The Dominance of TripAdvisor

Whenever Natty or I talk to anyone about online travel, we inevitably talk about or reference TripAdvisor somewhere in the conversation.  This is because TripAdvisor (and its partner websites including virtualtourist.com, independenttraveler.com, etc.) has, by far, the most extensive database of user generated reviews and the most active base of users of any travel information site.  TripAdvisor completely dominates the market despite a horrible design, deceptive sponsored links, multiple pop-up ads and disorganized site layout.

TripAdvisor has built themselves to be at the center of the online travel information universe.  We strongly believe that network effects have, at this point in time, firmly ensconced TripAdvisor’s position.  This is because they are the only site that has the depth and breadth of reviews to drive users to their site, and conversly, they are the only ones who have the vast number of users to entice reviewers to review purely based on the impact of their reviews.

There are no less than twenty different sites attempting to unseat TripAdvisor.  However, none are having a large impact and this is directly derived from a classic chicken-and-the-egg problem: they are struggling to attract users to review, and with no reviews, they are struggling to attract users.  Some sites, such as WAYN.com among others, have resorted to enticing users through point systems (sometimes redeemable for real-world services) to write reviews.  Others have resorted to large scale traffic generation schemes to drive users to their site.  Regardless, it doesn’t appear that it’s working.  A post on compete.com’s blog shows that, if anything, TripAdvisor’s reach is expanding after a 2008 site redesign.

Another takeaway from the Compete post is that over 1% of TripAdvisor users contribute reviews.  Given their huge inital base, the expansion of their database is expanding far more rapidly than newer entrants.  Competitors to TripAdvisor will have to drive the percentage of users contributing reviews much higher than TripAdvisors (already impressive) 1%, making the barriers to entry for online travel information sites almost-impossibly high.

They have a huge user base and that drives fantastic results.  According to Expedia’s 3Q08 press release, the TripAdvisor Media Network had revenues of $236m ($314mm annual rate) — nothing astounding, compared to the billions that GOOG generates, the billion that myspace generates or the estimated $300m that Facebook generates.  However, due to the fact that travel advertising is extremely valuable online (something that the Everlater team has not overlooked), TripAdvisor CRUSHED the margins of all of these other online media companies — their reported operating income (actually OIBA per EXPE reporting) margin is 53% (compared to GOOG’s roughly 25% margin, and Fox Interactive Margins of 0-10%), meaning they are on pace to earn operating income of $165m — margins and profit that are almost unheard of in the digital media space.

We (at Everlater) have several takeaways from TripAdvisor’s dominance:

1. Travel advertising is a great place to be. While no one knows exactly where the economy is going to go, and whether online advertising will be worse or better than the whole, we do know that we are positioning ourselves to take a slice of the tastiest part of the online advertising pie.
2. Content is king. We are building a media site, and our content is the most important part.  Because we are not targeting the travel information space, we are targeting an active contributor user percentage much higher than 1%.
3. Paying users doesn’t work. This takeaway is courtesy of TripAdvisor’s competitors.  If we ever have to entice users to contribute content to our site, then our business model is broken, rather than our marketing plan.