maybe a secondary thing here is probably the lack of commitment to it, but to me, being matched with the correct supply is just a facet of the consumer experience.
Drew: Sure. Point taken.
Ben: So many levers to have it play here.
David: Well, I think it's the same thing. We’re quibbling over the definition of consumer experience but in the same way like I don’t think anybody – apologies to our friends at Facebook and especially LinkedIn, but nobody would argue that those are like the best, most beautifully designed sites, right? But as a consumer of them, you get your experience fulfilled best of what you’re looking for which is I'm looking for professional networking on LinkedIn and social networking on Facebook. Kind of what they look like is almost secondary but it’s what I get out of them.
Ben: So Drew, in thinking through this a little bit more, if consumer experience is the umbrella of things that enable you to win, I think you’re right that being matched with the correct supply is far more important than you’re required to commit.
David: Okay. One last one sort of sidebar I wanted to cover before we grade it and it might inform grading. Drew, I'm super curious. One thing we haven’t really talked about on the episode thus far, we’ve talked about OTAs, we’ve talked about the various flavors of them, we’ve talked about Airbnb, what role does metasearch play in this world? I mean, you were at Kayak for a long time and metasearch sort of takes a wholly different approach. It’s a layer on top, it’s not a marketplace itself. What is that role in the ecosystem here?
Drew: Well, I think it comes down to actually the point we were just talking about with Ben, which is how do I make a decision? How do I find what I want? And what’s the separation between the decision-making process, i.e. I want to stay at this hotel or take this flight on these dates and the transaction process, I'm going to complete this booking. And metasearch, vertical search was an abstraction of, again, that decision-making process. One thing that was really powerful about it that I think has allowed it to grow very quickly is it moved it in its scope. At Kayak it was like we have the most amazing website, it’s two pages long. It’s a front door you ask a question and then it’s a bunch of answers and you can find them when you want and you’re out. Like things moving through a goose was the metaphor they were talking about. I think you talk about –
David: We’re a friendly show here.
Drew: I know you have advertisers though.
David: Appreciate that.
David: No, no, that's great. So I guess for the metasearch layer, it does greatly improve the customer experience and what the metasearch folks have said is we’re not going to monetize at the transaction level, at the marketplace level; we’re going to take essentially a customer acquisition fee from the marketplaces themselves.
Drew: Yeah. So all the kind of mental model, if you will, for meta was Google. We’re going to be a vertical search engine, we’re going to get paid on a CPC basis and we’re going to get paid by the various marketplaces or ecommerce.
David: By the Booking’s and the Orbitz’s and the Expedia’s themselves.
Drew: Those lines have gotten blurry over time and the big driver or I think one of the big drivers that created that was mobile. So on the browser, on a desktop in a browser you had a bunch of windows open, you could do a search, you could then spawn separate windows to complete a transaction. Most websites were pretty well designed from an e-commerce standpoint. You could look at what the conversions were from leads out of a metasearch into an OTA. That broke down especially early on in mobile where folks had poorly designed mobile booking pages and in an app, that process going from one app to the next was convoluted. So the consequence was metasearch engines started to build what they described as “Instant Book”. Effectively they would allow you to complete a transaction. They would use a book API so they were calling into the OTA or the marketplace to complete the transaction but it happened within their environment.
David: Within the environment.
Ben: And they’re actually getting paid on the transaction fee then rather than just sort of the ad placement?
