Get­ting to Know You

Ex­pe­dia has bet ev­ery­thing o un­der­stand­ing the psy­che of the mod­ern trav­eler

Bloomberg Businessweek (Asia) - - MARKETS/ FINANCE - By Drake Ben­nett Pho­to­graph by Tina Schula

On a Mon­day morn­ing in mid-Oc­to­ber, in a sub­urb of Seat­tle, a young woman named Megan went on­line to make some travel plans. She and her par­ents, along with her sib­lings and their spouses, wanted to go some­where trop­i­cal in Jan­uary, and in a flurry of texts and Face­book mes­sages, Belize had emerged as the lead­ing can­di­date. It had fallen to Megan, as it of­ten did, to ex­e­cute. So, a lit­tle af­ter 9 a.m., she typed the name of the on­line travel agency Ex­pe­dia into her browser bar and be­gan to ex­plore flights.

Her pref­er­ence was for Alaska Air­lines—she’d had good luck with the car­rier—but when she couldn’t find any­thing, she started look­ing at Amer­i­can. She no­ticed there was only one ticket left for the least ex­pen­sive flight, which caused her some con­cern. She grew more ap­pre­hen­sive as she no­ticed that the cheaper avail­able flights had long lay­overs. Then she saw that some of the lay­overs were in Los An­ge­les, and she briefly con­sid­ered a visit to Dis­ney­land.

Af­ter eight min­utes, with­out set­tling on a flight, Megan be­gan to ex­plore ho­tels. The pho­tos from a “jun­gle spa” re­sort caught her eye—it looked ad­ven­tur­ous but also pam­per­ing— so she was crest­fallen when she no­ticed that it was booked up for the dates she wanted. “Oh, so sad,” she said softly. She looked through the re­views of an­other promis­ing ho­tel and found it had no Wi-Fi, which wouldn’t be a prob­lem, but also ants, which would. She stum­bled onto a re­view some­one had writ­ten about go­ing to a re­sort to re­cover af­ter “a sur­pris­ing end to a mar­riage en­gage­ment.” That bummed Megan out a bit.

Then she found what looked like the one. This ho­tel wasn’t on the beach, but the re­views men­tioned a spiral stair­case, which sounded neat, and an on-site bak­ery. Megan loved bak­eries. And it wasn’t too ex­pen­sive. She’d have to con­firm with her fam­ily, she re­minded her­self, but it was pretty close to ideal.

At that mo­ment, a dis­em­bod­ied woman’s voice came over a speaker and told Megan she was fin­ished. The voice be­longed to an Ex­pe­dia user-ex­pe­ri­ence re­searcher named Su­san Motte, who, with a team of pro­gram­mers and de­sign­ers from the com­pany’s ho­tel-shop­ping and ac­tiv­i­ties-book­ing teams, had been sit­ting in the next room watch­ing Megan through a two-way mir­ror. Megan, who ac­tu­ally was plan­ning a fam­ily trip to Belize (and whose full name Ex­pe­dia asked not to be used, for pri­vacy rea­sons), had been in­vited to the Us­abil­ity Lab at Ex­pe­dia head­quar­ters in Bellevue, Wash., com­pen­sated with a gift card, and asked to use the site as she would at home. An eye tracker mounted on the bot­tom of the com­puter mon­i­tor logged where Megan was look­ing on the screen at any given mo­ment. Sen­sors on one side of her face mea­sured the elec­tri­cal im­pulses in two mus­cles—the zy­go­mati­cus ma­jor, which tugs the cor­ner of the mouth into a smile, and the cor­ru­ga­tor su­per­cilii, which fur­rows the brow. Megan’s emo­tions, man­i­fested in in­fin­i­tes­i­mal changes in mus­cle fiber tone, had been play­ing out on a screen mounted on the wall in the ad­join­ing room. A red waveform on a scrolling graph tracked her ten­sion dur­ing the ses­sion, a green waveform below it, her de­light.

