The Internet has changed the fundamental operations of a multitude of industries. In general, the move online has been great for consumers, but bad for business.
For instance, consumers can now have books delivered to their doorstep for less money than they would have to pay to go to Barnes & Noble, Inc. (NYSE:BKS) to pick them up in person. This means consumers’ dollars go further than they did in the pre-Internet era, while businesses’ bottom lines are much smaller.
Of course, many companies have sprung up to take advantage of the move to the Internet. Perhaps no industry has been changed to a greater extent than the travel booking industry. Companies like Priceline.com Inc (NASDAQ:PCLN), Expedia Inc (NASDAQ:EXPE), and Orbitz Worldwide, Inc. (NYSE:OWW) have wiped out traditional travel agencies as consumers move their activity online.
Priceline.com Inc (NASDAQ:PCLN) and its peers have created enormous value for consumers and reaped huge profits as a result of their first-mover advantage and market segmentation. Priceline and Expedia Inc (NASDAQ:EXPE) have traditionally avoided direct competition because Expedia focuses on the U.S. market and Priceline on international markets. Orbitz has also traditionally been focused on the domestic market.
For most of the last decade, online travel booking agencies have been able to grow without significant competition from rival online companies, but the maturation and saturation of the market may be about to change that.
As growth in the U.S. market slows, Orbitz Worldwide, Inc. (NYSE:OWW) and Expedia Inc (NASDAQ:EXPE) are looking internationally for future growth opportunities. Last year, Expedia announced a partnership with China’s largest Internet firm and an Asian airline as part of the company’s push into Asia. Orbitz, too, has announced its intention to focus on overseas markets as domestic growth slows. This inevitably leads to greater competition between online travel companies, which means lower profitability.
Not all bad
Although it looks like competition between online travel agencies will become more intense over the coming decade, it is likely that the industry will continue to be dominated by just a handful of companies. This is because the quality of a company’s product is a function of the size of its network of airlines, hotels, car rentals, and other services that customers have come to expect. As a result of the scale already built up in the industry, it will be difficult for newcomers to unseat the current oligopoly.