September 12, 2012

Booking.com, the best acquisition in Internet history


As a former poster child of the dotcom bust, Priceline earned its first profit in 2003. But the company's true turning point occurred in 2004, when it acquired European hotel reservation site Booking.com, largely responsible for taking Priceline from a loss of $19 million in 2002 to $1.1 billion in profit in 2011.

Priceline had good reason to target Europe. Europeans typically have twice as many vacation days as Americans, and unlike us, they tend to take all of them. Moreover, the growth of discount airlines in Europe such as EasyJet and Ryanair have increased the popularity of "city breaks" -- the European equivalent of a weekend getaway.

Best of all, the European market for online travel services still has much room to grow. Compared with the U.S., a much smaller percentage of travelers book hotels online, a byproduct of the fragmented nature of the European hotel industry. There are far fewer big hotel chains, which means travelers are more likely to be considering stays at independently owned hotels -- which rarely have their own websites. Unless travelers are familiar with the city they are visiting, it's hard for them to differentiate the overpriced fleabags from the gems worth every euro. Priceline typically collects a 15% commission on every room reserved at Booking.com; in return, the hotels get access to more potential customers. "If you own a great hotel in Prague, you're probably going to have a very small marketing budget," says Darren Huston, a former Microsoft and Starbucks executive who became Booking.com's CEO in September 2011. "You might get to a certain level of occupancy via word of mouth, but you would have difficulty marketing to Russians or Brazilians or people from the Middle East because you don't have a brand name." Booking.com helps level the playing field.

But the European focus is also partially responsible for the recent earnings miss, which Boyd made no attempt to sugarcoat during an Aug. 7 earnings call. "We're assuming fairly significant deceleration for growth rates from here on," he said, citing concern about the economy and "our worry that conditions will worsen, particularly in Europe."

Get the full story at FORTUNE