All of her re­ac­tions, and her an­swers to the ques­tions Motte asked as Megan used the site, went into a grow­ing data­base. Ex­pe­dia, the par­ent com­pany of more than a dozen trav­elo­ri­ented brands in ad­di­tion to Ex­pe­, is ob­sessed with fig­ur­ing out how to make book­ing travel on­line more in­tu­itive, more ef­fi­cient, and more en­joy­able. That means, among other things, un­der­stand­ing the psy­chodrama of trip plan­ning: the shift­ing de­sires and par­a­lyz­ing wealth of choices, the un­set­tling gy­ra­tions in room rates and ticket prices, the com­pet­ing de­mands of fam­ily mem­bers and bud­gets and sched­ules, the need to bal­ance the thirst for ad­ven­ture against the fear of Zika virus in Latin Amer­ica or Is­lamic State in Europe.

There’s a mod­est body of lit­er­a­ture on the psy­chol­ogy of va­ca­tions, and one of its find­ings is that much of the plea­sure comes from an­tic­i­pa­tion—a 1997 study found that peo­ple are hap­pier think­ing about a trip be­fore­hand than when they’re ac­tu­ally tak­ing it. The goal of Ex­pe­dia’s us­abil­ity re­searchers is not only to make Ex­pe­dia’s var­i­ous sites and mo­bile apps more ef­fi­cient but also to make them an ex­ten­sion of the va­ca­tion fan­tasies that are al­ways run­ning in the back of our heads.

The ba­sic act Megan per­formed un­der such close scru­tiny plays out tens of mil­lions of times a day—in homes, in of­fices, in line at the coffee shop on smart­phones. In 2015 peo­ple per­formed 7.5 bil­lion air­fare searches and booked 203 mil­lion ho­tel room nights through Ex­pe­dia and the other sites owned by the com­pany—Ho­, the “meta-search” site Tri­vago, the busi­ness travel site Egen­cia, the dis­count site Hotwire, Aus­tralia’s Wo­tif, and oth­ers. Over the past decade rev­enue has more than tripled, from $2.1 bil­lion in 2005 to $6.7 bil­lion last year, and the stock price has risen five­fold. Along with Price­line, whose sites in­clude Price­, Kayak, and OpenTable, Ex­pe­dia dom­i­nates the on­line travel busi­ness.

Like Price­line, Ex­pe­dia is a sur­vivor from an ear­lier tech era—both date from the mid-1990s—but un­like con­tem­po­raries such as Net­scape and Ya­hoo!, they con­tinue to thrive. Both were for­tu­nate enough to get big quickly in a busi­ness that ben­e­fits greatly from scale and brand recog­ni­tion, and their growth over the past sev­eral years has cor­re­lated with a long, grad­ual eco­nomic ex­pan­sion dur­ing which both va­ca­tion and busi­ness travel have steadily grown. Both have made big ac­qui­si­tions— most of Price­line’s growth has come from Book­, the dom­i­nant Euro­pean ho­tel web­site, which it pur­chased a decade ago. Ex­pe­dia, for its part, last year ac­quired the orig­i­nal on­line travel com­pany, Trav­e­loc­ity, for $280 mil­lion, the up­start Or­b­itz for $1.3 bil­lion, and the va­ca­tion rental site Home­Away for $3.9 bil­lion.

What dis­tin­guishes Ex­pe­dia is its ded­i­ca­tion to un­der­stand­ing the psy­che of the mod­ern travel plan­ner. That may be

most ap­par­ent in the Us­abil­ity Lab, but much of it hap­pens on the sites them­selves, as the com­pany re­lent­lessly tests new ideas about look and feel and func­tion. Ex­pe­dia’s lead­er­ship be­lieves the re­sult­ing base of knowl­edge is what has al­lowed it to re­cover from ear­lier stum­bles. It’s also what they’re bank­ing on to keep the com­pany grow­ing in a more hos­tile cli­mate, as in­vestors worry about the threat of Airbnb, con­sol­i­da­tion in the ho­tel in­dus­try, and the ever-present specter of Google mov­ing into the travel busi­ness. Then there’s the ques­tion of whether peo­ple are go­ing to feel like trav­el­ing at all in what looks like a very tu­mul­tuous world.

