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IAC/InterActiveCorp Message Board

  • jeff44293 jeff44293 Sep 19, 2003 7:00 PM Flag

    Ouch! Orbitz slaughtered in Bus. Week

    Wow, Tim Mullaney sure looks like a reader of my past posts! Look familiar?

    :-) --------
    This IPO Doesn't Deserve to Fly
    By Tim Mullaney
    BusinessWeek - 9/29/03

    Three years after the dot-com bust, companies with loopy business models should not be going public. That may seem obvious, but the Aug. 28 initial public offering filing by online travel agency Orbitz Inc. makes it clear the point hasn't gotten through to everyone. It's bad enough that Orbitz, despite being on pace to sell $3 billion in travel this year, doesn't make money -- it lost $5.3 million in the first half of 2003 on revenue of $107 million.

    It's worse that Orbitz' revenues are growing only a little more than half as fast as those of rival and segment leader Expedia Inc. Investors should avoid this deal, and Orbitz should pull it.

    Orbitz' worst problem is straightforward: The five big airlines that own it, and will control its board even after an IPO, have forced Orbitz to underprice its services to subsidize themselves. And it's going to get worse. Commissions, mostly from owners United Airlines, American, Continental, Northwest Airlines, and Delta Air Lines, provide 21% of Orbitz' revenue, among the biggest line items in its budget. But under the deal that created Orbitz, commission rates fall 27% in 2004, 28% in 2005, and 30% in 2006. That means the work that earns Orbitz a buck in commissions this year will get it about 37 cents in three years. Other online agencies don't disclose their airline deals, but they're known to take incentive payments for directing consumers to specific airlines. Orbitz doesn't. Why not? Because airlines hate paying those incentives. And the only top online agency willing to negotiate them away has been -- what do you know? -- Orbitz.

    Orbitz has been too slow to figure out how to replace its commissions. For other travel Web sites, the big money is in merchant hotel sales and vacation packages. In both, travel agencies buy rooms and/or air tickets from suppliers, mark them up around 25%, and sell them at a profit. It beats the heck out of selling airline tickets for 3% or 4% commissions. Expedia gets 61% of revenue from merchant hotels and packages. Orbitz gets less than 15% of revenue from the same sources. Why? Orbitz CEO Jeffrey G. Katz has said lowering the cost of airline bookings is a higher priority. Sure -- for airlines.

    Orbitz hopes to build a long-term advantage around the technology connecting its site directly to airlines' reservation systems. Dubbed ``Supplier Link,'' it promises to cut out such middlemen as Sabre, Worldspan, and Cendant's Galileo International. The middlemen charge about $13 per round trip. Meanwhile, Orbitz charges airlines a comparatively paltry $4 a ticket for the service. That saves the airlines $9 a shot.

    Once again, that's great for the airlines -- and lousy for Orbitz, which eked out just $4 million in first-half revenue from Supplier Link. And even though no other online agency has the technology, Orbitz set the price of Supplier Link low to favor the carriers. It makes you wonder: Is Orbitz really set up to make money? And for whom?

    The solution for Orbitz is obvious: The airlines should cut it loose and let it compete on an equal footing with its online rivals. Once it's not dominated by airlines, Orbitz will have a chance to thrive, cutting better carrier deals, focusing on the more lucrative hotel and package-tour business, and competing to please customers, not suppliers. Orbitz' technology is first-rate. Its management team is a lot brighter than the ideas Orbitz' ownership makes them defend. And Orbitz would still help airlines by competing with Expedia, whose market power threatens airline and hotel margins.

    When you take a company public, you promise investors that you will fight to make them money. Orbitz isn't built for that. Until it is, this IPO should stay grounded.

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    • I think we'll just have to agree to disagree here. It might not be a big deal to get a few people to purchase from you. But it is a big deal to get millions to do it and to keep doing it. And that's exactly what these sites are doing. You think they're a commodity. I don't. Both opinions. Enough said.

    • There is no question of brands here, you're buying a commodity you're not buying a product made by IACI. What do you think, that TMCS sells tickets because it's a trustworthy brand? No, it's because it has been pushed as a distribution monopoly and that strategy only goes so far in the travel space where IACI does not represent an irreplaceable entity.

      It's not a big deal to get customers to actually purchase from you, it's much harder to keep them loyal and in this commoditized space, IACI will not be able to do that just because it's a specific "brand" of distribution.

