Expedia, Inc.

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Expedia, Inc.

13810 Southeast Eastgate Way
Suite 400
Bellevue, Washington 98005
U.S.A.
Telephone: (425) 564-7200
Fax: (425) 564-7240
Web site: http://www.expedia.com

Wholly Owned Subsidiary ofInterActiveCorp
Incorporated: 1996
Employees: 1,758
Sales: $590.6 million (2002)
NAIC: 561510 Travel Agencies; 561520 Tour Operators; 514191 On-Line Information Services

Expedia, Inc. began offering online travel services on the Microsoft Network toward the end of 1996. Microsoft Corporation nurtured its start-up company, investing heavily in technology to provide advanced search capabilities and other features. Microsoft spun the company off in 1999 while retaining a controlling interest. In 2001 it agreed to sell its interest in Expedia to media conglomerate USA Networks, Inc., a deal that was finalized in 2002 after USA Networks divested its entertainment properties and subsequently became USA Interactive, Inc.

Over its short history Expedia has expanded in many ways. It has grown from primarily selling airline tickets and reaping the commissions, to offering a wide range of travel products such as discounted hotel rooms and packaged travel plans. It also has entered the corporate travel market and expanded internationally, opening sites in Canada, the United Kingdom, and other European countries. It has developed cutting-edge technology solutions to make it easier for consumers to plan and purchase online travel. As a result, the company has weathered downturns in the market and outperformed numerous other online travel ventures to become the industry leader in online travel.

Offering Online Travel Services: 1996–99

When Microsoft Corporation launched Expedia on the Microsoft Network in October 1996, it was the first online travel service to be offered by a major technology company. Expedia allowed consumers to make air, car, and hotel reservations onlineand to browse a library of multimedia travel guides. At first, Expedia accepted bookings only from consumers, not from other travel agencies. At the time most consumers were using the Internet to browse rather than to purchase, so it was not clear whether they would utilize an online service to purchase travel services. The American Society of Travel Agents, for example, responded to Expedia’s launch with a statement quoted in Travel Weekly: “There may be a small percentage of do-it-yourselfers who want to book electronically, but most people think their time is too valuable.” Travel agents in general stressed the personal attention that people wanted when they made their vacation plans.

The person at Microsoft who was responsible for the development of Expedia was Richard Barton, who became Expedia’s president and CEO. Barton worked in Microsoft’s CD-ROM division and was responsible for creating CD-ROM travel guides. As the CD-ROM market was collapsing, he transferred to the multimedia group and developed the idea of selling travel online. He presented the concept to Microsoft cofounder and CEO Bill Gates at the company’s annual product review, and Gates immediately approved the idea.

Microsoft ran its first mainstream ad for Expedia in November 1996. A full-page ad in the Wall Street Journal urged consumers to access “the same reservation system” that travel agents used. By March 1997 Expedia reported that it had booked $1 million worth of travel reservations in a seven-day period, with about 80 percent due to airline bookings. Preview Travel, a competing online service available on the World Wide Web and America Online, took seven months following its launch in early 1996 to book $1 million a week in December 1996.

In May 1997 Expedia upgraded its web site and added several new features, including airline seat selection, real-time flight information, and an expanded directory of hotels and bed-and-breakfast inns. The travel service also added new destinations to its Expedia World Guide, which was the most popular feature of its web site. Other improvements included consolidating the Flight Wizard, Hotel Wizard, and Car Wizard onto a single screen, thus reducing download time.

In February 1998 Expedia launched the Expedia Associates Program, which gave suppliers and other companies access to Expedia’s booking engine to set up co-branded web sites. During the first year companies such as American Express Vacations, National Car Rental, National Leisure Group, and Hotel Reservations Network joined the program.

Toward the end of 1998 Microsoft expanded Expedia’s reach by launching an Expedia travel service in the United Kingdom. The site provided consumers with details on air fares, hotels, and car rentals. It also included a section offering discounted, late-availability packages from various tour operators. To book their travel services, consumers in the United Kingdom had to call a toll-free telephone number or send in an e-mail request. Destination information on Expedia’s U.K. site was provided through an arrangement with Business Traveller magazine. In its first three months of operation, Expedia’s U.K. site booked travel for an estimated 15,000 customers, representing more than £3 million of business. About one-fourth of its business came from business travelers in small and medium-sized companies.