Drew: Yeah. The reality is those transaction fees is they’ve always been a little bit blurry. A lot of the CPC deals had some kind of performance guarantee or you would get paid on a CPA and you normalize that back to CPCs. So it wasn’t all that different to go from the metasearch-type agreements to the Instant Book type agreements. The thing that was hard about it and I think Instant Book has had a relatively mixed track record. If you’ll get Trip Advisor’s stock performance, their financials you can see the challenges that Instant Book has had. It has had a huge impact on Trip Advisor’s monetization. We played around with it at Room 77. Kayak has done some of it. But it is not taken that much root among metasearch agencies. It has not become that dominant. I think one of the big reasons is it’s actually pretty hard to complete these transactions. You think of sort of all the edge cases that happen when you’re going to complete a booking – the credit card fails, the room is no longer available. All those kinds of issue. Packing gets lost. Like for whatever reason, the transaction doesn’t complete. If you’re doing that in your environment –
David: And it's still a considered purchase for the consumer too, right? I mean you’re spending hundreds of dollars here.
Drew: Exactly. And it’s much harder to deal with those edge cases if it's somebody else’s book API than if it’s happening in your own environment.
David: Interesting. Okay. I feel like we have the full picture now of the online travel industry. Should we grade it?
Ben: Or at least as much as you can get in an hour.
David: Yeah. Online travel industry in one hour or less.
Ben: Well, I don’t think we need to spend a lot of time on grading or at least I certainly don’t. I'm not sure that there was something that was more successful that we’ve done other than NeXT. Like this was a company that was –
David: Whoa. Are you going higher than Instagram?
Ben: I think so.
Ben: I know. To me, because I look at it this way, like Instagram wasn’t really company saving for Facebook. Instagram has become an incredible boon but would Facebook be completely irrelevant if it weren’t for Instagram? I mean Instagram helped them inform the mobile strategy and like lots more young people interact more per day on Instagram, but in the way that I think that Apple would have been totally hosed without buying NeXT, I think that Priceline may have been totally hosed without buying Booking, and Booking has turned into a gigantic business. Like just comparing Priceline and Expedia, Priceline’s market cap is 92 billion, Expedia’s is about 22.6. Over 2/3 of that 92 billion comes from Booking.com, going from $130 million to responsible for a market cap of 60 billion plus, A+.
David: Wow. You heard it here first. Booking.com - bigger than Instagram. I love it. Wow! I hadn’t thought about that. We’ll let Drew have the last word here but do I think that this is better than Instagram? Yeah, I mean, you made a pretty compelling case there and I haven’t checked the latest Instagram financials. I guess so here’s my knee jerk reaction to that, but I think is the wrong one, is I would say, well, yeah, that's true but like think about market size. Instagram is everybody in the world but then I'm like, wait a minute, travel is everybody in the world too. Or at least a huge portion of it and it is monetizable at a vastly higher rate than social networking apps. So yeah, wow. I don’t know that I'm willing to go better than Instagram but I’ll go at least as good as Instagram. I’m trying to think back through all of our episodes, we have so many at this point, and the ones that are popping to mind I think at stacked rank, NeXT, I mean as we said on that show, it literally was a trillion dollars in revenue that was created by that acquisition. And then I think Instagram and Booking are both of a scale that are pretty incredible. Not a trillion dollars yet but maybe someday.
Drew: What was the purchase price on Instagram?
David: A billion. One billion dollars.
Drew: What do you guys put as the current value of Instagram?
David: Well, when we did the episode which was about two years ago at this point, right, Ben?
David: I think there was an analyst report.
Ben: It was from Citibank.
David: Yeah, from Citibank that valued it at, what, around $35 billion?
Ben: Somewhere in there. I don’t know why I remember the number 19 or 20 but it’s that big.
David: So sort of on the order of that big in a timeframe of call it three years post acquisition and so here we have $60 billion after 10 years. All right, Drew, school us all.
Drew: Well, I'm with Ben on this one. I guess it’s a little bit of home team pride. You’ve got a travel industry guy, of course I got to say it’s the best deal ever.
David: Better than NeXT?
Drew: Okay. I'm hopefully rational as well. But yeah, I think it’s just phenomenal. To think that Jeff Boyd had an 100x increase in the value of Priceline stock as a CEO. That is just breathtaking. Going through the numbers and looking at the level of growth that these guys have been able to achieve over the duration – staggering. And yeah, I guess one of the things, to me, just it’s a little bit humbling. I remember talking to Jeff Boyd at one point in time. I don’t remember when it was –
David: And Jeff was the CEO of Priceline group until, well there was a long history but CEO or chairman of Priceline group until Glenn took over in the beginning of 2017.
