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July 2, 2010
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The software would help Google offer comparison shopping for airline tickets and so could put online travel agencies such as Expedia Inc. (EXPE), Orbitz Worldwide (OWW) and Travelocity.com at risk. It is important to note that Google is not entering the travel business, so it will not be earning money on tickets sold. Google’s services will be limited to sending customers to the least-cost site at any given time. The company will continue to earn money on advertisements sold in the process.
However, these online travel companies could well be concerned, since this move obviously takes away their ability to differentiate their products, limits their ability to provide adjacent services and commoditizes their offerings through increased price competition with each other. Moreover, some airline companies could also be concerned, given the fact that they might have to compete with the travel agencies for listing on the search engine.
Google believes the search engine will in fact drive higher sales for online travel agencies, since the effectiveness of its services will pull more customers online, materially changing offline buying habits. However, it will position the company more favorably versus its archrival Microsoft Corp (MSFT).
Microsoft acquired Farecast some time back, which enabled it to offer fare comparison services through Bing. It seems the strategy paid off very well for Microsoft, enabling it to generate incremental traffic. Google’s move will be particularly strategic in the sense that most of the comparison shopping for airline tickets offered by Bing, Expedia’s Hotwire, Orbitz and Kayak is currently enabled through the licensing of ITA software. Although Google has promised to honor existing contracts, it is doubtful that the licensing to competitors (in this case Microsoft) would continue if the acquisition does actually take place.
Strategic acquisitions of this nature will no doubt draw the attention of regulators, especially when parties like Microsoft and Expedia are involved. However, there is a possibility that Google could come out the winner in the end.
We currently have a short term Hold recommendation (Zacks rank #3) on Google shares due to the increased level of controversies related to privacy, China and several other issues that have led investors to discount the tremendous growth potential of the company.
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