TripAdvisor Case Study - Tufts Fletcher Schoolfletcher.tufts.edu/~/media/Fletcher/MIB/pdfs/B236...

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B236 Strategy and Innovation: Team Anita Roddick TripAdvisor !!

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TripAdvisor: To Spin-off or not to Spin-off?!!“Expedia Chief Executive Dara Khosrowshahi said TripAdvisor had grown to the point that it was now ready to be spun off into a pure-play media company that can stand on its own. ‘It is a matter of size, globalization and diversification of revenues,’ Mr. Khosrowshahi said in an interview. ‘It is really ready to stand on its own.’”!

-The Wall Street Journal, April 8, 20111 !Introduction!

!In 2011 TripAdvisor was the market leader for consumer travels. It had helped create an

industry for companies that aimed to provide online information and connect travelers with holiday bookings, while providing consumer-generated recommendations on destinations, flights, rentals, hotels, and more. Additionally, its position as the market leader allowed TripAdvisor to use its logo as a validation symbol for hotels, restaurants and other service providers in the tourism industry.!

! Originally created in 2000 to address the lack of objective hotel reviews available online, Boston-based TripAdvisor raised enough capital to incorporate and begin creating a database. It wasn’t until one and a half years and two revenue model pivots later that TripAdvisor was able to generate enough revenue to break even. The upward trend continued until 2004 when Expedia acquired TripAdvisor to its umbrella corporation, where it continued to flourish and generate profits for the next 7 years.!!

The question the leadership of Expedia and TripAdvisor faced in 2011 was whether to maintain TripAdvisor as part of Expedia or spin off TripAdvisor as a pure play company. Joining Expedia had been valuable to TripAdvisor and resulted in significant growth for both. Yet as TripAdvisor grew, its founders contemplated whether the company could generate more value to shareholders by operating separately from Expedia. Given the Expedia and TripAdvisor symbiotic relationship and history of relative success in working together, the decision to spin TripAdvisor off of Expedia into its own entity would be far from straightforward. !!TripAdvisor History!!

The realization of the need for a site like TripAdvisor was born out of founder Stephen Kaufer’s own frustrations in planning a family vacation to Mexico in 1998. “What I got was a thousand sites showcasing exactly the same gorgeous picture and the very same descriptive paragraphs.” After significant searching, he eventually found an honest review from a couple that stayed in the same hotel that he had in mind.2!!

This experience inspired Kaufer to create a rich database containing valuable travel information through a simple web search. In 2000, he and Langley Steinert founded TripAdvisor, a travel website that provided reviews and other information for consumers about travel

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!1SCOTT MORRISON, “Expedia to Spin Off TripAdvisor,” The Wall Street Journal, April 8, 2011, http://www.wsj.com/articles/SB10001424052748704013604576249182080661932 2 Kaufer, S. (2013). An Average Traveler. Retrieved April 08, 2016, from http://www.nytimes.com/2013/02/24/jobs/stephen-kaufer-of-tripadvisor-is-an-average-traveler.html?_r=0!


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destinations around the world.3 “The idea was to aggregate existing travel advice into a vertical search engine and we were going to sell the service to Expedia and Travelocity and all the other big names that were already out there.”4 !

!Based on this idea, Kaufer and Steinert wrote the business plan and received funding.

They developed a demo site called TripAdvisor as an example of how the information could be used and what someone could do with it. After a year and a half, Kaufer and Steinert had no clients and no revenue, but the demo site started to pick up traffic. Although the site worked like its founders expected and it provided links and relevant information, it still lacked a revenue model behind it.!!

To attract traffic, Kaufer and Steinert decided to place banner ads on the TripAdvisor site. Because they deemed the site’s users to be well-qualified travelers, they expected high rates (3-5%) of clicks on the banner. However, the banner ad received click rates of only 0.1%. Once it realized the banners were not an effective source of revenue, the company introduced a cost-per-click (CPC) model. With this model, TripAdvisor went from zero revenue in November 2001 to approximately $70,000 a month to reach its break-even point in March 2002.!