Drew: And I remember talking to him, it was like, “What are you guys going to do next year? Talk about your plans. You know, focus on the big industry kind of confines.” It's like, “We’re going to do like we did last year and a little bit more. That's what we’re going to do.”
David: Booking is going to grow 40%.
Drew: That's a pretty good plan. You should keep doing that.
David: Yeah, you should keep doing that. Wow. Well, there we have it. The history of either the second or third best acquisition of all time on the internet. Thanks for joining us, Drew. This has been awesome.
Drew: Guys, thanks for having me. It was a lot of fun.
David: Okay. Real quick. Carve Outs?
Ben: Carve Outs? Sweet. One thing I watched last week that was linked to Daring Fireball and was really awesome to kind of leave on in the background and do some stuff around the apartment was Scott Forstall appearing publicly for the first time to talk about anything related to his old gig at Apple running the iPhone project when he was live at the Computer History Museum a few weeks ago. There’s a Facebook video that we’ll link to here but it starts with an hour of a super interesting panel with some of the folks that worked under Scott on the original iPhone project. This is all sort of commemorating the 10-year anniversary and Scott just telling amazing stories of how the iPhone came to be, a lot of sort of never-been-revealed stuff, personal interactions with Steve, the time when Steve Jobs in his words “saved his life” quite literally from when he was incredibly ill and Steve and some incredible acupuncture sort of saved his life. And it’s really cool. Like if you’re into this podcast or you’re into the Internet History Podcast, Brian McCall’s show, you will really, really like this interview.
David: It's been on my to-watch list and it just sounds amazing. I think this is Scott’s first public appearance.
Ben: Regarding technology, yeah, he I think spoke extremely briefly when I think they won a Tony. He produced a Broadway play.
David: That's right.
Ben: But never about any of this.
David: Since the Apple keynote stage.
Ben: The funniest thing is it looks like he’s wearing the same shirt. They made fun of that but like the dude has a style.
David: Love it. Hey, you got to have a calling card.
David: Mine is so Jenny and Jenny’s dad, my father-in-law Gary and also shout-out to Gary, fan of the show, went to see The Big Sick in movie theaters last weekend and it was great. If you haven’t seen this movie yet, it was both the funniest and the most well done and most touching movie I think I've seen in many, many years. Best movie I've seen since The Force Awakens, for sure.
Ben: Wow. High praise.
David: It deserves it. I think it’s got like a 98 on Rotten Tomatoes or something like that. And it’s great and it’s Kumail Nanjiani – apologies if I butchered that too – who plays Dinesh on Silicon Valley and it’s the mostly true story of him and his wife and how they met and their lives together. It’s wonderful.
Ben: Wow. Cool.
David: Drew, do you want to join in on the fun?
Drew: Sure. I like email newsletters, jetsetter, you know, can’t get away with it. But I’ve been loving Money Stuff from Matt Levine. It’s a little more kind of markets-oriented than pure tech but he is just an incredibly funny writer and super insightful on what’s going on in the markets. A lot of kind of block chain commentary, what’s moving on, going on, people are worried about not being worried enough. He’s got this great segment. So definitely worth checking out.
Ben: Awesome. Will do. I think that's it. Drew, where can our listeners find you on the internet?
Drew: My Twitter handle is @drewpats. That's probably the best way to track me down.
Ben: Great. Well, thank you so much. We appreciate you coming on the show. It’s a pleasure and I know our listeners will appreciate some actual domain expertise and insight for a change too.
David: Rather than Ben and me speculating wildly.
Drew: Well, thanks for having me, guys.