By mid-1999 Expedia had separate versions in the United States, United Kingdom, Germany, Canada, and Australia. In its third year of operation Expedia had become the 25th largest travel agency in the United States and was projected to join the top ten by the end of the year. Although the company had yet to show a profit, it reported $250 million in travel bookings in 1998, a figure that was projected to reach $750 million in 1999. Revenue increased from $2.7 million in fiscal 1997 to $13.8 million in 1998. Expedia’s U.S. web site had 3.5 million daily visitors and weekly travel bookings worth more than $16 million. The company had grown from a staff of 40 developers to more than 400 full-time employees, including about 250 customer service representatives who provided ticket fulfillment at Atlanta-based WorldTravel Partners.

Operating As a Public Subsidiary of Microsoft: 1999–2002

In September 1999 Microsoft announced that it would sell a minority interest in Expedia to the public through an initial public offering (IPO). It was the first time that Microsoft had spun off one of its businesses. The move suggested that electronic commerce in general, and online travel in particular, had become established. For fiscal 1999, Expedia reported revenue of $38.7 million and a net loss of $19.6 million, according to its filing with the Securities and Exchange Commission(SEC).

Expedia’s IPO took place the week of November 8, 1999, with shares opening at $38. The company sold 5.2 million shares, or 13.6 percent of its outstanding shares, at $14 apiece through underwriter Goldman Sachs. Microsoft retained the remaining 86.4 percent of Expedia’s shares. Once trading began, the stock price quickly rose to $63 before closing the day at $52.75.

At the time of its IPO, Expedia’s quarterly revenue was about $15 million, with approximately two-thirds coming from transaction commissions and the rest from advertising. Net proceeds from the IPO were $72.8 million, of which the company planned to spend $10 million on product development, $30 million on sales and marketing, and $5 million for general and administrative expenses.

Overshadowing Expedia’s successful IPO was a lawsuit from Priceline.com, which claimed that Expedia’s Price Matcher service infringed on its patents. Similar to Priceline’s online bidding service that allowed consumers to name a price they were willing to pay, Expedia’s Price Matcher for hotels and airline tickets let consumers name their own price. Expedia also was facing another lawsuit filed by Reed Elsevier in November on behalf of its subsidiary, Cahners Travel Group, which claimed that Expedia breached a contract regarding the use of Cahners’ worldwide hotel directory database.

At the beginning of 2000 Expedia and Travelocity were locked in a battle for the top ranking among online travel services. Following its IPO in November, Expedia experienced more traffic at its site than Travelocity during the 1999 holiday season, according to Media Metrix. Travelocity’s planned takeover of Preview Travel and an alliance with Priceline.com, however, gave it added strength in its competition with Expedia. Expedia, for its part, launched a $50 million multimedia advertising campaign designed to position Expedia as a travel advisor. The campaign’s taglines were, “Don’t just travel. Travel right,” and “Where do you want to go today?”

In February 2000 Expedia made two significant acquisitions that enabled it to offer a wider range of accommodations. It paid $82 million in stock for VacationSpot.com Inc. of Seattle, a reservation network for vacation homes, condo rentals, and bed-and-breakfasts. The company also announced that it would acquire Travelscape.com, Inc., a Las Vegas-based company that specialized in discounted hotel rooms, for some $95 million in stock. The acquisition of these two online lodging leaders gave Expedia listings for 65,000 properties worldwide, guaranteed lowest hotel rates in 240 cities, and some two million room nights per year.

Company Perspectives

Expedia, Inc. is the world’s leading online travel service and the eighth largest travel agency in the U.S. Expedia’s award-winning Expert Searching and Pricing (ESP) technology delivers the most comprehensive flight options available online. ESP also allows customers to dynamically build complete trips that combine flights, Expedia Special Rate hotels and other lodging, ground transportation, and destination activities. Expedia operates Classic Custom Vacations, a leading wholesaler of premiere vacation packages to destinations such as Hawaii, Mexico, Europe and the Caribbean; and Metropolitan Travel, a corporate travel agency. Travelscape.com, Inc., wholly owned by Expedia, also operates as WWTE, bringing complementary cross-sell and dynamic packaging booking functionality to third parties on a private-label basis.

For fiscal 2000, Expedia reported revenue of $94.6 million and a net loss of $127.7 million. The largest reported loss in Expedia’s history was due in large part to increased operating expenses, especially a $125 million increase in marketing and general administrative expenses. The company had invested heavily in operations during the year, including new technology that enabled its pricing engine to run on PCs instead of a large mainframe computer. The new fare-searching technology meant that Expedia could price more itineraries than other travel agencies, giving customers more choices and more flexibility. Fiscal 2000 was also the first year that Expedia shifted its business model from one of primarily selling airline tickets to one that included more profitable lodging and package transactions. The company’s workforce also had grown to about 500 employees during the year.

At the end of fiscal 2000 Expedia received additional financing of $10 million from Microsoft and a capital infusion of $50 million from venture capital firm Technology Crossover Ventures. As a result, Technology Crossover gained a 7 percent interest in Expedia, with Microsoft retaining a 70 percent share of Expedia.

