TripAdvisor: A pioneer in monetizing user-generated content
TripAdvisor, the world's leading travel website, has built a robust business with $1.2Bn in revenues last year. The bulk of the company's value capture comes from advertising, but it also earns revenue through business listing subscriptions and transaction fees. TripAdvisor's heavy user traffic, strong community engagement, and high-value user base will ensure that its revenue model remains strong.
TripAdvisor is a leading travel site that aims to help users “plan and book your perfect trip.” The company operates in 45 countries globally and has 315 million unique monthly visitors. The company has annual revenues of over $1.2Bn and a market capitalization of $12.5Bn, making it a great success story for businesses built on user-generated content.
TripAdvisor has recently moved beyond a CPC model to launch Instant Booking, where hotels pay TripAdvisor a commission for bookings made through its featured "Book on TripAdvisor" button.
TripAdvisor creates value through its two-sided platform. The company has created a travel community of users who share advice and recommendations about hotels, attractions, restaurants, and all things related to travel. TripAdvisor’s core value proposition to the user is its database of millions of user-generated reviews, photos and articles. The site crowd-sources information that is often more accurate and up-to-date than guidebooks, the typical alternative for travelers. On the other side of the platform, advertisers and travel vendors (hotels, tour companies, cruise lines, etc.) benefit from access to a highly valuable demographic of users ready to spend money on travel.
The bulk of value capture for TripAdvisor comes from advertising. Click-based ads brought in 70% of total revenue for 2014, while display earned 11% of revenue. There are two main programs that TripAdvisor promotes under its TripConnect program for marketers: CPC and Instant Booking. Under its traditional CPC model, TripAdvisor collects bids from online travel agencies (OTAs) like Priceline, as well as the actual hotels themselves, to appear as one of the top three booking options for a given hotel property. Like Google Ad Words, the advertiser pays a fee to TripAdvisor for every user click. TripAdvisor has also recently launched the Instant Booking program, which allows the user to book directly through TripAdvisor without leaving the site. The option “Book on Tripadvisor” shows up as the top booking option for the property. Hotels can elect to pay a commission percentage, 15% or 12%, to claim either 50% or 25% of the reservations made through this button. Instead of paying for clicks, the hotel pays TripAdvisor only when a booking is made. TripAdvisor’s display advertising is offered in multiple formats (e.g. banners, mobile displays, videos) and the company also allows advertisers to sponsor certain campaigns on the site.
In addition to advertising, TripAdvisor generates revenue through subscriptions and transactions. This revenue comes from transactions such as restaurant and tour bookings, some of which go through TripAdvisor’s recent acquisitions like La Fourchette, a leader in restaurant reservations in Europe, and Viator, an attractions and tour site. In addition, TripAdvisor generates subscription fees from its Business Listings program, which allows hotels to add their contact information to the TripAdvisor page for their property and also feature special offers.
Looking forward, I think there are two aspects of value capture that will be important for TripAdvisor to monetize well. One is Instant Booking—it’s a new program launched in Q4 2014 which promises to direct more value to TripAdvisor compared to the CPC model, if TripAdvisor can ensure adoption from hotels (which has been slow to-date) and avoid OTAs like Priceline viewing this move as an encroachment. Secondly, as more users go mobile with the TripAdvisor app vs. the desktop, the company will have to counter a drop in CPC advertising (less popular on mobile devices) with advertising streams that are a better fit with the mobile experience.
Overall, I’m quite confident that TripAdvisor has built a robust model for monetizing its user network. Because the company is in the travel space, where consumer spending is high and marginal costs are low, TripAdvisor’s users are incredibly valuable to businesses and advertisers. TripAdvisor is likely to retain its position as the portal of choice for users looking to book and plan their upcoming travel because of its strong network effects. The more users who provide information and reviews about the various attractions, restaurants, hotels, etc. in a given destination, the more valuable TripAdvisor is to each discrete user. The current amount of content and traffic on the site is hard for a competitor to replicate. Given this dynamic, TripAdvisor will remain a compelling partner for businesses and OTAs looking to capture customers.