I recently learned that Expedia is planning to spin-off TripAdvisor, with hopes of an IPO later this year. My initial reaction: this is a win-win-win. Expedia gets to cash out, and use the proceeds however they wish. TripAdvisor (employees) will likely have more flexibility to be more aggressive and daring without having to worry about what the parent company says, or whether there are conflicts of interest.* And most importantly, if the company gains the capacity to be more innovative, we’ll all have an even better travel site.
I briefly worked at TripAdvisor in the summer of 2005. From my limited experience, I got the impression that it’s a well-run company, with dedicated, serious, and smart employees. In fact I once overheard a colleague who had worked there for a number of years complain that the only thing wrong with the firm was that the employees were too serious and didn’t have enough fun on the job. In some sense, I guess he was right. We didn’t have scooters, a bowling alley, or volleyball in the office. Like the employees at some firms around town.
As I was doing a little research to write this post, I came across this, by Tom Johansmeyer at Gadling, which struck a nerve. I wouldn’t normally write such a lengthy response to this type of blog post, but it was the only other recent coverage I found. Here’s the Gadling post in its entirety:
Travel industry … welcome to high finance! By the end of the year, online travel agency Expedia is expected to spin off its TripAdvisor unit in an initial public offering, according to MarketWatch. And, the deal could be worth as much as $4 billion.
Think about it: all those hotel reviews you’ve written, photos you’ve posted and advice you’ve sought could be worth as much as Facebook generates in advertising revenue this year. Clearly, you’ve been working hard to churn out all that free content for your fellow travelers.
So, here’s the cosmic justice in all this. Expedia, the largest online travel agency in terms of revenue (which is what really matters), is set to benefit in a big way. But, you don’t post to TripAdvisor for fame and fortune. You do it to help your fellow travelers. Well, imagine how much traveling the folks cashing in on this IPO will be able to do. Maybe they’ll take your reviews to heart!
Look for the IPO filing in a few weeks … and celebration by a handful of people around the Christmas holiday.
This is loaded with misleading nonsense. The fact that TripAdvisor “could be worth as much as $4 billion” is a testament to all the hard work of the dedicated employees and users. Expedia’s decision to spin-off the firm doesn’t create this value. The firm is worth what it’s worth – with a few exceptions that aren’t relevant here – and Expedia has decided that it would rather sell the firm to the public than hold it directly. In fact, the public shareholders of Expedia own most of the firm anyway. At it’s core, that’s what’s great about our market economy: people can sell their stuff.
Then there’s Johansmeyer’s assertion that the writers of reviews have been in some way duped. He implies that there’s something wrong with the fact that review writers have been working hard, altruistically providing free content, while a handful of people – the company owners – profit. That’s been the business model from day one. It was never supposed to be a secret.
Ten years ago the only way to get good travel advice was to ask a friend, pay a travel agent, or buy a travel guide. And each of these sources have their problems and biases. Now we can go online and read a free review written yesterday about a hotel we’re planning to book today. We’re better off. And now the hotels have improved incentives to be more accountable and to provide better service. We’re better off again. In exchange? Every now and again we go and write a review. Usually when we have a strong opinion. And the site gets better.
And the same is true for just about every internet company that offers free services. Do I expect Facebook to pay me for posting pictures on the site and messaging friends. After all, the site wouldn’t be very interesting if nobody used it. Of course not. Zuckerberg makes money for his execution of a good idea, and I have an easier way to communicate with friends. Do I expect Google to pay me a commission every time I click on an ad and one of their customers pays a fee? Same answer. They let me search the internet for free (and they send a surprising number of people to this blog). That in itself is worth something to me. These are far from perfect analogies, but the same general idea holds.
If it wasn’t for creative thinkers, such as TripAdvisor’s founder Stephen Kaupher, who take risks, we wouldn’t be better off in these ways. So they should be rewarded. And in 2004, Kaupher chose to sell most of the firm to what ultimately became Expedia. Expedia, which took a risk and invested money in TripAdvisor, and presumably made some decent management decisions since then, should also be rewarded. If they weren’t presented with reasonable incentives, we wouldn’t have TripAdvisor.
Not every industry works like this. Some have perverse incentives to do less than optimal things. And that’s a whole different conversation. But in principle, I see absolutely nothing wrong with Expedia selling TripAdvisor for a profit.
*I say this without any knowledge of whether or not the employees and founder are getting a fair** piece of the equity. Regardless, many of those decisions would have been made a long time ago, when the firm was first acquired by Expedia’s then parent company, IAC.
**There’s a big difference between what’s actually fair, and the way a person looking back with the benefit of perfect hindsight considers to be fair.