Fiscal 2001 was a good year financially for Expedia. Although the company failed to report a profit, its revenue more than doubled to $222.2 million, and its net loss was reduced to $77.1 million. Expedia’s revenue was bolstered in part by increased wholesale sales of inventory from lodging and travel package suppliers, which gave the company merchant income in addition to its traditional commission income from airline ticket sales. In August 2000 Expedia committed further to its merchant model by acquiring Travelscape, which continued to maintain its format and operate independently. Expedia also formed a marketing alliance with eGulliver.com, a lead generation service for travel agents, that added links between each company’s web sites. In November 2000 Expedia and Ziff-Davis Publishing launched Expedia Travel, a bimonthly travel magazine that began with a circulation of 200,000. Around this time Expedia also enhanced its service for business travelers by adding a feature that allowed one person in a company to book travel for a group.

Internationally, Expedia’s U.K. site, which was named the fastest growing online travel agent earlier in 2000, moved into full-service travel operations by offering hotel reservations, car rentals, and other travel services. The company hired a tour operation manager in October 2000, and by early 2001 was working on expanding its Holiday Shop offerings of late tour deals. Another enhancement added during the year involved providing electronic ticketing for British Airways flights. In January 2001 the service launched a month-long, £2.3 million television and billboard campaign that promoted the site’s new services, including a mobile service introduced in December 2000. In Canada the company formed an alliance with online portal Excite Canada, integrating Expedia’s services throughout Excite Canada’s travel channel.

In January 2001 Expedia and Priceline.com settled their patent disputes when Expedia agreed to a royalty arrangement with Priceline.com. The settlement allowed Expedia to continue to offer its Price Matcher services. In March 2001 Expedia faced a different challenge when Northwest Airlines and KLM Royal Dutch Airlines stopped paying commissions on ticket sales to Internet-based travel agents. While competing site Tra-velocity promptly added a $10 surcharge on all Northwest and KLM tickets, Expedia reached an agreement with the two airlines to avoid having to add such a surcharge. The terms of the agreement were not disclosed.

Anticipating the launch of the airlines-backed online travel site Orbitz in June 2001, Expedia and Travelocity began adding new features and services. Earlier in the year Expedia introduced a new flight search platform, Expert Searching and Pricing (ESP), after four years of development. ESP was designed to integrate several existing site features into one user-friendly platform, thus giving consumers more choices and more control over their travel planning. Expedia also introduced a program called Bargain Fares, which allowed consumers to purchase blind tickets at a discount. After they purchased a ticket, consumers were told the flight time and name of the airlines.

In its third quarter ending March 31, 2001, Expedia reported a surprising profit. Previously, the company had predicted that it would not become profitable until mid-2002. The company’s reported profit of $4.4 million, though, was before noncash expenses such as stock options and amortization. With those charges included, the company’s quarterly loss was $17.6 million, compared with a quarterly loss of $66.5 million the previous year.

Becoming a Subsidiary of USA Networks, Inc.: 2001-03

Although it was announced in July 2001 that USA Networks, Inc. would buy a controlling interest in Expedia from Microsoft for about $1.5 billion, the acquisition was not approved by Expedia’s shareholders until February 2002. USA Networks, headed by entertainment mogul Barry Diller, planned to acquire a 75 percent stake in Expedia by purchasing all of Microsoft’s shares and those of other shareholders. Other electronic commerce operations owned by USA Networks included Hotel Reservations Network, Ticketmaster.com, Citysearch, and HSN.com, the online division of the Home Shopping Network. USA Networks also planned to purchase National Leisure Group, an online cruise and package travel agency.

Key Dates

1996:: Microsoft Corporation launches Expedia, an online travel service, as part of the Microsoft Network (MSN).
1998:: Expedia begins operations in the United Kingdom.
1999:: Expedia is spun off from Microsoft as a publicly traded company, with Microsoft retaining a majority interest.
2001:: USA Networks, Inc. acquires Expedia from Microsoft for an estimated $1.5 billion.
2002:: USA Networks changes its name to USA Interactive, Inc., following the sale of its entertainment assets to Vivendi Universal.
2003:: USA Interactive, renamed InterActiveCorp, acquires the remaining shares of Expedia for an estimated $3.3 billion.

Meanwhile, Expedia was expanding internationally, launching sites in Holland and Italy. It also entered into a joint venture in France with railway operator SNCF, which resulted in a co-branded site launched at the end of 2001. Through an alliance with online retailer Amazom.com, the two companies opened a travel store at the Amazon.com site.