!Kaufer originally hired editors to search the Web for quality travel articles and link to

them from TripAdvisor. Later, he allowed users to post their own reviews on the site on a whim.5 In late 2000 the company added a simple button at the top of the web page, giving users the ability to write their own reviews. The company found that viewers began to skip the professional reviews and were gravitating more toward the peer reviews. Once it realized this trend, TripAdvisor decided to put the user reviews at the front and center of its website.!

!TripAdvisor Joins Expedia! !

The success of TripAdvisor’s user review feature drew attention from other players in the travel services industry. In 2004, Barry Diller’s media conglomerate InterActive Corp (IAC) acquired TripAdvisor for $212 million and put it under the Expedia brand.6 According to Diller, CEO of IAC, “TripAdvisor is a fine addition to both our extensive travel service offerings and our local group of services connecting customers to consumers with targeted information and offers”.7 !

!This acquisition was closed in the second quarter of 2004 and was seen as a win-win for

both TripAdvisor and Expedia. Kaufer saw the acquisition as an opportunity to grow his company and believed that the synergy between Expedia’s consumer reach and TripAdvisor’s

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!3 Bussgang, J. (2012). Scaling is Hard, Case Study: TripAdvisor. Retrieved April 01, 2016, from http://www.inc.com/jeff-bussgang/scaling-is-hard-case-study-tripadvisor.html 4 T. (2011). TripAdvisor's Stephen Kaufer | Founder Stories. Retrieved April 01, 2016, from https://www.youtube.com/watch?v=5JBa9ZH1i1M 5 Bussgang, J. (2012). Scaling is Hard, Case Study: TripAdvisor. Retrieved April 01, 2016, from http://www.inc.com/jeff-bussgang/scaling-is-hard-case-study-tripadvisor.html 6 Liberty takes control of TripAdvisor - FT.com. (n.d.). Retrieved April 08, 2016, from http://www.ft.com/cms/s/0/590239ea-43a4-11e2-a48c-00144feabdc0.html#axzz45CwYQ07B 7 IAC Acquires TripAdvisor, Inc. - Leading Travel Research Site Empowers Consumers with Information and Savings Advice; Will Join IAC Local and Media Services Group. (n.d.). Retrieved April 08, 2016, from https://www.tripadvisor.com/PressCenter-i43-c1-Press_Releases.html


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existing partnerships would fuel this growth.8 In addition, Expedia consolidated its portfolio because it could now provide its customers with more reliable information. !

!TripAdvisor’s Growth Under Expedia! !

Some industry experts were concerned with the growth prospects of TripAdvisor as part of Expedia9; however, TripAdvisor did extremely well under Expedia in large part due to the following:!!

First, Washington-based Expedia allowed TripAdvisor to work remotely and autonomously, and maintain its headquarters in Massachusetts. In turn, TripAdvisor practiced the same management style by allowing its acquired companies, such as VirtualTourist, Cruise Critic, SmarterTravel and SeatGuru, to operate autonomously.10 !!

Second, Expedia expanded TripAdvisor’s workforce from 50 employees to 434 employees, infused an additional $400 million in TripAdvisor, and hired 50 engineers and salespeople in Europe, India and China with a vision for expansion into these regions.11 Additionally, TripAdvisor grew organically, which manifested in its acquisition of 9 travel-related companies between 2007 and 2011.12 Within a few years of Expedia’s acquisition of TripAdvisor, TripAdvisor grew from a startup with $23 million in annual revenues to a brand worth $5 billion.13!!Industry and Competitors!!

Yahoo Travel was not the only threat to TripAdvisor. As with any lucrative business opportunity, countless competitors to TripAdvisor emerged, multiplied by the number of services TripAdvisor offered. TripAdvisor belonged broadly in the “travel services” industry, but competitors also included travel booking sites and recommendation platforms. !