Ex­pe­dia wasn’t orig­i­nally an on­line travel agency. In 1994,

Rich Bar­ton, a young Mi­crosoft en­gi­neer, was put in charge of a pro­ject to cre­ate an en­cy­clo­pe­dic travel guide on the then state-of-the-art tech­nol­ogy of CD-ROM. “I pretty quickly de­cided that was a dumb idea,” he says. Bar­ton per­suaded Bill Gates to in­stead let him cre­ate a web­site where peo­ple could book trips rather than just re­search them. The travel tech­nol­ogy com­pany Sabre, which was owned at the time by Amer­i­can Air­lines and han­dled reser­va­tions for many of its com­peti­tors, was work­ing on Trav­e­loc­ity, and got to mar­ket first. But Trav­e­loc­ity, ham­strung by its air­line own­er­ship, was slow to move from flights into the higher-mar­gin busi­ness of ho­tel rooms. In 1999, at the height of the tech bub­ble, Ex­pe­dia was spun off, with Bar­ton as CEO. Mi­crosoft re­tained a ma­jor­ity own­er­ship stake.

“It was re­ally one of the first busi­nesses to use the In­ter­net as a ser­vice for con­sumers,” re­calls Barry Diller, now Ex­pe­dia’s chair­man and se­nior ex­ec­u­tive. “I couldn’t wait to buy it.”

Diller had al­ready run Paramount Pic­tures and Fox in his pre­vi­ous ca­reer as an en­ter­tain­ment mogul. In 1999 he was in the process, through a se­ries of sales and ac­qui­si­tions, of turn­ing a col­lec­tion of TV sta­tions into an In­ter­net com­pany. USA In­ter­ac­tive, as it was called at the time, pur­chased Mi­crosoft’s stake in Ex­pe­dia in 2002 for around $1.3 bil­lion, then bought the rest of the com­pany the next year. In 2005, Diller’s com­pany, now called IAC/In­terAc­tiveCorp, spun off its prof­itable travel brands—Ex­pe­dia, Ho­, TripAd­vi­sor, and Hotwire—un­der the um­brella of Ex­pe­dia Inc., with Diller re­tain­ing con­trol of a ma­jor­ity of the share­holder votes.

The new Ex­pe­dia strug­gled. Ho­tel and air­line part­ners re­sented the com­pany for the rates it de­manded and started to take steps to cir­cum­vent it. An­gered that con­sumers could of­ten find lower prices on Ex­pe­dia than on their own sites, some ho­tels ended their re­la­tion­ship with it. The ma­jor U.S. air­lines started up a ri­val, Or­b­itz.

Most dam­ag­ing, though, was the rapid rise of Book­ and its com­pet­ing busi­ness model. On Ex­pe­dia, cus­tomers had to pay for ho­tel rooms when they booked. This so­called mer­chant model re­lied on buy­ing large blocks of rooms at whole­sale rates and mark­ing them up. The mar­gins were large; for the priv­i­lege of get­ting their wares into the gi­ant global shop win­dow that was Ex­pe­dia, ho­tels of­ten had to pay 25 per­cent or more of the room rate. Book­, on the other hand, used what was called the agency model: It al­lowed users to pay when they checked out (and it took a smaller cut in the form of a com­mis­sion). When cus­tomers got a taste of that flex­i­bil­ity, they tended

The goal is to make Ex­pe­dia’s sites and apps an ex­ten­sion on n va­ca­tionof the fan­tasies that are al­ways run­ning in the back of our heads

The prob­lemis, pur­chas­ing the tick­ets and re­serv­ing break the the room spell

to pre­fer it. With cus­tomers leav­ing, rev­enue stag­nant, and com­mis­sions squeezed, Ex­pe­dia in 2005 faced ob­so­les­cence.

