Senator Herb Kohl, Chairman of the Senate Antitrust Subcommittee, has weighed in on the proposed Google-ITA merger — and he has serious reservations about it. Senator Kohl wrote the Department of Justice expressing his belief that the DOJ should “scrutinize it closely.” Kohl isn’t standing alone on this. He joins a growing chorus of critics, Expedia, Orbitz and Travelocity as well as ACT, who fear the proposed merger will endanger the online marketplace for air travel. He states,
Many of ITA’s customers believe that access to ITA’s technology is critical to competition in online travel search because it cannot be matched by other players in the travel search industry.
Lots and lots of people have written about this. So what does this mean? Why is this deal so controversial?
ITA’s reservation search technology is licensed by almost everyone in the industry. ITA’s ownership of it now is not a great cause for concern because it is a small company that does a niche product well. But Google’s acquisition would be troubling precisely because it is not a niche player. Since it dominates the online search and advertising markets, it would be positioned to capture all the consumer data in the online travel industry.
At the center of all this commotion is software called QPX. This product by ITA is important because it powers the reservations systems for nearly two-thirds of all online travel bookings and 90% of all the searches on meta-search engines that combine fare results from a number of different airlines. This commerce occurs on sites familiar to most people, such as Expedia, Kayak, and Travelocity. This search industry is significant because 49% of all travel purchases are made online. QPX is used by almost every online travel agency and is the crucial element that allows the marketplace to function competitively.
Google’s proposed acquisition of ITA has sounded alarm bells throughout the industry. If it wanted to get into the airline travel agency business, like Kayak or Orbitz, Google could simply have licensed ITA’s technology just like those companies do. Just like all the other companies do. That it chose to buy ITA instead is what’s troubling. A company as big as Google wouldn’t spend $700 million on a product unless it provided a big advantage over its competition. Since Google isn’t even operating in this marketplace yet, the jump it would have to make is substantial. The most likely way to achieve this would be through leveraging its search dominance. It’s a step that Google CEO Eric Schmidt calls “deep integration.”
The last time Google deeply integrated was when it acquired Where 2 Technologies to take on MapQuest. Remember that site? Just a few years ago you used MapQuest as a verb. Back then, Google wasn’t a player in location search. But it integrated its newly purchased maps application into search results, and inflated the search ranking of its own service, while redirecting search traffic away from MapQuest to Google Maps. Leveraging its search dominance was deadly and very quickly MapQuest was left in the dust.
For Google’s “deep integration” of ITA to be worth its $700 million price tag, revenues will likely come initially from advertising where the company generates 99% of its profits. Airfare search results will be ranked based on whichever website pays the most in the advertising auction. Think Sponsored Links. This will add an extra layer of expense for online travel agents meaning higher prices for consumers.
But there’s an element to the merger that no one is talking about.
While Google licenses ITA, it will have access to every transaction record of everyone in the online travel industry using QPX. It will possess all the market data and customer history in the industry because that will be a condition for licensing the ITA software. Just as Google uses the data it acquires from search, search advertising and website analytics to drive its advertising sales, it will have the benefit of using all the market data that exists for the online travel industry.
And if Google decides to directly enter the market, it will be well prepared. It will know at exactly which price point it can undercut its competitors and where their breaking point is on profitability. Google will be able to sell at that price point because it will not have to pay to license its own software or advertise on its own site. Moreover, it will be able to deliver airfare search results immediately on its search page in exactly the same manner it handles map searches — eliminating the need to ever click away from a Google page. This is why the future of the online travel industry is in peril if this deal goes through.
Now, keep in mind Google offers assurances that it is trustworthy and is pursuing this deal because it will be “driving more potential customers to airlines” and “solve end user problems.” But this is the same company that brags about operating right at the line of creepiness, and that its stored knowledge of users is so vast and dangerous that children should change their names upon entering adulthood, lest their youthful transgressions are later used against them.
No matter how much it purports to do no evil, Google has become such a huge force online that it can blot out competition effortlessly. If Google succeeds in controlling ITA, how much success can new entrants have in that industry? How much innovation can be expected to occur when the tools and rules come the market dominant company? Questions such as these have led the European Commission to initiate an antitrust investigation of Google, a step the New York Times today suggested is the course the U.S. should pursue. Tasked with preserving competition in the marketplace, the DOJ will have to give full consideration to these issues before making its decision on ITA.