!With an estimated 60 million unique desktop visitors in 2011, San Francisco-based Yelp

was TripAdvisor’s biggest competitor in the recommendation space.14 Because Yelp relied on the same recommendation model as TripAdvisor, namely generating crowd-sourced reviews of places, both companies faced similar issues and objectives. The main difference between the two companies, though admittedly a small one, was that TripAdvisor focused on the experiences of travelers, while Yelp intended to provide recommendations that were targeted more at locals than at visitors. The strength of Yelp lay in recommendations in densely

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!8 ibid 9 Weisman, R. (2008, September 4). TripAdvisor flourishes under Expedia. Retrieved April 8, 2016, from http://www.nytimes.com/2008/09/04/technology/04iht-trip.4.15899354.html?_r=1 10 Weisman, R. (2008, September 4). TripAdvisor flourishes under Expedia. Retrieved April 8, 2016, from http://www.nytimes.com/2008/09/04/technology/04iht-trip.4.15899354.html?_r=1 11 Ibid 12 "TripAdvisor’s Acquisitions." Crunchbase. Accessed April 08, 2016. https://www.crunchbase.com/organization/tripadvisor/acquisitions. 13 "TripAdvisor Shares Acquired At 63% Premium By Liberty Interactive." ValueWalk. 2012. Accessed April 08, 2016. http://www.valuewalk.com/2012/12/tripadvisor-shares-acquired-at-63-premium-by-liberty-interactive/. 14"Yelp Fact Sheet." Yelp. Accessed April 08, 2016. http://www.yelp.com/factsheet. !


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populated areas such as cities, whereas TripAdvisor’s repertoire included locations regardless of population density. In 2011 Yelp filed to go public with the SEC.15 !!

Both Yelp and TripAdvisor used Google’s application program interface (API) to direct traffic to their respective sites. This led the two companies to a dispute with Google16, who tried to establish its own recommendations website, Google Places. In fact, Google copied Yelp and TripAdvisor’s reviews and showed them as Google Places recommendations - this was possible because both companies used the Google-owned API for their businesses. However, the FTC later deemed this illegal17, which meant that Google Places could only showcase the reviews that people had left on that very service. !!

Google Places allowed business owners to list their locations as destinations, providing users with reviews and the ability to take several actions directly on the Google Search site, such as make a phone call, visit the destination’s website, or place an order. However, Google had yet to figure out how to build an umbrella site for travel as TripAdvisor had done. Although Google had introduced Google Flights and Google Hotel Finder, these were not unified under one page like TripAdvisor, causing Google to lose a significant amount of traffic to the travel services portal.!!Two Evolving Business Models! ! In the 2011 financial year, TripAdvisor’s revenue was $637 million. With operations in 29 countries, 50 million unique monthly visitors, and a total of 60 million reviews, TripAdvisor was the leader of the travel media market18. The site offered value to users through reliable information, real-time user reviews, and the ability to plan and book trips or tours easily. Yet despite its value and sizable user base, TripAdvisor did not charge its users directly. ! ! TripAdvisor had four distinct sources of revenue: cost-per-click advertising, display advertising, subscriptions, and affiliates (See Exhibit 6). Conversely, Expedia’s business model followed a combination of the merchant and the agency models (See Exhibit 7). Like TripAdvisor, Expedia also earned revenues from its affiliates. In 2011, the two business models were different enough to not be viewed as direct competitors.! Considering a Spin-off!!