All online travel services were negatively affected by the events of September 11, 2001, when terrorists flew hijacked airliners into New York’s World Trade Center and the Pentagon. Travel bookings and stock prices dropped dramatically, with Expedia reaching a 52-week low of $19.64 after stocks resumed trading. Expedia had been growing when the disaster occurred, however, with gross bookings up 78 percent over the previous year. Its stock rebounded to more than $30 by early October, and online travel bookings reached previous levels within a month after 9/11.

For the quarter ending December 31,2001, Expedia reported its first bottom-line profit of $5.2 million on revenue of $81.8 million. The company’s pro forma profit excluding noncash and nonrecurring charges reached $18.9 million for the quarter. Revenue was boosted by strong activity in hotel and vacation packages, which offered higher margins than airline ticket commissions. It was the first quarter that Expedia surpassed rival Travelocity.com in gross travel bookings, with $704 million compared with Travelocity’s $630.2 million. For the same quarter Travelocity posted a $25 million loss. At the end of 2001 Expedia changed its fiscal year to match the calendar year and reported six-month revenue of $161.2 million and net income of $2.1 million.

Before the end of 2001, USA Networks announced that it would not pursue its acquisition of National Leisure Group. Although the boards of directors of Expedia, USA Networks, and Microsoft all approved USA’s takeover of Expedia by December, Expedia decided to delay its shareholder vote until February 2002. The reason for the delay was that USA Networks was in the process of selling its entertainment assets, including cable television networks and film assets, to Vivendi Universal. Following the sale of its entertainment assets to Vivendi, which was completed in May 2002, USA Networks changed its name to USA Interactive, Inc.

Expedia’s board approved its acquisition by USA Networks in February 2002, and in March Expedia completed its acquisition of Classic Custom Vacations for about $52 million. A vacation wholesaler that sold vacation packages to Hawaii, Mexico, North America, Europe, and the Caribbean, Classic Custom Vacations became a subsidiary of Expedia, with offices in San Jose, California; President Ron Letterman remained its head.

In June 2002 USA Interactive announced plans to acquire the remaining interests in its subsidiaries, Expedia.com, Hotels.com, and Ticketmaster, and possibly consolidate them all into a single publicly traded company. The announcement drove USA Interactive’s stock price down some 12 percent, however, and the company tabled the proposal. It subsequently acquired all of Ticketmaster in October 2002.

In July Expedia acquired Seattle-based Metropolitan Travel in a move that positioned the company to compete in the corporate travel market. Metropolitan had about 230 corporate customers and some 150 employees. Following the acquisition Expedia launched a corporate travel site, Expedia Corporate Travel Services, which gave clients access to both call-center reservation agents and online booking tools. Expedia Corporate Travel, a full-service travel management company, was formally launched in November 2002.

Expedia’s revenue climbed dramatically in 2002, reaching $590.6 million, while net income jumped to $70 million. The company’s strong financial results were attributed to a significant and early investment in technology and diversification into wholesale accommodations, where the company could set prices and control margins. Approximately 60 percent of Expedia’s 2002 revenue came from the sale of wholesale accommodations, which the company called its merchant business. At the end of 2002 Expedia added a $5 service charge for all airline tickets not sold as part of a packaged trip.

The following year brought upper-level management changes as USA Interactive consolidated its ownership of Expedia. CEO Richard Barton announced in February 2003 that he was resigning as CEO to take a year off with his family. He became a director of USA Interactive and also consultant to Expedia’s new CEO, Erik Blachford, who was formerly president of Expedia North America. Another executive, Senior Vice-President of corporate travel Byron Bishop, also left Expedia around this time.

In March 2003 Expedia’s board of directors accepted a $3.3 billion buyout offer from USA Interactive to purchase the remaining 46 percent of Expedia’s shares that USA Interactive did not already own. USA Interactive’s stock-for-stock offer represented a 30 percent premium over Expedia’s market price at the time. The next month Hotels.com accepted a $1.1 billion stock buyout from USA Interactive for its remaining shares. USA Interactive (soon to be renamed InterActiveCorp) indicated that all of its properties would continue to operate independently. Expedia continued to outperform expectations in the first quarter of 2003, with net income quadrupling to $26.9 million on revenue of $198.8 million. The company noted growth in its travel-package business, which accounted for 30 percent of quarterly revenue. Expedia also planned to bolster its corporate travel offerings in the coming year by going after accounts of large corporations.

Principal Subsidiaries

Classic Custom Vacations; Expedia Corporate Travel; Travelscape.com, Inc.

Principal Competitors

American Express Company; Cendant Corporation; Hotwire; Navigant International, Inc.; Orbitz LLC; Priceline.com Inc.; Travelocity.com, Inc.; Travelweb LLC.