67 WALL STREET, New York – October 28, 2011 – The Wall Street Transcript has just published its Internet Services Report offering a timely review of the sector to serious investors and industry executives. This special feature contains expert industry commentary through in-depth interviews with public company CEOs, Equity Analysts and Money Managers. The full issue is available by calling (212) 952-7433 or via The Wall Street Transcript Online.
Topics covered: Internet Infrastructure and Services Consolidation – Enterprise Adoption of Cloud Computing – Growing Cybersecurity Demand – Social Networking Economics
Companies include: Blue Coat (BCSI); TJ Maxx (TJX); Yahoo! (YHOO); ATT (T); Akamai (AKAM); Amazon (AMZN); and many more.
In the following brief excerpt from the Internet Services Report, expert analysts discuss the outlook for the sector and for investors.
Herman Leung is an Analyst with Susquehanna Financial Group LLLP. Previously, he was the Vice President, Internet Research, for Deutsche Bank Securities Inc. Before that, he was an Associate at RBC Capital Markets. He’s also held positions with Nextag, Inc., TeleSoft Partners and Thomas Weisel Partners Group. Mr. Leung has a B.S. in finance from the California Polytechnic State University, San Luis Obispo.
TWST: In terms of the online travel space, you have a “positive” rating on Priceline, but you’re “neutral” on Expedia. What’s Priceline doing differently and better than Expedia?
Mr. Leung: I’m generally more positive on the online travel space. I think Priceline is enjoying a lot faster transaction-based growth compared to an Expedia, and it all has to do with Priceline’s positioning in the European market, the Asia Pacific market as well as the Latin American market. Now Priceline continues to enjoy the fragmented nature of the European hotel market, where they have the largest supply, and with the large supply they’re able to buy a larger and more relevant inventory of keywords to drive a very successful marketing campaign for the business for a very long time, and that has kind of entrenched themselves to be in a position to benefit from strong transactions volumes on the hotel side of the business.
Now compared to an Expedia, I think Expedia enjoys a lot of the same kind of dynamics of an online travel agency. But because of their positioning – which is larger in the U.S., where the chain hotels are operating – there is a higher risk because of the concentration of inventory on a limited number of chain hotels, and I’d say that the Expedia business has a lot more legacy technology infrastructure that they’re working to upgrade. So when you’re running on a legacy platform, there are disadvantages associated with scaling and getting the right levels of optimization. So over time, I think they’re working on it, trying to make things better.
TWST: Which of Priceline’s business units is currently experiencing the best growth, and what does that say about which direction the online travel space is moving toward?
Mr. Leung: I think online travel agencies benefit where there are areas of high fragmentation and a need for improved distribution to consumers. I’d say most of the online travel agencies are primarily hotel based, except for Orbitz (OWW). So where Priceline is moving are more geographies, and the focus for both Expedia and Priceline is to do a good job of expanding into Pan Asia as well as Latin America. Now in China, Ctrip (CTRP) basically dominates, for the most part, the China travel market today. But just because of the dynamics in China – where occupancy rates are near 90% plus to 100%, compared to Europe, where it’s more like 50%, and the U.S. is more like the 50% level – the need for online travel agencies is probably a little bit less because they’re able to just fill so much inventory. Ming Zhao, my colleague, covers CTrip in China. So where these guys are going are to geographies that need distribution, and I think Pan Asia, the Thailand, Singapores of the world and India I think are important markets, as well as Latin America, which is still an early-stage market for them.
TWST: Looking at the big picture, what are the risks for Google that investors should monitor?
Mr. Leung: I think with the MMI (MMI) acquisition for $12.5 billion, I would say that could be viewed as a big opportunity. We think the big opportunity is also balanced with plenty of risk and concerns around the hardware business they bought and how it protects the long-term growth of wireless and the Android ecosystem that Google is looking to protect for the long term. Google basically purchased 17,000 patents, a hardware business and a set-top box business for $12.5 billion. There’s little visibility into what Google bought for $12.5 billion other than that. The big focus was on: one, protection from a legal standpoint; and two, to extend the Android ecosystem; and three, to basically have a legal arsenal of patents to basically make potential litigators think twice before trying to sue Google because of its 17,000 patent black box.
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