By the fall of 2011, TripAdvisor accounted for 15% of Expedia’s revenue, with 38% revenue growth in the previous year alone, almost triple that of Expedia over the same period. (Exhibit 1). Further, TripAdvisor boasted more than 50 million unique visitors per month, generating 35% of Expedia’s operating income while catering to 27 countries via 18 different

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!15 "Yelp Soars 64% on First Day of Trading after IPO." USATODAY.COM. March 2, 2012. Accessed April 08, 2016. http://usatoday30.usatoday.com/money/industries/technology/story/2012-03-02/yelp-ipo-first-day/53331544/1. 16 "Leaked Documents Show How Yelp Thinks It’s Getting Screwed By Google." TechCrunch. Accessed April 08, 2016. http://techcrunch.com/2014/07/09/yelp-google-anti-trust/. 17 "Google Places Removes Yelp, TripAdvisor Review Snippets." Google Places Removes Yelp, TripAdvisor Review Snippets. Accessed April 08, 2016. http://www.eweek.com/c/a/Search-Engines/Google-Places-Removes-Yelp-TripAdvisor-Review-Snippets-839406. 18TripAdvisor. "2011 Annual Report and Notice of 2012 Annual Meeting and Proxy Statement." April 30, 2012. Accessed April 8, 2016. !


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websites.19 Consequently, the idea of spinning off TripAdvisor into an independent pure-play media company developed from the possibility of creating new value in two primary ways: shareholder value creation, and the ability to focus and specialize.!!

Shareholder value creation: By taking TripAdvisor out of Expedia’s shadow, the split would allow TripAdvisor to grow and develop a separate value proposition, attracting new streams of investment and revenue without being tied to the Expedia model. Specifically, TripAdvisor had the potential to significantly increase its earnings multiple. In terms of industry comparables, Travelzoo Inc. had a similar value proposition as TripAdvisor, catering toward tourist travel, entertainment, and discounts. Travelzoo boasted an earnings multiple five times that of Expedia. Separating out the TripAdvisor business model could enhance shareholder value by enabling the opportunity to increase the earnings multiple through the introduction of a newly spun-off TripAdvisor, without competing directly with Expedia on the same business model.20!!

Focus and Specialization: Separating the two business models could also allow Expedia and TripAdvisor to specialize and capitalize on different value propositions. Expedia would focus on its value proposition as an online travel agency offering partnerships with similar booking sites, such as Hotels.com and Hotwire, while TripAdvisor would focus on an advertising business model. This new focus and specialization strategy would allow for management teams to further focus their efforts and tailor their products based on the specialized new value propositions.21 !

!For TripAdvisor, this represented a golden opportunity to expand its brand as the world's

largest and most trusted travel site. Uniquely, TripAdvisor offered customers an open forum to post their own reviews and advice, a concept that created trust by leveraging the open market and allowing the customers themselves to be part of the value proposition.!!Challenges and Adaptability!!

Despite the potential upsides, the decision to spin-off TripAdvisor would be a hard pill for Expedia to swallow. A decision to spin-off meant Expedia might lose a high-margin, fast-growing media business on a gamble that it could increase its referral business. This could also make Expedia vulnerable to becoming dependent on TripAdvisor for marketing efforts. Additionally, a spinoff would limit Expedia’s revenue stream to a single business model, a step back from the diversification it enjoyed with the TripAdvisor business model. Above all, TripAdvisor could potentially grow new business arms that would bring it into direct competition with Expedia in the future.22!

!An immediate risk of a spin-off to Expedia, as expressed by several analysts, was a

potential decrease in confidence caused by a perceived weakening of its operating model,

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!19Tricia Duryee, “Why Is Expedia Spinning Off TripAdvisor?” All Things D, APRIL 8, 2011, http://allthingsd.com/20110408/why-is-expedia-spinning-off-tripadvisor/ 20 Scott Morrison, “Expedia to Spin Off TripAdvisor,” The Wall Street Journal, April 8, 2011, http://www.wsj.com/articles/SB10001424052748704013604576249182080661932 21 ibid 22 Dennis Schaal, “Does Expedia Have TripAdvisor Spinoff Remorse?”, Skift, Oct 03, 2013, http://skift.com/2013/10/03/does-expedia-have-tripadvisor-spinoff-remorse/.


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possibly leading to a downgrade in company bond ratings.23 Furthermore, the company would need to plan carefully how to restructure the separate companies, particularly from the perspective of the shareholder. !

