Google Acquires Frommer's - Looks To Compete With Trip Advisor

By Will Ashworth | August 16, 2012 AAA
Flying under the radar on August 13 was the news Google (Nasdaq:GOOG) was buying Frommer's, the well-known travel guide currently owned by John Wiley & Sons (NYSE:JW.A). According to The New York Times, Google paid $23 million to acquire the brand. So why is it bothering with such a tiny acquisition? Because it wants to go up against the likes of TripAdvisor (Nasdaq:TRIP) and other travel-related websites; Frommer's gives it additional content. How long it's able to avoid the scrutiny of the Federal Trade Commission is another subject altogether. In the meantime, I'll examine what this means for some of the parties involved.

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Google

In April 2011 Google acquired ITA Software for $700 million. ITA provides travel companies with technology platforms to operate in the ultra-competitive world of online travel sales, a $119 billion business (annually) in the U.S. Five months later it acquired Zagat Survey, the eponymous restaurant and hotel review site for $151 million. Now it's adding Frommer's to the mix in an effort to compete in the online travel business. Companies like Yelp (NYSE:YELP) and TripAdvisor are now directly in the crosshairs of Google, whose aspirations to marry content and commerce appear large.

SEE: 5 Surprising Companies Google Owns

As Lorraine Shanley, president of publishing consultant Market Partners International, explains, "When Google buys Frommer's, they're not really buying a book publisher or imprint, they're buying a database with both content and photography." Wiley didn't want the company any more as it's focusing on its textbook business, so Google was likely able to negotiate an attractive deal. Now Google has a trio of businesses that will allow it to compete effectively in both travel and local search. Where this ultimately leads is anybody's guess, but you can bet Google wouldn't have done the Frommer's deal without some sort of commitment to this segment of its business.

SEE: Acquire A Career In Mergers

TripAdvisor

This company generated $637 million in revenue in 2011, about two-thirds of which was unrelated to Expedia (Nasdaq:EXPE), its former parent. Regardless of where the revenue came from, its business is extremely profitable and growing rapidly. With Google's addition of Frommer's, its ability to grow its revenues in the future is somewhat threatened, causing its stock to drop by 4.5% on Monday. However, without knowing how Google will use the trio of companies in its travel group, investors are being presumptuous. Until we shave specifics of where this is going, TripAdvisor shareholders are best advised to hang on to their stock. It's got a good business model, and I doubt the addition of Frommer's will erode that overnight. Hang tight, and the urgency to do something will pass.

SEE: Patience Is A Trader's Virtue

Bottom Line

Google generates somewhere in the neighborhood of $2 billion to $3 billion each year from travel-related ads on its search engine as well as its travel-booking site. I find it hard to believe it would jeopardize those revenues and healthy margins simply to become more vertically integrated - at least not in the short-term. Eventually, it will have to figure out how it successfully navigates the fine line between content and commerce. If it doesn't, the FTC will decide for it, and I can assure you it won't be nearly as favorable a result.



At the time of writing, Will Ashworth did not own shares in any of the companies mentioned in this article.

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