Auctions And Pricing Power | ValueWalk

It’s a great time to discuss the distribution of power in auctions. Not only is this highly relevant for all users of Google paid search and our investment in TripAdvisor, but Leonardo daVinci’s Salvator Mundi just broke a record for the highest price paid for art at auction, clearing for $450.3 million (for a good article describing the process of bidding, click here). Your author had the good fortune of seeing this beauty in person before the auction, and dare we say, it’s probably worth it. For a far cheaper and more educational look at the painting, we’d highly recommend Walter Isaacson’s latest biography on this genius that was 200-300 years ahead of his time. But we digress.

Everyone has experience with auctions. If you’ve bought a home, you have perhaps unwittingly participated in an auction. Didn’t the whole process feel like you (the buyer) were sort of being taken advantage of? Don’t hate the player, hate the game.

At least that’s exactly what Google would have its users and advertisers think. As profiled in Scott Galloway’s recent book The Four, the auction gives Google the ability to claim innocence on all of the value it extracts from online transactions – it simply lets its advertisers set the price.

What It Means For Us

So why have we gone into this level of detail on auctions? A key position for us, TripAdvisor, finds itself in the power position of running auctions for its hotel metasearch. The site has been the gorilla in the travel space, with over 3 billion annual users, nearly half a billion monthly active users, and the most downloaded and used travel app on mobile. Yet the company has historically not monetized this ecosystem well. The issue has not been cheaper auctions, but a conversion problem. So a few months ago, starting in June, the company embarked on public campaign to educate users that they could, in fact, book their hotels with TripAdvisor.

The company’s second largest customer, Priceline, suddenly realized this campaign would effectively make its traffic on this core channel more expensive and would simultaneously allow the site to capture more of the consumers’ bookings over time. Because Priceline is between 15-20% of TripAdivsor’s revenue, and its profitability and market cap dwarf that of TripAdvisor’s, the new management of Priceline decided that it, Goliath, would try and get TripAdvisor, David, to stop its new messaging campaign. It reduced its spending on the TripAdvisor platform outside of the U.S., where it has a far more dominant footprint than Expedia, which caused TripAdvisor to lower revenue guidance. This sent the share prices of the entire sector down, including Priceline’s. The reason for this pullback was cited as “lower ROIs,” coming from TripAdvisor metasearch, even though both lower cost and higher conversion claimed by TripAdvisor actually equals “higher ROIs.”

If Priceline wanted to acquire TripAdvisor, this is exactly what it would be doing. Its new CEO ran the company’s M&A division for the past couple of decades. Yet, whether or not Priceline wants to own TripAdvisor is beside the point now. Because nearly 15% of Priceline’s traffic comes from TripAdvisor metasearch, and this traffic has a higher purchase conversion than Priceline’s general traffic, it can ill afford to abandon TripAdvisor completely.

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Auctions And Pricing Power – ValueWalk.