!Spinoffs were historically known to be risky for investors, as the share prices were

known to be more volatile and could underperform in a down market. Although spun-off stocks tended to do well in up markets, the risk of a market downturn was a very real concern coming out of the 2008-2009 recession, especially with a slow ongoing economic recovery. Additionally, if parent company shareholders did not want the new shares of the spun-off company, there could be high sell-off activity, which could in turn lead to a short-term fall in stock price, even if the stock was expected to do well in the long term.24 The company would have to decide whether to go with a stock redistribution model, issuing new TripAdvisor stock to Expedia shareholders in either a forward or reverse stock split, and whether to include a stock reclassification model.25 !

!Further, Expedia would need to evaluate how to compete in the absence of TripAdvisor.

Expedia had a large barrier to localization, as it relied on teaming up with country-specific travel agencies to maintain a consistent service across borders. A large part of the decision to acquire TripAdvisor had been to address the challenge Expedia encountered in localizing its services. Due to its customer-generated reviews, TripAdvisor did not experience this problem to the same scale. For TripAdvisor, localization was merely a question of language diversification and building a gradual customer relationship with the hoteliers in a given country. In an industry where exploring, travelling across borders, and being exposed to new cultures, countries, and languages was desired, the spin-off could leave Expedia without its primary tool to localization. !!Decisions to Make!!

The business models of Expedia and TripAdvisor were different enough so as to not be in direct competition: one was partnership and service-based, the other advertising-based. The thought behind the split was to create complementary services, offering referrals that fed each other more or new business, thus enhancing the bottom lines of both companies. However, granting new freedom to TripAdvisor, coupled with its high growth potential, introduced the risk that TripAdvisor might in the future open new lines of business that could directly compete with Expedia’s business model and cannibalize Expedia’s sales.26 !!

As the leadership of the two companies considered the gains from a spin-off, they knew the split would not be without its significant challenges, and that the risk of a poor execution had the potential to cost both companies significant value. Aside from the independent success of TripAdvisor, in order to go through with the spin-off, the company also needed to believe in Expedia's ability to compete independently on quality, service, inventory and innovation.!!

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!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!23 Scott Morrison, “Expedia to Spin Off TripAdvisor,” The Wall Street Journal, April 8, 2011, http://www.wsj.com/articles/SB10001424052748704013604576249182080661932 24 “What is a Spinoff?” Investopedia, April 8, 2016, http://www.investopedia.com/terms/s/spinoff.asp. 25 Trip Advisor Website, Trip Advisor Spin-Off FAQ’S, http://www.expediainc.com/tripadvisor-spin-faqs/ 26 Tricia Duryee, “Why Is Expedia Spinning Off TripAdvisor?” All Things D, APRIL 8, 2011, http://allthingsd.com/20110408/why-is-expedia-spinning-off-tripadvisor/!


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Exhibit 1: Earnings Reports from Expedia and TripAdvisor (2011)27!!

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Exhibit 2: Countries with a localized TripAdvisor website (2011)28!

Exhibit 3: List of localized Expedia websites (2011)

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!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!28TripAdvisor. "TripAdvisor - 10-K Annual Report." TripAdvisor Investor Relations. 2012. Accessed April 08, 2016. http://ir.tripadvisor.com/secfiling.cfm?filingID=1193125-12-117448.


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Exhibit 4: Expedia Financial Summary29!!

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Exhibit 5: TripAdvisor Fact Sheet30

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!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!29 Expedia. "Expedia, Inc. Reports Fourth Quarter and Full Year 2011 Results." Investor Relations. February 9, 2012. Accessed April 8, 2016. http://files.shareholder.com/downloads/EXPE/1690288636x0x541644/3d3161bd-6cdd-454f-904a-b4918bdc074b/EXPE Q4 2011 Earnings Release.pdf. 30 O'Neill, Sean. "TripAdvisor Overview." Tnooz. Accessed April 8, 2016. https://www.tnooz.com/?s=TripAdvisor. !


