Analysis of Kayak.com and SideStep.com Merger

Overview:

On December 21st it was announced that the two largest Meta Search Engines in the travel industry, Kayak.com and SideStep.com, will be merging. The larger of the two, Kayak, will be simultaneously raising $196 million in a new round of financing and using a portion of those funds to purchase SideStep. For those who monitor online travel distribution trends this is a major development. Given the scale that Meta Search Engines are reaching in travel, this deal is among the most significant news items of 2007 with regard to the online channel in travel.

Compete studied trends at both Kayak and SideStep and developed the following analysis of the two sites to shed light on their usage levels, performance, and implications of the acquisition.

Kayak The Largest Travel Meta Search Engine:

Kayak is the largest Meta Search Engine among U.S. consumers with nearly 3.2 million site visitors in the seasonally slow month of November, down from a summer high of 4.2 million in July. This compares to 2.7 million visitors to SideStep.com in November, with its July high at 3.4 million.

While SideStep has been in business for far longer, it took Kayak just 2 years from its Q4 2004 launch to grow to the several million monthly visitors needed to take the leadership position in late 2006. Kayak’s ascension shows no immediate signs of slowing, with traffic up an average of 55% compared to a year ago. SideStep’s traffic is down 5% over the same period.

A Different Approach to Generating Traffic:

While viral growth in traffic lowers marketing costs and has been important in fueling Kayak’s rise, Meta Search Engines must invest heavily in online marketing to maintain the now multi-million consumer volume that is reaching their sites on a monthly basis. Search engine marketing is a given, but notably Kayak.com has gone beyond this category and is also heavily dependent upon other travel sites for traffic. 43% of all of the visits to Kayak.com come directly from other travel sites, compared to 29% for SideStep.com. Conversely, SideStep is far more dependent upon search engine marketing for its traffic.

Among the travel sites that Kayak is working with to generate traffic are many of the largest Travel Lead Generator sites, such as BookingBuddy.com, ShermansTravel.com, and Cheapflights.com. The seven largest of these publishers collectively drive over 15% of all of the visits to Kayak.com, with these same sites delivering just 4% of SideStep’s traffic.

A combined Kayak-SideStep entity may be poised to reduce some of its per-visitor marketing costs. Kayak will now have a stronger negotiating position as a single high-volume buyer of traffic from some of its partners, and the two sites will no longer be competing directly against one another in bidding for search terms.

Kayak’s Edge in Lead Generation Effectiveness:

Travel Meta Search Engines generate revenue based upon their ability to provide leads to Online Travel Agencies and Travel Suppliers. This comes in the form of clicks out of the "organic" search results that consumers can sort and filter on a Meta Search Engine, as clicks on sponsored messages that surround these search results, and lately on Kayak as non-user-initiated pop-up windows that drive traffic to advertiser sites.

While it is supplier-direct sites that are commonly thought of as the primary beneficiaries of Meta Search Engines, the OTA’s are very active here as well. Kayak in particular has been working aggressively with the OTA’s and now delivers them more traffic than it does to hotel chains and airline carriers.

Kayak, despite having site traffic that is only 20% greater than SideStep, delivers over twice the total number of leads to its partners than SideStep. Consequently, all else being equal, Kayak is far more effective at generating revenue on a per-visitor basis. Chief among Kayak’s announced post-acquisition plans are a quick transition of SideStep.com onto Kayak’s technology platform. Assuming no hiccups in this process, there is significant revenue upside at SideStep.com if the technology upgrade will bring it up to par with Kayak.com in lead generation effectiveness for its advertisers.

Among supplier-direct sites, Both Kayak and SideStep deliver the majority of their leads to airline carriers, however Kayak is significantly more concentrated here than is SideStep. An overwhelming 90% of the leads that Kayak delivers to supplier sites go to airlines, whereas this represents just 67% of SideStep’s leads. In both percentage share as well as absolute volume, SideStep is notably more effective at generating leads to the hotel chain and car rental agency categories than is Kayak.

With hotel rooms not commoditized the way that airline seats have become online, SideStep’s strategy of building out its content through acquisitions of sites like TravelPost.com may have proven to be a winning formula for non-air categories. In this regard, a transition to Kayak.com’s platform could be a risk to the performance of SideStep.com in generating hotel and car rental leads.