Ben: Yeah. Thank you to our sponsor Silicon Valley Bank for sponsoring this episode. Listeners, if you are still listening and you are not one of those people that like me really that sort of turns it off at the end of the podcast, please take our survey. Pop open the show notes right now, 5 to 10 minutes. You just finished the podcast, you probably have a couple minutes more of free time. You should do it and hopefully every single one of you, but it can only be one of you, will win a pair of Airpods. So thanks so much guys and have a great day.
David: Thanks everyone.
We finally did it. After five years and over 100 episodes, we decided to formalize the answer to Acquired’s most frequently asked question: “what are the best acquisitions of all time?” Here it is: The Acquired Top Ten.
Note: we ranked the list by our estimate of absolute dollar return to the acquirer. We could have used ROI multiple or annualized return, but we decided the ultimate yardstick of success should be the absolute dollar amount added to the parent company’s enterprise value. Afterall, you can’t eat IRR! For more on our methodology, please see the notes at the end of this post. And for all our trademark Acquired editorial and discussion tune in to the full episode above!
Purchase Price: $4.2 billion, 2009
Estimated Current Contribution to Market Cap: $20.5 billion
Absolute Dollar Return: $16.3 billion
Back in 2009, Marvel Studios was recently formed, most of its movie rights were leased out, and the prevailing wisdom was that Marvel was just some old comic book IP company that only nerds cared about. Since then, Marvel Cinematic Universe films have grossed $22.5b in total box office receipts (including the single biggest movie of all-time), for an average of $2.2b annually. Disney earns about two dollars in parks and merchandise revenue for every one dollar earned from films (discussed on our Disney, Plus episode). Therefore we estimate Marvel generates about $6.75b in annual revenue for Disney, or nearly 10% of all the company’s revenue. Not bad for a set of nerdy comic book franchises…
Total Purchase Price: $70 million (estimated), 2004
Estimated Current Contribution to Market Cap: $16.9 billion
Absolute Dollar Return: $16.8 billion
Morgan Stanley estimated that Google Maps generated $2.95b in revenue in 2019. Although that’s small compared to Google’s overall revenue of $160b+, it still accounts for over $16b in market cap by our calculations. Ironically the majority of Maps’ usage (and presumably revenue) comes from mobile, which grew out of by far the smallest of the 3 acquisitions, ZipDash. Tiny yet mighty!
Total Purchase Price: $188 million (by ABC), 1984
Estimated Current Contribution to Market Cap: $31.2 billion
Absolute Dollar Return: $31.0 billion
ABC’s 1984 acquisition of ESPN is heavyweight champion and still undisputed G.O.A.T. of media acquisitions.With an estimated $10.3B in 2018 revenue, ESPN’s value has compounded annually within ABC/Disney at >15% for an astounding THIRTY-FIVE YEARS. Single-handedly responsible for one of the greatest business model innovations in history with the advent of cable carriage fees, ESPN proves Albert Einstein’s famous statement that “Compound interest is the eighth wonder of the world.”
Total Purchase Price: $1.5 billion, 2002
Value Realized at Spinoff: $47.1 billion
Absolute Dollar Return: $45.6 billion
Who would have thought facilitating payments for Beanie Baby trades could be so lucrative? The only acquisition on our list whose value we can precisely measure, eBay spun off PayPal into a stand-alone public company in July 2015. Its value at the time? A cool 31x what eBay paid in 2002.
Total Purchase Price: $135 million, 2005
Estimated Current Contribution to Market Cap: $49.9 billion
Absolute Dollar Return: $49.8 billion
Remember the Priceline Negotiator? Boy did he get himself a screaming deal on this one. This purchase might have ranked even higher if Booking Holdings’ stock (Priceline even renamed the whole company after this acquisition!) weren’t down ~20% due to COVID-19 fears when we did the analysis. We also took a conservative approach, using only the (massive) $10.8b in annual revenue from the company’s “Agency Revenues” segment as Booking.com’s contribution — there is likely more revenue in other segments that’s also attributable to Booking.com, though we can’t be sure how much.