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Exhibit 6: TripAdvisor’s Business Model!!Advertising revenue model (77%)!Click-based advertising makes up the primary source of its revenue of up to 77%, earning US$70,000 monthly in its first three months into launching their “Cost Per Click” model and managed to breakeven, continuing to grow profitably on this model alone. Because each time a consumer clicks on an advertisement or a hotel to book an accommodation via TripAdvisor, advertisers and hoteliers will pay a fee for each click for an average of 60 million of visitors monthly. !!Advertising revenue model (13%)!Display advertising and text ad advertising is where advertisers and hoteliers pay a fixed amount to advertise a site channel or a section on TripAdvisor.!!Subscription revenue model (10%)!Subscription revenue is generated from advertisers such as hotels, restaurants, travel attractions, rental agents pay a regular fee to increase their business’ exposure to the 60 million unique monthly visitors on TripAdvisor to find out more about their services and to even reach them directly by displaying their contact details on their profile page.!!Affiliate model!Hoping to emulate Amazon’s success in the affiliate marketing sector, TripAdvisor looks to new revenue areas to maximize profits. Working within the leisure and business travel fields, TripAdvisor forms affiliations with third party websites such as airlines, hotels, attractions and other travel sites like Expedia.com, Booking.com, Zuji.com, HotelClub and Hotels.com to generate additional revenue by directing traffic over to those websites and earning affiliate commissions.

!Source: “E-Business Model of TripAdvisor.cm.” E-Business Model of TripAdvsior.com. Accessed April 08, 2016. http://e-businessmodeltripadvisor.blogspot.com/.!

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Exhibit 7: Expedia’s Business Model

Merchant Model!

In this model, hotels sell rooms to OTAs in bulk at discounted or wholesale prices. The OTAs then sell them to customers at a markup price. This is the most commonly used model, and it benefits both parties.!

Agency Model !

This is a commission-based model wherein hotels give OTAs commissions based on business bought. In this model, the hotels list their services, and the OTAs don’t have to buy anything up front. This is beneficial for hotels, as it gives them the freedom to price their rooms as per the demand scenario.!

Expedia’s business model!Expedia (EXPE) uses both the merchant model and the agency model.31 Historically, the company has followed the merchant model, but with the agency model being more popular in Europe, the Middle East, and Africa, the company has adopted it as well.!

Both models had advantages for Expedia: The merchant model could drive revenues up by allowing Expedia to set mark up prices. The agency model increased revenues because it allowed both large and small hotels to be a part of this model, since participation did not require large upfront payments.!!Expedia Travel Affiliate Program!!In addition to the two revenue models mentioned above, Expedia earned revenues from business it received from its affiliates. In this program, Expedia put links on the websites of its affiliates and paid them commissions based on the business that Expedia received from them. !Source:!"Welcome to Market Realist." What Business Model Does Expedia Follow? Accessed April 08, 2016. http://marketrealist.com/2015/09/business-model-expedia-follow/. !

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!31 Through its Traveler Preference program, Expedia allowed guests to decide how they would like to book each property, whether pre-pay as in the merchant model, or pay at the hotel as in the agency model.

Preparation Questions for TripAdvisor Case

B236: Strategy and Innovation

Louis Cotti, Logan Kessler, Anupam Kulkarni, Mariel Sanchez, Constantin Weiss

TripAdvisor Case Discussion Questions:

1. What were the early challenges that TripAdvisor faced and how did it adapt to those challenges? What makes TripAdvisor innovative?

2. How were the TripAdvisor and Expedia business models different in 2011? 3. What are the benefits of spinning off TripAdvisor? Who would benefit? What

might prevent these benefits from being realized? What might a spinoff do to the stock prices of Expedia and TripAdvisor?

4. What are the risks of spinning off TripAdvisor? Are these likely to occur? How might these risks be alleviated?

5. Which of the two companies faces greater risk in the case of a spin-off? How so? 6. Should TripAdvisor be spun-off?

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