The com­pany’s CEO, Dara Khos­row­shahi, 34 at the time, was painfully aware that he didn’t know ex­actly how the com­pany should re­spond to its new trou­bles. The Ira­nian-born for­mer in­vest­ment banker, who’d been IAC’s chief fi­nan­cial of­fi­cer, de­cided he didn’t have to. If Ex­pe­dia could be re­made as a dif­fer­ent sort of com­pany, its cus­tomers would pro­vide the an­swers them­selves. At the time, Ex­pe­dia was cen­trally or­ga­nized, in terms of both peo­ple and soft­ware. Tech­nol­ogy de­ci­sions for all sites ran through one chief tech­nol­ogy of­fi­cer; mar­ket­ing ques­tions ran through one chief mar­ket­ing of­fi­cer. Each site was an in­ter­con­nected tangle of code. If pro­gram­mers wanted to add the abil­ity to han­dle credit card billing in Ger­many, for ex­am­ple, that might end up caus­ing er­rors in the flight-search fea­ture. As a re­sult, changes were rare: A site would be up­dated only a cou­ple times a year. Each change “would break the sys­tem down be­tween a week and God knows what,” Diller says in an in­ter­view at IAC’s Man­hat­tan head­quar­ters. “We couldn’t change a Tues­day to a Thurs­day with­out thou­sands of hours of work.”

Khos­row­shahi made the case to Diller that the com­pany needed to spend hun­dreds of mil­lions of dol­lars hir­ing and equip­ping coders to do work that would be largely in­vis­i­ble to con­sumers. “We just had to go in and in­vest very ag­gres­sively with­out hav­ing a clear re­turn on in­vest­ment,” Khos­row­shahi re­calls. Diller bought it, and he per­suaded the board to buy it, too. The com­pany’s tech spend­ing in­creased from $130 mil­lion in 2005 to $362 mil­lion in 2010—in 2015 it was $750 mil­lion. Brand Ex­pe­dia alone has in­creased its cod­ing work­force since 2010 from 200 soft­ware en­gi­neers to 2,000.

To­day each of Ex­pe­dia’s brands has its own tech­nol­ogy and mar­ket­ing teams, and they’re en­cour­aged to set their own course. They all ben­e­fit from the mas­sive in­ven­tory of ho­tel rooms and plane tick­ets and the fi­nan­cial re­sources and tech­no­log­i­cal fire­power of the par­ent com­pany. How they use all that is up to them. “They are com­pet­ing against each other, they steal from each other,” says Khos­row­shahi. We’re sit­ting in a meet­ing room near his desk at Ex­pe­dia head­quar­ters in Bellevue, next to a white­board that he grad­u­ally fills with draw­ings and charts. “Some­times they do the same thing as each other, which is kind of a waste,” the CEO con­cedes. “You know, they’ll build the same ex­act fea­ture twice. But the trade-off is speed.”

The pace at which the sites evolve is paramount to him, and the most im­por­tant

mea­sure of it at Ex­pe­dia is how many tests the soft­ware en­gi­neers run. The com­pany’s gospel is “test-and-learn,” pro­nounced as a sin­gle three-syl­la­ble word. Also called A/B test­ing, it bor­rows the logic of phar­ma­ceu­ti­cal re­search: Test an in­no­va­tion against the sta­tus quo and see if there’s any dif­fer­ence. It’s com­mon prac­tice at Google and Face­book, but it was rel­a­tively un­known in the on­line travel in­dus­try un­til Book­ started us­ing it. Ex­pe­dia’s com­mit­ment to the prac­tice is quasi-cultish. In 2011, when the com­pany’s chief prod­uct of­fi­cer, John Kim, started there, Ex­pe­dia was run­ning 50 to 100 tests a year. Last year it ran 1,750.

To­day Ex­pe­di­ans, as they call them­selves, don’t de­bate ques­tions, they test them: How big should a but­ton on the web­site be? Should ho­tel avail­abil­ity be pre­sented in list form or cal­en­dar form? How likely is it that some­one typ­ing a par­tic­u­lar trav­el­re­lated search query into Google is book­ing a trip right then, and how much should Ex­pe­dia there­fore pay for an ad that will run in the search re­sults page? What should the Ex­pe­dia brand’s loy­alty pro­gram look like, and should Hotwire have one at all? Are peo­ple more likely to re­serve a ho­tel room if they’re shown how few are avail­able at a par­tic­u­lar price? (As it turns out, yes, even though they say they hate it.)

