In classical economics, no concept is more important than that of utility. The theory goes that every transaction we make in the marketplace is an attempt to maximize our satisfaction, however we choose to define it. While utility might be at the top of the list, convenience isn’t far behind. A company that makes it as effortless as possible for customers to spend their money, replacing hours of drudgery with just a few keystrokes, can write its own ticket. Or, to some extent, and to borrow a phrase, Name [Its] Own Price.

On February 21, 2018, the Priceline Group announced its decision to re-brand to Booking Holdings Inc., in the light of its largest revenue generating subsidiary - Booking.com.

Booking Holdings Inc. (BKNG) is the largest online travel company in the world. In addition to its well-known namesake website, Priceline Group operates several other sites that, at least on first glance, seem to offer the identical service. You can rent a hotel room or vacation stay at Booking.com, Agoda.com, Villas.com or Kayak.com — all of them Priceline Group operations. The last of those is a meta-site, allowing users to compare rates on not only Priceline Group sites, but also competitors’ sites. Priceline Group also acquired restaurant booking site OpenTable.com and car rental site RentalCars.com. 

On August 9, 2018, Booking Holdings released Q2 earnings. Total revenues for the quarter totaled $3.5 billion and gross profit totaled $3.0 billion, a 20% increase from the prior year. Net income for the quarter was $977.4 million, a 36% increase versus the same quarter last year.

Same, But Different

The differences among Booking Holdings' travel booking sites are largely of geographical preference. Purchased in 2005, Agoda.com is headquartered in Singapore and caters mostly to customers in Asia and the Pacific. Booking.com originated in the Netherlands, and draws most of its clientele from Europe. That being said, both sites will allow you to book a room pretty much anywhere on Earth. 

Owning similar and seemingly redundant travel sites isn’t particular to Booking Holdings, either. Expedia (EXPE) owns Hotwire, Trivago, and Hotels.com, as well as the Orbitz and Travelocity families. 

Beyond U.S. Borders

Perhaps inevitably for a worldwide travel company, Booking Holdings makes most of its money outside the United States. The United States is the world’s largest economy, so surely it should account for more of Priceline Group’s business, right? 

It doesn't, and for several reasons. The American hospitality industry is dominated by chains to a far greater extent than in the rest of the world. If you’re in the United States and want to stay at, say, a Carlson or Vantage hotel, chances are fairly good you’re going to book via the chain’s own website. Book enough nights with one chain, and your loyalty will be rewarded with discounts and complimentary rooms, thus giving you little incentive to use Priceline Group’s services. Internationally, independently operated properties and smaller chains hold a greater share of the market, and it serves those properties well to be associated with globally powerful brands like Booking Holdings. 

Following the Money

Booking Holdings organizes revenue into three categories: agency, merchant and advertising/other.

“Agency” doesn’t literally mean a brick-and-mortar travel agency, a concept that quickly is becoming extinct. Rather, Booking Holdings acts as the “agent” for the third party that’s selling its services. Book a room at the Hilton through Agoda, and the travel commission is counted here. 

Merchant revenue comes from transactions in which Booking Holdings, which of course doesn’t operate hotels and car rental lots itself, is the “merchant of record.” When you literally “Name Your Own Price” on Priceline.com, the sale counts here. Obviously, Booking Holdings takes just a few dollars for itself while the rest of the money goes to the hotelier. 

Advertising revenue is an underrated and under-appreciated stream for the modern online business, one on which Booking Holdings capitalizes like few others. Those square inches of screen space on Priceline.com and Kayak.com are paid for by someone, in some cases even competitors within Booking Holdings. 

BKNG stock has been trading at more than $1,000 a share since September 2013. Unlike the majority of second-generation online darlings that trade at such astonishingly high prices, Booking Holdings makes money. Its year-over-year balance sheet data is as pleasing to look at as that of any company’s, with revenues rising every year. Just as impressively, cost of revenue has somehow managed to decline each year — and not just in relative terms, but absolute ones. Extrapolate the trends a few years into the future, and in a few years Booking Holdings will be spending practically nothing to make money.

The Bottom Line

To a casual observer of the markets, Expedia Inc. would seem to be the big player and Booking Holdings the up-and-comer. The former is better publicized, carries greater name recognition, and has more notable subsidiaries. But Booking Holdings is far more successful. By establishing itself with an uncommon business model – the buyer setting the price, within reason – and then transitioning into a more conventional model while retaining what made it famous, Booking Holdings positioned itself to broaden its base through acquisition. It bought Booking.com on the cheap, for cash, and turned it into a vital part of the core business. It did the same with Agoda, more or less. As the family of Booking Holdings sites continues to offer steep discounts to customers while generating enough business to make the arrangement more than worth the providers’ while, continued growth and success seem inevitable.

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