We're not in Kansas anymore.....

OK here it is- the full transcript of the article that appears in this week's Travel Weekly (they had to cut it down quite a lot- (honestly,physical media- limited shelf space- I don't know...) This also contains most of the presentation matter from this week's Institute of Travel and Tourism conference. I'd be particulary interested to hear feedback from anyone who was there.

Simon Ferguson

Virtual Integration and the long tail– contours on a new landscape of travel distribution

Anyone heard of Pareto’s principle? Coined by an Italian economist it’s the maxim that 20% of a company’s products will account for 80% of their business, and basically eschews what has become a fundamental of market economics- that your big lines, will outsell your specialist/smaller ones. However in a landmark article in online magazine Wired, Editor Chris Anderson points out that this principle is being turned on its head, and replaced by the phenomenon of the long tail. Essentially, the advent of the internet and ‘virtual distribution’ is creating patterns where specialist/niche offerings are flourishing, and cumulatively, outselling the ‘big lines’. For instance, More than 50% of Amazon’s sales come from outside its top 130,000 titles, and internet music store Rhapsody streams more music tracks from outside its top 10,000. Under Pareto’s principle you’d expect the 20 % of Amazon’s top 10,000 titles would be regular sellers (i.e sell at least once a month), whereas in fact 99% of them sell regularly. Essentially, the combination of the internet, with its unlimited shelf space and the power of network consumers ( e.g online reviews, Amazon recommendations and the like) is turning conventional economic on it head. Online brands are able to sell products bricks and mortar couldn’t stock due to the requirements of getting a commercial return on limited shelf space- thus the availability of specialist/niche items is growing significantly. Similarly, market sectors are seeing new/niche entrants occupying a bigger share of the pie, and cumulatively driving larger growth than existing players Google and e-Bay are both ‘long tail’ businesses- deriving revenue from a large volume of small/specialist transactions. In Google’s case, the number of niche search terms entered (using multiple terms/longer strings of words) far outstrips the ‘big seller’ terms (e,g cheap hotels), allowing them an advertising model based around a growing long tail.

The significance? Exactly the same is happening in travel. Consider this- how many UK tour operator companies were there in 2004, licensed to carry over 4,000 passengers? Answer- 90. How many companies were there carrying less than 4,000? Answer 1,668 (Source, Travel Directory, DG&G Travel Information). Less than 4,000 is pretty specialist, and the tail is growing. In fact 2004 saw a record number of ATOLs issued, but, according to the CAA’s Richard Jackson: “There has been rapid growth by online specialists and smaller operators. In fact, the proportion of total authorisations made up by the top four groups has declined to 46 per cent, compared with a peak of 57 per cent four years ago”. This growing tail is likely to spawn increased choice in hotel availability- the top 90 operators contact, give or take, 15,000 hotels between them, whereas, there are some 400,000 hotels worldwide (Source Hotels magazine US). Indeed according to hotel industry site 4 hoteliers.com, over 60% of Expedia’s inventory is independent hotels. Expedia can afford to stock smaller hotels that don’t sell regularly, because, like Amazon, it has unlimited shelf space.

However scarier still is that, although the long tail phenomenon in travel is partly the effect of blurring in the roles of operators and agents, and the increasing ability of hotels, airlines and even tourist boards to become holiday providers, it goes way beyond ‘licensed operators’. On the day I wrote this article there were 1,006 ‘holidays’ being advertised on the UK e-bay site- consumers offering their, or their family’s holiday accommodation, often packaged with pre-booked excursions, for auction: Consumers themselves are becoming holiday providers, growing the long tail even further.

This is liable to increase with the growth of consumer weblogs or ‘blogs’. A blog is a website set up by an individual, usually as a forum for that individual’s opinions (just like this one!). They’re becoming increasingly influential- particularly in the US, where there are over 8 million such sites. Some US blogs sites now attract more traffic than regional press sites, and they generate revenue, through either advertising or e-commerce: The Drudge report, set up by ex-journalist Matt Drudge earns in excess of $1.5 million per year. A site called Blogshares lists the top blog sites in a virtual stock market- and assigns each blog a ‘virtual market capitalisation’, based on how many other sites a Blog has linking to it. Blogshares currently has over 750 travel blogs- a natural area as consumers like to log their holiday/travel experiences-and these are growing exponentially.

How long before blogs implement the new and growing travel ‘meta search’ tools, or dynamic packaging components, and become brands in their own right? Well just to show how easy it is.... at the top right of this page we’ve added the Kayak travel search tool, allowing this blog to compare prices across thousands of hotels, and refer through to a booking engine. With an hour’s work we became the latest addition to the online travel provider community, and have grown the long tail by one!