    • <<Exactly my point, many have ALREADY been using Expedia because they don't realize how they can search for better deals>>

      I think you missed my point. People DO realize they can search other sites. They're just choosing Expedia/ instead of the 'real' fly-by-night sites.

      People trust the brands these two sites have built. They also trust a handful of others (like Travelocity).

      Competing with these sites is neither cheap nor easy. And by 'compete', I don't mean being able to sell something for a dollar cheaper. By 'compete', I mean getting customers to actually purchase from you.

    • <Are you referring instead to the Sabre group (TSG)? If so, why don't we focus on Sabre versus IACI (istead of Travelocity).">

      >> Are you so ignorant that you don't know that Travelocity is a subsidiary of the Sabre Group?

      No, I am quite aware that Travelocity is owned by TSG.

      I am asking you to be specific, because you are being specifically WRONG when you say that Travelocity has great cashflow.

      If, instead, you mean TSG, then please say it, and we can talk about the problems that Sabre has compared to IACI.

      Your statement that Travelocity has "fabulous cashflow" is just plain wrong.

      And it, plus other repeated statements you appear to just make up out of nowhere expecting that no one will challenge you, really damage your credibility.

    • Please post the specific quotation you are referring to, thanks.

      I'll bet you $1,000 that it did not characterize Travelocity's overall cashflow as "fabulous".

      Because it's not.

    • <Do you really base your trades on six month old news?>

      How did you arrive at that conclusion? A net 250 million shares of IACI were sold by Funds in the past 6 months *through last Friday*.

    • <<< A NET 250 million shares of IACI were sold by Funds in the past 6 months.>>>

      Do you really base your trades on six month old news?

    • <"Travelocity is just beginning to make a start in the merchant model, and are quite far behind IACI, which -BEFORE- the acquisition of was already accounting for over 60% of the hotel rooms booked online.>

      Just beginning, but what a beginning. The Barrrons article indicated that they have already doubled their goal set for the end of this year. And I imagine at least some is taken out of Expedia's hide.

      <Are you referring instead to the Sabre group (TSG)? If so, why don't we focus on Sabre versus IACI (istead of Travelocity).">

      Are you so ignorant that you don't know that Travelocity is a subsidiary of the Sabre Group? If so, stop pretending to be an expert. A NET 250 million shares of IACI were sold by Funds in the past 6 months. In the same time period, they were big buyers of Sabre Group(TSG). That is where the future lies. Are you, jeff44293, a shill on the Yahoo boards, a bigger expert than the collective wisdom of the Institutions? GMAFB.

    • >> As for cash flow, Travelocity also sports fabulous cash flow in this type of business.

      No, it doesn't.

      Where do you get your "facts" from?
      Phdry, it really lessens your credibility.>>

      "Facts" come from Barrons two weeks ago. They lavished praise on all facets of Travelocity's operation, pointing out the exceptional cash flow in the process. They also mentioned their tremendous success at grabbing a big share of the merchant hotel traffic that Expedia had dominated. Even if Expedia puts up the "big" numbers of last quarter ($.25), which I doubt, it will show up only as $.05 this quarter on IACI's bloated dilutive balance sheet. Big deal.
      As for giant IACI's cash flow, valuation professional ValuePro shows them with a negative residual cash flow after it is all said and done. You direct our attention to the top lines, but the professionals look even more closely to the bottom lines.
      Their conclusion: IACI's has a stock market value of $7.28. No doubt this number was arrived at by way of the huge dilution that exists here that you never mention.
      Jeff, you're a good con artist. Your mentor should be proud of you. However, you should be more careful about your "facts".
      This is a financial board, jeff. How do all these glistening, scintillating "facts" that you mention translate to the bootom line? Five cents.

    • Jeff, I definently agree on Homestore and Points, I just can't see why IACI would move with ANOTHER travel booking site like EBookers or Lastminute. Granted, consolidation is happening in the industry, but you can't buy up EVERYONE. Hopefully some of these smaller operations will be knocked out by market forces themselves. Economies of scale should be quite sufficient with just hotwire and expedia.

      Changing topics, how come nobody seems to talk about LendingTree anymore? What's the word there? And, how are they going to link something like lending tree with these other services?

      You know, though, even if they can't create some sort of overarching loyalty program or branding system, it's really just a testament to the varieties of customers IACI can target. Now, don't laugh, but seriously, especially with the lending operation, IACI could manage to collect and connect more sophisticated customer information than ANYONE except the biggest banks! Now that's interesting.



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