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Monday, April 26, 2010

Travel Game Changer - What does Google's potential acquisition of ITA mean?

Last week, Bloomberg released a story "Google (NASDAQ:GOOG) Said to Be in Talks to Buy Travel Company ITA".  They report that venture funded ITA may be seeking as much as $1b.

Who is ITA Software and why are they appealing to Google?

Whether this rumor is indeed true, what would this mean for the GDS & OTA industries?

How would this acquisition impact Google?  Would it create new opportunity for Yahoo (NASDAQ:YHOO) and Bing if Google's travel advertisers decide to boycot their new direct competitor?

This article by Chicke Fitzgerald is being republished.  It was originally published on GLG News, intended for the investment community.  For my travel industry friends, you will have to take off your traditional travel industry lenses and put on your Google lens before reading this.  
April 23, 2010

Just last week I was meeting with one of the major GDS companies as we talked about possible scenarios in the marketplace, I held up (apparently presciently) the book by Jeff Jarvis, What Would Google Do? and suggested that if a company with Google's deep pockets truly decided to get into this business, it would be a game changer.

Let's begin the analysis with who in fact is ITA Software?  The company is based in Cambridge Massachusettes and was founded by ITA CEO Jeremy Wertheimer and a group of computer scientists from the Massachusetts Institute of Technologyin 1996.  

In the early days, they were called a GNE (LON:GNE), or GDS New Entrant, competing head to head with Farelogix and G2Switchworks.  GDS stands for Global Distribution System and originally, ITAs mission was to connect the travel agency network directly to the supplier network, bypassing the established leaders, Sabre, Amadeus, Galileo and Worldspan (the latter two are now known as Travelport).  Over time, that model has shifted and ITS now primarily a provider of software and services to online travel companies and airlines.  Farelogix is still operating true to its original mission and G2Switchworks was acquired in 2008 by Travelport.

According to the National Venture Capital Association, ITA has raised $111.4 million in venture capital.  Their investors include General Catalyst Partners and Sequoia Capital.  Hoovers reports that their annual revenues are $51m.  

ITA Software's primary product, QPX, is a search and pricing system built into airline and travel companies' Web sites. The Web sites are typically used by travelers to search for flights, fares, and related information. Some of the company's clients include major airlines like United, American, and Continental, and online travel companies like Orbitz and Hotwire.

So the next question is why would they be appealing to Google?  What would make a company step into a space owned by some of their largest advertisers -- channel conflict of mammoth proportions?  Some would look at the obvious ability of Google to simply disintermediate the online travel agencies and even the metasearch players (such as Kayak and Microsoft (NASDAQ:MSFT) Bing's Farechase) with ITA's QPX product.  Powerful yes, but key enough to tick off your customers?  We can be absolutely certain it is not ITA's airline software that is appealing to Google. 

Knowing Jeremy Werthheimer and his amazing technology team, I am putting my money on Needlebase being the real driver of this transaction.  ITA has been developing this product in stealth mode over the past few years.  While one of my travel colleagues touted this as a travel tool for non-air types of inventory, if you read their product capabilities, this is really all about taking disparate data sources and making sense of them in an astounding way.  Their frequently asked questions states "Now, with Needle, we're aiming to revolutionize other forms of vertical search, too.  By dramatically lowering the time and cost required to aggregate a comprehensive database of any domain, we hope to extend our impact beyond air travel to literally any domain where the data is currently too disaggregated, unpolished, or difficult to use efficiently."

The next question is how this transaction would (at least theoretically) impact the GDS companies and the major online travel players. 

eCommerce is not new to the travel industry.  For over 30 years, the GDS companies have been at the center of the travel distribution value chain, electronically marrying buyers through the travel agency community (online and offline) to a wide range of global travel suppliers.  They not only aggregated the sellers (the inventory), but also the companies that serviced those that travel for both pleasure and for business.  The GDS business yielded well over $10b in revenues last year. 

The online travel players have been selling travel online for over 15 years and came on the scene in the mid-1990s as a disintermediator of the traditional brick and mortar travel agency.  PhoCusWright's Online Travel Overview Eighth Edition for 2009-2010 projected low single digit growth in this sector, to $93b in 2010, with their offline counterparts producing $145b in leisure and unmanaged business sales.

Clearly if Google steps directly into the travel value chain, they will disintermediate more than just the offline travel agent, they will get squarely in the face of the online players as well.  And since the GDS power both of those channels, there would most certainly be a major impact to their transaction volume for air ticket sales, which is what drives their business model. 

But if Google is really after Needlebase, then the impact and the threat won't be nearly as great to the "old guard".

Nevertheless, rumor has a way of skewing behavior, irrespective of what is really true.  Travel suppliers and OTAs may begin spending more with Bing and with Yahoo!, just as a matter of principle.  So just the thought of Google becoming Google Travel or GTravel, may drive away advertising dollars.  So the rumor itself may become the self-fulfilling prophesy that actually drives Google to leverage the travel assets of ITA.

As always, I continue to ponder the irrational behavior of all of these players, continuing to focus on the air traveler and how to meet his or her needs, whether traveling on business or leisure, as this represents just 15% of the trips taken each year in this country.  The other 85% of travel is done by car and demands a solution that integrates content, planning tools, booking tools, mapping and navigation.  Needlebase could be an interesting part of that equation.

Stay tuned.  And if you need something to occupy you this weekend, read Jeff Jarvis' What Would Google Do?

Analysis Author


Chief Executive Officer
Solutionz Group International, Inc.


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