Ex­pe­dia’s de­ci­sion, for ex­am­ple, to pre­serve the dis­tinct brands it pur­chases rather than sub­sume them into the Ex­pe­ site was driven by re­search show­ing that even in the world of on­line com­par­i­son shop­ping, peo­ple re­tain stub­born brand loy­alty. Ac­cord­ing to Aman Bhutani, pres­i­dent of the Ex­pe­dia brand, the same per­son might shop for a cheap busi­ness ho­tel on Trav­e­loc­ity, a nicer ho­tel for a fam­ily va­ca­tion on Ex­pe­, and a car rental on Hotwire, even though all three are Ex­pe­dia sites of­fer­ing iden­ti­cal in­ven­tory. In keep­ing with the rad­i­cal ag­nos­ti­cism of the com­pany, Bhutani isn’t par­tic­u­larly in­ter­ested in why that is. “I just want to know what you like and how many other peo­ple are like you so that I can pro­vide those ser­vices,” he says.

Two-thirds of the A/B tests Ex­pe­dia runs show no ef­fect or a neg­a­tive ef­fect, and most of the suc­cess­ful ones are only marginally so. “It’s a game of inches,” Khos­row­shahi says. “What you have now is lots and lots of inches, and it adds up to very big num­bers.” This stock­pile of tech­no­log­i­cal and be­hav­ioral in­for­ma­tion al­lows the com­pany to give its brands a far more nu­anced un­der­stand­ing of what cus­tomers want and how to get them from win­dow-shop­ping to book­ing. “The en­tire on­line travel mar­ket has im­proved its con­ver­sion rates,” says Ryan Wil­liams, an an­a­lyst at Mill­ward Brown Dig­i­tal, a con­sult­ing firm that tracks In­ter­net use. “But Ex­pe­dia’s con­ver­sion im­prove­ment is out­pac­ing the mar­ket.”

Ex­pe­dia sees its trav­eler-be­hav­ior data as a de­fense against su­per­fluity. De­spite its size and name recog­ni­tion, Ex­pe­dia doesn’t have its own ho­tel rooms or its own air­planes. It’s a mid­dle­man among other mid­dle­men. Book­ still has the big­ger in­ven­tory of ho­tel list­ings; Google shows flight and ho­tel re­sults right in the search page. Even TripAd­vi­sor, spun out of Ex­pe­dia in 2011, has be­come a ma­jor com­peti­tor by al­low­ing vis­i­tors to book di­rectly on its site. For Ex­pe­dia to con­tinue to jus­tify its com­mis­sions and its ex­is­tence, it has to be bet­ter than ev­ery­one else at di­vin­ing va­ca­tion­ers’ de­sires. That draws on both the steady churn of test­ing and learn­ing and the more open-ended qual­i­ta­tive work in the Us­abil­ity Lab, where re­searchers use terms like “de­light” and “fan­tasy” in a clin­i­cal man­ner.

“We’re do­ing more work to un­der­stand the dream state, the plan state,” says Scott Jones, who runs Ex­pe­dia’s de­sign and user-ex­pe­ri­ence depart­ment. “Peo­ple are al­ways plan­ning a trip. They may not be ac­tively shop­ping for a trip, but they’ve al­ways got this idea in mind.” The prob­lem, as he sees it, is that pur­chas­ing the tick­ets and re­serv­ing the room breaks the spell. “Book­ing travel on­line has be­come so full of de­ci­sions and an­swer­ing ques­tions,” Jones says. “Peo­ple are al­ways day­dream­ing about trips, but as soon as they come to our site, it be­comes more of a work thing.”

