Online Travel Sector Faces a Significant New Challenge

Google has stepped up its assault on the online travel sector by announcing the acquisition of Frommer’s, the leading online and print travel guide business.   Frommer’s follows earlier acquisitions of ITA, the number one travel software and database provider, and Zagat, the leading restaurant review site.  These acquisitions are part of a strategy to leverage Google’s monopoly of search and search advertising into closely related adjacent markets, such as online travel.  The strategy has several components.

First, by monopolising vital sectors such as online travel, Google increases the amount of data it captures and entrenches its super-monopoly position in search.  The importance of scale in search is widely recognised, including by Google.  Scale in search is about not only numbers but the quality of the search results.  The more queries that are made, the more relevant the results are likely to become.  It is already impossible for rivals to compete effectively with Google in search because of the much greater scale that Google has achieved and this deal will only lengthen that gap.  In Europe, with the multitude of languages used for search queries, the gap is probably insurmountable as things stand.

Second, the strategy harms the ability of competitors in the online travel space to compete with Google and create rival pools of consumer data.   Google achieves this through its manipulation of search results and its discriminatory practice of directing consumers to its own results, rather than to objectively the most relevant sites.  By granting preferential search rankings to its own sites, Google demotes rivals to places in the listings where consumers are much less likely to click on them.  It has done this in other sectors and can be counted upon to do so in travel, unless prevented by regulators.

Third, it has a chilling effect on other online content providers who must fear Google’s ability to enter their markets at will and undermine their ability and incentives to compete.  Google is in a unique position as the owner/operator of the monopoly search platform to oversee the efforts of others to develop their online activity.  Where it sees others succeeding, Google can cherry-pick those ideas and launch its own competing commercial services, to which it grants highly uncompetitive advantages.  As such, there is a huge disincentive to invest in activities which Google might  decide to compete with.

The implications stretch far beyond attempts to monopolise travel guides or restaurant review sites.  In the immortal words from All the President’s Men: “Follow the money”.  Here, the money is in advertising.  Google generates about $2 billion to $3 billion per year from selling travel-related ads on its search engine and hotel- and flight-booking service, according to Herman Leung, a stock analyst at Susquehanna International Group LLP. Google entrenches its monopoly in search, and thereby protects its monopoly in search advertising.  Google extends its monopoly into online travel, and thereby monopolises travel-related ads.  Google discriminates in favour of its own local content sites, and thereby creates the conditions to monopolise local ads.

These effects are felt not only by brands faced with a single outlet for their search, travel or local ads.  Rivals demoted in search rankings will effectively be obliged to increase their advertising spend with Google to regain some prominence with consumers.  For Google, it is a win-win situation.  For its rivals, it is lose-lose.

Consumers should care about these changes.  There may be superficial or short-term improvements in certain activities.  But the actual and potential downside is enormous.  Google’s acquisitions are not competition on the merits.  They are financed by deep pockets filled by years of monopoly rents in search-related advertising.  They are strategically designed to entrench Google’s monopoly and to snuff out any competitive threat to Google.  They reduce choice and destroy incentives to invest in jobs, growth and innovation.

It is so far unclear what regulatory hurdles Google will have to surmount to complete its purchase.  It can be assumed that the authorities will want to take a very close look at the competition implications of the proposed transaction and may well want to impose conditions, such as commitments not to discriminate in favour of Frommer’s in search rankings.  In any event, as with all of Google’s strategic acquisitions, this is a worrying development in which all other providers of online content will want to take a close interest.

ICOMP Legal Counsel, David Wood