This illustrates a key point: Many travel agents lambaste Expedia, BA or Last Minute.com for cutting them out of the equation, blissfully unaware that e-Bay is teaming with consumer-originated holidays. It is the shift in the balance of power to the customer that threatens to dis-intermediate agents- not the online providers, who are merely positioning themselves to take advantage of this. Ultimately, the long tail phenomenon is all about a shift in the balance of power from supplier/producer to the customer. The de-regulation of airspace and resulting growth of low cost carriers has provided more capacity than ever before. The advent of the internet, and free flow of information facilitated by search engines and blogs, has made price and availability transparent and given customers the ability to dictate how, when and where they buy. The long tail is an example of how low the barriers of entry are.

However new entrants have impacted the top end of the market as well as the tail: Few would argue Expedia’s impact on the travel market, and yet it was Microsoft, a software company with no apparent interest in travel, that had the vision to launch it. There are currently only four travel-related entrants in the Financial Times Global 500 companies list: Carnival (107th), Cendant (225th), Interactive Corps now Expedia’s owners (351st), and Marriott hotels. Of these, Cendant and Interactive are comparative new entrants to travel- neither were in the 500 list in 2001. Similar stories abound in other sectors, where new players have sprung from obscurity to dominant positions- Vodaphone in Telecoms, and Google itself, which from being virtually unheard of a few years ago is now bigger in terms of market Capitalisation than AOL/Time Warner and some of the American TV networks.

So different is the travel landscape now, that arguably, a new paradigm is needed: Traditionally the travel supply space was a classic linear chain- airline/hotel distributing through GDS to agent, or tour operator distributing through brochure or agent. In this environment vertical integration made sense, as with regulated routes to market, owning the means of production and distribution gave control of the outcome. However now, if anything, we are in an era of virtual integration, where hotels, airlines, online aggregators, consumer brands like Tesco, and even consumers themselves are all capable of becoming providers. The hotel I’m currently in can be accessed directly via the web, but also via Last Minute.com. So it also appears on the Tesco website under the Last Minute.com white label deal. And LMDC have it through their acquisition of OTC...who also supply Thomas Cook. Oh, and the same hotel is available to be dynamically packaged by a host of agents, and specialist operators. Thus the traditional integrated supply chain is replaced by a complex network of relationships. Does the customer care? Not as long as they can buy how, when and where they want. In the Virtually integrated world, owning the relationship with the customer becomes the key.
Thus online travel suppliers will have to shift from enabling transactions- arguably the industry’s focus for the past few years- to building a sustainable brand relationship with the customer. By owning online aggregators (Expedia, Hotels.com); a search engine (Ask Jeeves) and trusted content (Trip Advisor), Interactive Corps have pursued virtual integration by acquisition- their scale has allowed them to acquire some of the key customer relationship points that underpin online travel.

At the heart of virtual integration is using your brand/assets/capabilities to develop new services, often by partnering with affiliates, and this is relevant to both large brands and small agents. Other sectors are embracing this strategy, in fact we increasingly live in a virtually integrated world: Supermarkets now sell 20% of petrol in the UK; Virgin has over 1 million financial services accounts; Amazon now sells more consumer electronics products than it does books. In the travel sector, 30% of Ryan Air’s revenue is from ancillary services, and Last Minute.com is increasingly leveraging its brand position to generate advertising revenues as well as e-commerce. Tescos, one of the doyens of virtual integration, not content with its non-food sales is prototyping an online property website, where consumer will be able to post their houses for sale for as little as £50.

Such strategies point the way for all sectors of travel: The competitors and partners of the future are liable to be very different to those of the past: Suppliers should look to new distribution partners such as financial services companies, mobile phone operators and e-Bay, if it’s the brand their customers respond to, and be prepared to position themselves as providing bullets to combatants by working with established consumer brands. Agents should take heart from the long tail phenomenon- there is clear room for them to occupy the provider role with the right mix of services and technology. They should also embrace a virtually integrated view of the world: If being dis-intermediated by a supplier is a concern, use your web brand to drive traffic to that supplier and charge a referral fee. Advertising is often easier to monetize than e-commerce- in fact Google’s $44bn market value rather gives the game away!

The shift from big sellers to long tail; from producer efficient to customer effective; from vertical to virtually integrated are contours on a new landscape of virtual distribution. At the end of the 20th century manufacturing accounted for 20% of UK GDP, by 2020 this is forecast to be displaced- 20% of GDP will be IT/technology related.

As Dorothy famously said in the Wizard of Oz, when confronted with a similarly bewildering landscape: ‘We’re not in Kansas anymore Toto’.