Total Purchase Price: $429 million, 1997
Estimated Current Contribution to Market Cap: $63.0 billion
Absolute Dollar Return: $62.6 billion
How do you put a value on Steve Jobs? Turns out we didn’t have to! NeXTSTEP, NeXT’s operating system, underpins all of Apple’s modern operating systems today: MacOS, iOS, WatchOS, and beyond. Literally every dollar of Apple’s $260b in annual revenue comes from NeXT roots, and from Steve wiping the product slate clean upon his return. With the acquisition being necessary but not sufficient to create Apple’s $1.4 trillion market cap today, we conservatively attributed 5% of Apple to this purchase.
Total Purchase Price: $50 million, 2005
Estimated Current Contribution to Market Cap: $72 billion
Absolute Dollar Return: $72 billion
Speaking of operating system acquisitions, NeXT was great, but on a pure value basis Android beats it. We took Google Play Store revenues (where Google’s 30% cut is worth about $7.7b) and added the dollar amount we estimate Google saves in Traffic Acquisition Costs by owning default search on Android ($4.8b), to reach an estimated annual revenue contribution to Google of $12.5b from the diminutive robot OS. Android also takes the award for largest ROI multiple: >1400x. Yep, you can’t eat IRR, but that’s a figure VCs only dream of.
Total Purchase Price: $1.65 billion, 2006
Estimated Current Contribution to Market Cap: $86.2 billion
Absolute Dollar Return: $84.5 billion
We admit it, we screwed up on our first episode covering YouTube: there’s no way this deal was a “C”. With Google recently reporting YouTube revenues for the first time ($15b — almost 10% of Google’s revenue!), it’s clear this acquisition was a juggernaut. It’s past-time for an Acquired revisit.
That said, while YouTube as the world’s second-highest-traffic search engine (second-only to their parent company!) grosses $15b, much of that revenue (over 50%?) gets paid out to creators, and YouTube’s hosting and bandwidth costs are significant. But we’ll leave the debate over the division’s profitability to the podcast.
Total Purchase Price: $3.1 billion, 2007
Estimated Current Contribution to Market Cap: $126.4 billion
Absolute Dollar Return: $123.3 billion
A dark horse rides into second place! The only acquisition on this list not-yet covered on Acquired (to be remedied very soon), this deal was far, far more important than most people realize. Effectively extending Google’s advertising reach from just its own properties to the entire internet, DoubleClick and its associated products generated over $20b in revenue within Google last year. Given what we now know about the nature of competition in internet advertising services, it’s unlikely governments and antitrust authorities would allow another deal like this again, much like #1 on our list...
Purchase Price: $1 billion, 2012
Estimated Current Contribution to Market Cap: $153 billion
Absolute Dollar Return: $152 billion
When it comes to G.O.A.T. status, if ESPN is M&A’s Lebron, Insta is its MJ. No offense to ESPN/Lebron, but we’ll probably never see another acquisition that’s so unquestionably dominant across every dimension of the M&A game as Facebook’s 2012 purchase of Instagram. Reported by Bloomberg to be doing $20B of revenue annually now within Facebook (up from ~$0 just eight years ago), Instagram takes the Acquired crown by a mile. And unlike YouTube, Facebook keeps nearly all of that $20b for itself! At risk of stretching the MJ analogy too far, given the circumstances at the time of the deal — Facebook’s “missing” of mobile and existential questions surrounding its ill-fated IPO — buying Instagram was Facebook’s equivalent of Jordan’s Game 6. Whether this deal was ultimately good or bad for the world at-large is another question, but there’s no doubt Instagram goes down in history as the greatest acquisition of all-time.
Methodology and Notes:
Transcript: (disclaimer: may contain unintentionally confusing, inaccurate and/or amusing transcription errors)
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