Within the air category, individual carriers are generating about twice the traffic from Kayak as they are from SideStep. In the seasonally slow month of November, large carriers such as American and Delta generated over 50,000 leads from Kayak, compared to about 30,000 from SideStep.

Consumer Behavior Differences on Each Site:

While both Kayak and SideStep offer similar products on their sites, consumers end up using them in markedly different ways. Activity in the flight section of Kayak dominates the site, with 50% to 60% of all Kayak.com visitors entering the flight path each month. Hotel activity on Kayak is almost an afterthought for many visitors, attracting only 10% of site visitors into hotel content. SideStep, meanwhile, is almost evenly split between the two products, with hotel content actually attracting a larger share of site visitors than flights during Q2 and Q3 of 2007.

Both Meta Search Engines also offer additional content areas beyond the standard hotel and flight categories. Kayak and SideStep each have a Car Rental, Cruise, and Deals section on their sites, with SideStep attracting a larger share of each of its site visitors into the sections than does Kayak. Additionally, Kayak maintains a "Buzz" section on its site that tracks the best fares uncovered by other Kayak users, while SideStep has tabs for Vacation Packages, Activities, and Travel Guides content. The most notable of these secondary features is SideStep’s Vacation Packages tab, which a healthy 3.3% of site visitors will navigate to each month.

Key takeaways for site usage are that Kayak.com, primarily a technology platform rather than a travel content site, has become heavily dependent upon its flight category to fuel the company’s growth. Its no-frills design appeals to air shoppers looking for the quickest way to find the best flight, but when it comes to more complex travel products such as hotels and vacations, consumers look elsewhere. SideStep, while unable to solve the flight-search puzzle as elegantly as Kayak did, has much to offer its new parent company in the way of travel content and expertise outside of standalone air products.

A risk with Kayak.com’s dependence upon the flight category is the airline carriers’ ever-evolving quest to shrink their distribution costs. While a lead-generation fee paid to a Meta Search Engine does not rank among the highest-cost channels for airlines, there may come a time when the channel grows large enough that carriers begin exerting pressure here. As evidenced by carrier negotiations with Global Distribution System (GDS) operators in 2006, this can make life difficult for airline distribution partners. Consequently, one of Kayak’s key priorities must be in continually demonstrating to the airlines that Meta Search delivers incremental and high-yielding shoppers that are worth paying for. There is currently no consensus on the most appropriate way to measure and value a lead generated from a Meta Search Engine.

Incrementality of SideStep.com to Kayak’s Business:

While many travel sites, such as the largest OTA’s, have a high degree of overlap in visitors with one another, this is less so between Kayak.com and SideStep.com. Each month between 10% and 15% of the visitors to Kayak.com will also have visited SideStep.com. This overlap peaked at 18% in March of 2007 but for the remainder of the year has not threatened to climb back to that level.

A site audience overlap can also be calculated in the reverse direction, and from this point of view between 15% to 20% of SideStep.com visitors each month will also visit Kayak.com. Much like most of a niche website’s visitors will also visit Google, while a low percentage of Google’s visitors will visit the niche website, it is the smaller Meta Search Engine (SideStep) that has the higher overlap rate.

The overlap levels are low enough to demonstrate that there is significant user incrementality to the acquisition, with fewer than 1 in 5 shoppers ever using both sites.

Takeaways:

Other travel marketers, if not previously aware of the scale that Meta Search Engines have reached, should now recognize the importance that the category is approaching within online travel distribution. Specifically within the air category, Kayak has developed a technology platform that millions of consumers rely upon each month, and with the acquisition of SideStep as well as the raising of significant capital, it has the opportunity to move into the realm of the largest OTA’s as being a central online hub for shopping for airfare.

From a financial perspective the transition of SideStep.com onto Kayak.com’s technology platform may significantly improve the effectiveness of SideStep at generating leads for its advertisers without an increase in site traffic. Revenue per site visitor could increase notably within the air category. SideStep, though, is currently a better performer within the Hotel, Car Rental, and Vacation Package categories and any technology shifts could potentially disrupt this performance advantage.

With low user overlap between the sites, the combined entity will attract over 5 million monthly U.S. website visitors (significantly more in peak summer season), launching it past the traffic levels of sites like Priceline.com, Hotwire.com, and Hotels.com. 2008 looks primed to be the year where Meta Search, led by the new Kayak, has its true coming out party.

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