Ready for take off

It's the world of online travel as envisioned by Barry Diller, CEO of USA Networks, which bought a controlling interest in online travel company Expedia last week, in a deal valued at $1.3 billion.

"This deal cements USA Networks as a major player in online travel and the travel industry overall," says Henry Harteveldt, senior analyst of Forrester Research in San Francisco. "It will impact the entire online travel industry going forward."

More than a third of the consumers in the U.S. and Canada label themselves as technology pessimists and don't want to buy travel online, according to Harteveldt. The USA Travel Channel bridges the gap, he says, and will only help grow the industry. The interactive travel channel is scheduled to launch in September and will run 24/7. It is also expected to be available through streaming media on Expedia's Web site, just like the Home Shopping Network broadcasts on HSN.com.

"This experience of building online and offline relationships parallels what we have been doing at the Home Shopping Network," Diller says. "Broadband is all about rich video that is also seamlessly connected to online services."

In a further push into the online travel business, USA Networks also announced the acquisition of private-label cruise and vacation packager National Leisure Group for an undisclosed price. Diller plans to integrate Expedia, NLG, the new travel channel and his stake in Hotel Reservations Network into one business unit. With these moves, USA Networks will control 17 percent of travel bookings and be one of the largest travel agencies in the world, Diller says. When the deals are done, USA Networks expects to generate $4 billion in annual gross travel bookings.

Creating one of the largest interactive travel sites has long been a goal for Diller. He says he has been after Expedia for the past three years. He also has interests in City Auction, Citysearch, dating service Match.com and Ticketmaster. His entertainment properties include the Sci Fi Channel, the USA Network cable channel, and a film and television studio.

As part of the deal, Expedia will remain an independent, public company, and CEO Richard Barton will remain in his post, USA Networks says. Diller will become chairman of Expedia, to oversee what he feels is an "exploding" market. "Expedia is going to grow," Diller says. "It's going to grow fantastically."

Forrester backs up his claim. The firm predicts that total U.S. leisure and business online travel purchases will grow from $24 billion this year, which represents 11 percent of the overall market, to $54 billion by 2004. "Travel is the single largest e-commerce category on the Web," Harteveldt says.

In fact, online travel has been one of the few areas to live up to the early promise of e-tailing. While hundreds of dot-com retailers have folded, online travel sites continue to prosper. And at least two major new sites have launched in the last 12 months: Hotwire and Orbitz, both backed by major airlines.

"There is a tidal shift of demand from people moving from the traditional world of booking travel to the online world," Expedia's Barton says.

Once the deal is complete, USA Networks is expected to own 75 percent of Expedia. Given the projected growth in online travel, it's surprising that Microsoft would want to give up control of such a plum. A Microsoft spokeswoman says Microsoft is moving away from the online content business, and saw the USA Networks deal as a good opportunity. Microsoft launched Expedia in 1996 and took the company public in 1999.

Strong rivals

USA Travel Channel faces competition from discovery Communications, which owns the Travel Channel, but the difference is the USA Travel Channel will be an e-commerce site, Diller says. In the recent past, Diller has talked with Discovery about teaming up. Discovery and Liberty Digital announced in December that they were exploring the possibility of starting their own commerce-based interactive travel channel.

Expedia also faces stiff competition from Travelocity.com, which controls 35 percent of the online travel market; Expedia controls 25 percent. Expedia and Travelocity had combined bookings that totaled $4.3 billion last year, according to PhoCusWright, a Connecticut research firm that tracks the online travel industry.

And Orbitz, which launched in June and is backed by five major airlines, has taken off like a sleek jet. It has already booked more than $100 million worth of travel and has more than 1 million registered users. In the next few years, Orbitz expects to capture about 20 percent to 30 percent of the online travel business.

To compete with newcomers such as Orbitz, Expedia has beefed up its technology in recent months. It has also made a big push to sell more lucrative, higher- margin vacation packages that helped the company reach profitability sooner than expected, Barton says. Expedia's main areas of revenue are its merchant business, which sells customized travel packages, and its agency business, which collects a fee for selling an airline ticket. Its remaining revenue comes from licensing and advertising, which are shrinking as the ad market declines.

Expedia released preliminary fourth-quarter results last week that indicate that the company's performance would be much stronger than expected. For the three months ended June 30, Expedia said it expects a loss of 11 cents to 15 cents per share. Excluding certain unspecified noncash items, the company forecast a profit of 20 cents to 23 cents per diluted share - substantially higher than the 9 cents expected by analysts surveyed by Thomson Financial/First Call.

Expedia also says revenue for the quarter more than doubled from a year ago, and gross bookings rose 78 percent to $802 million. The television tie-in will further spur growth for Expedia, Barton says. "The TV angle has so many possibilities. It will create demand with consumers, and we will be there to scratch that itch."