Ev­ery De­cem­ber the an­nual Ex­pe­dia Part­ner Con­fer­ence

takes place in Las Ve­gas, the same week­end as the Na­tional Fi­nals Rodeo. Cruise-line ex­ecs and car rental com­pany reps mix along the Strip with hon­est-to-God cow­boys and cow­girls. The con­fer­ence is a chance for peo­ple who do busi­ness with Ex­pe­dia to meet with one an­other and with the com­pany’s lead­er­ship. It’s also a time for Ex­pe­dia to con­vince all of those part­ners that the com­pany’s no longer the bully of a decade ago. Many of the new fea­tures Ex­pe­dia is rolling out are for its sup­pli­ers, al­low­ing them, for ex­am­ple, to mon­i­tor what sort of pho­tos or de­scrip­tive lan­guage at­tracts the most Ex­pe­dia users. For the past few years, Ex­pe­dia has re­duced com­mis­sions, sac­ri­fic­ing prof­its to in­crease its in­ven­tory by lur­ing more ho­tels to work with it.

One of the con­fer­ence’s main events was a con­ver­sa­tion be­tween Khos­row­shahi and Diller. At the front of a cav­ernous ball­room at the Bel­la­gio Ho­tel & Casino, the two sat on­stage in leather club chairs. Khos­row­shahi wore tight jeans and a slim, short suit jacket; Diller wore a pin­striped suit, driv­ing shoes, and no socks.

The talk ranged from the fu­ture of ca­ble tele­vi­sion to the health ef­fects of Coca-Cola to Don­ald Trump—“an evil man,” Diller called him. “I’m very proud that for 30 years I haven’t spo­ken to him, be­cause I’ve al­ways dis­liked him.” Mid­way through they turned to the ques­tion of whether peo­ple were too scared to travel. The pre­ced­ing weeks had seen both the Paris and San Bernardino ter­ror at­tacks. Is­lamic State was promis­ing more. Trump was telling sell­out crowds he wanted to de­port 11 mil­lion il­le­gal im­mi­grants. In Europe, cit­i­zens were re­volt­ing against the idea of wel­com­ing waves of Syr­ian refugees into their coun­tries, and in the U.S., politi­cians and pres­i­den­tial can­di­dates were re­ject­ing the idea of let­ting in any at all. The world was feel­ing hun­kered-down.

Khos­row­shahi asked Diller what it meant for the travel in­dus­try, and the two started talk­ing about Sept. 11. The at­tacks, along with ev­ery­thing else they wrought, caused peo­ple to stop trav­el­ing al­most en­tirely for months. Diller was clos­ing the pur­chase of Ex­pe­dia at the time, and he and Khos­row­shahi had de­bated whether to back out.

“We sat around and talked,” Diller said into his mi­cro­phone, “and I don’t re­mem­ber, you may re­mem­ber who it was who said, ‘If there’s life, there’s travel.’ ” “I think that was you,” Khos­row­shahi in­ter­rupted. “Oh,” Diller said. “So nice to hear. I’ve al­ways given credit to some­one else.”

It’s a res­o­nant line, and over the day and a half that re­mained of the con­fer­ence, var­i­ous Ex­pe­dia ex­ec­u­tives worked it into their pre­sen­ta­tions. It’s com­fort­ing to the com­pany to think that the cur­rent trep­i­da­tion about the world be­yond one’s bor­ders will pass. It’s com­fort­ing, too, to think of travel as a fun­da­men­tal hu­man ac­tiv­ity, no mat­ter what hap­pens. Even among civ­i­liza­tion’s ra­dioac­tive re­mains, Mad Max will need to get from one place to an­other. He might need to find some­where to stay when he ar­rives. And if there’s an on-site bak­ery, who’s to say he won’t want to know about it? <BW>

A test sub­ject t is wired with sen­sors that will recordd im­pulses in her fa­cial mus­cles us­cles as she nav­i­gates the site.e. She’ll be mic’d’d up and ob­servedved through a two--way mir­ror

In the Us­abil­ity Lab, an eye tracker traces what draws a sub­ject’s at­ten­tion. The ob­ser­va­tion room

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