Israeli Startups Want in on Next Generation of Online Travel

Largely ignored by online giants, local companies try riding new wave of personalized travel.

For most Israelis, trips and vacations bring to mind the holiday seasons along with long queues at Ben Gurion Airport and booking flights just before prices go up. For a group of Israeli startups, however, your vacation is their bread and butter.

Around 15 Israeli companies are exploring innovative ways for reserving hotel rooms, taking advantage of frequent flyer points, and making smarter travel plans.

The travel industry was among the first fields to undergo an online revolution. Travel agents were forced to find new ways to deal with fierce competition from online agencies. Recall the last time you planned a vacation: Before calling your travel agent you probably looked for hotels or compared airline prices on websites such as Issta, Booking, or TripAdvisor.

Gulliver Tourism says 62% of the reservations it's handled this year have been through the Internet compared to 54% last year and just 7% in 2008. In May the company launched its mobile site. Since then the new site has been responsible for 15% of its domestic reservations and 7% of its foreign bookings. Focusing its activities on the Internet, Gulliver is at the forefront of the Israeli market where an estimated 20% to 25% reservations are made online. The rest are still closed the old-fashioned way: by phone or in person.

It isn’t just consumers who are holding back; innovation is seeping down slowly and services haven't changed in any significant way since first being launched. The global market is dominated by players that entered the industry in the early days of the Internet: Orbitz, with a market value exceeding $1 billion; Expedia, trading now in the range of $7 billion; and Priceline, the largest of them all, worth close to $50 billion.

Battling the giants head-on is daunting and Israeli companies wanting to break into the market need to find a special niche or develop technology that fits the needs of the major players.

"The travel industry accounts for 35% of the world's online commerce – about $350 billion a year," says Jonathan Meiri, CEO of flight search startup Superfly. "Most of it is fairly unsophisticated: People visit the websites, look for flights, apply filters, and eventually find something they consider reasonable. Each site has an inventory of flights and hotels. Most of the players in the field, including the major websites, make most of their money from hotels, not from flights where the earnings range is quite small." Commissions from selling airline tickets run at about 1% as opposed to around 15% for hotel reservations.

The new wave: Personalized travel

The new wave of online travel, which a number of Israeli startups are trying to hook into, is being powered by several major technological trends such as mobile communications, social media, location based services, and personalization. For instance, there are services that provide the ability to make last-minute reservations from a mobile device based on the user's history and preferences of friends. In many cases Israeli companies like Superfly utilize the immense volume of data on the Internet and, using big data tools, offer new tools and services. (The term “big data” refers to a “collection of data sets so large and complex that it becomes difficult to process using on-hand database management tools or traditional data processing applications,” according to Wikipedia.)

"The first and major wave was travel agencies going online, a long process that took 10 to 15 years," says Meiri. "Today we see that in tourism it is important to know who the user is, what his preferences are, and where he's traveling, factors barely reflected in the first wave. It was a mass marketing industry based on acquiring traffic from Google and its conversion into bookings. The major players buy the relevant keywords to attract the customers making reservations. Priceline pays over $1 billion a year to bring in traffic from Google."

Meiri reveals that Google gets paid $11 for each hotel reservation it helps Priceline obtain and $22 from Expedia. "The large companies don't care if it's the customer's first or tenth booking, or whether he prefers business class or coach," he says. "There is no concern about the person behind the search. This is where the opportunity lies."

Waiting for the global giants

Israel hasn't yet developed a critical mass of companies or know-how in the field of tourism. This is evidenced by no major investments in the area having been made, no large exits having been executed, and hardly any development centers having been set up locally by the leading multinationals in the industry.

One exception is the Orbitz development center in Herzliya whose story represents the digital tourism industry's situation in Israel in a nutshell. The local activity is based on Neat Research, a startup acquired by Cendant which later purchased Orbitz. The Israeli startup's activity was subsequently merged into the operations of Orbitz.

Neat Research developed a method for bundling flight plans, hotel accommodations, rental car and attractions together into attractively priced travel packages. United Airlines and Orbitz itself were among the company's clients. Following the merger the Israeli technology was transferred to India.

The staff in Israel, numbering 28 at its peak, formed the basis of the Orbitz's largest development center outside the U.S. but a decision was reached in December to close it down as part of a company-wide cost cutting drive. Most of the local employees were laid off in May and the center is slated to shut down completely at the beginning of 2014.

"Large companies like Expedia and Orbitz aren't interested in the Israeli market, probably due to the complexities of the language and market size," says Yori Landau, CEO of Orbitz Israel. "Booking.com has proved that it's interested in every place where sales can be made." Landau points out that innovation in the tourism industry has been nearly nonexistent.

The opportunity for Israelis: Big data

Landau has met with many Israeli startups in the tourism field, some of them candidates for takeover by Orbitz. "The Israeli startups are very niche oriented with respect to their place in the world of tourism," he says. "Within this world lie many problems, like how to translate the site for a specific place and what hotels to offer."

One area where Landau thinks a big breakthrough will occur and where Israel enjoys an advantage is big data. "When I want to travel to a popular destination I can see a thousand hotels," he says. "How can I find the deal that best suits me and at the best price? A better understanding of the user and inventory will lead to development and creation of value."

"Small startups need to grasp where they stand vis-a-vis the large companies," says Meiri. "Putting together a cool product isn't enough: It needs to be backed by a strong business model. Our model, for example, is organizing [travel program] points for users and helping them find a hotel or flights. Behind this we have a large volume of data on users that allows us to bring them to us at a lower cost. We concentrate on the world of business travel because there's more money in it. The top 10% of frequent travelers are responsible for 50% of revenues and close to 70% of the profit in this industry, and this is also true for hotels. On the other hand this is a sector where mass marketing is less relevant. Large companies have a hard time identifying these people and that's where data comes into play in our case."

Reuters