By Daniel Wetzel
Digitalisation is changing the travel industry. Online platforms already play a leading role in selling air tickets and hotel rooms. Nevertheless, TUI CEO Fritz Joussen sees no cause for concern regarding the competition from Silicon Valley. The software engineer is convinced that the blockchain technology will soon lead to a shift in power on the Internet, anyway. He is consistently preparing the world’s largest travel group for that situation.
Welt am Sonntag:
Mr Joussen, Silicon Valley’s Internet giants have long since started to stir up the tourism market. Holidays are no longer booked in a travel agency but via an app. Platforms such as Trivago, Expedia or Booking.com seem to be dominating the travel business. Is market leader TUI concerned about the digitalisation of tourism?
Not particularly. At TUI, we are well prepared for digitalisation, I see no reason for concern here. Moreover, in my view, the widespread fear of Silicon Valley’s Internet giants is based on a fundamental misunderstanding.
If you go to Silicon Valley in order to learn something about software and the future of technology, I believe something is going wrong. After all, there isn’t that much to learn about technology and software development in Silicon Valley.
Sorry? This is where the big disruptive ideas that are revolutionising many sectors come from.
The ideas, that’s true - but that is not because software development is so revolutionary there. Just look at the budgets. The software development budgets are relatively modest in many of these Silicon Valley start-ups. Most companies launch their commercial services with 30 man-years of software development worth around 40 to 50 million euros. During my time with Vodafone Germany, our IT budget stood at 300 million euros, a multiple of the amount available to some of the globally well-known online platforms during their innovation phase. The software development budgets of Daimler or Bosch are also much bigger than those of any start-up you will find in Silicon Valley.
And yet, the US start-ups make big waves based on these budgets.
The difference is: The platforms you have mentioned, e.g. Expedia or Trivago, are giant traffic machines attracting a maximum number of visitors to their website with a relatively simple service. After all, Internet users always flock to the largest known provider. "The winner takes it all", while all smaller competitors vanish into thin air. It is therefore crucial to build maximum traffic in a minimum of time. Software development only plays a secondary role. This also applies to a global travel start-up, which in its early phase spent 80 million euros for advertising, primarily to Google, for every 100 million euros worth of revenues, only in order to attract Internet traffic to its own website. This is what you can learn in Silicon Valley.
In Silicon Valley you can learn all about traffic and reach, ambitions to change the world, total product focussing, deadly speed, around-the-clock competition.
So we should not fear the likes of Google?
We should show respect, but not fear. Silicon Valley companies aren’t tech companies but rather media companies by their very nature. Who pays for Google? It is always the advertising client, not the user. Booking is financed from commission paid by the hotels, not by charging the customers themselves. TUI, by contrast, is a customer company. I’m not saying that one is better than the other – you should simply be aware that Internet companies never get any money from their users.
Nevertheless, these companies generate profits on the Internet from services that theoretically might also have been offered by TUI. You might be criticised for not inventing Airbnb yourselves.
The start-up business simply has its own peculiarities. Of 100 Googles, Airbnbs or Bookings launched, only one will survive. Discovering that one early on is the business of venture capitalists. Groups such as TUI but also Daimler or Bosch have a different type of investor, and these investors expect a reliable dividend and a steady cash flow. They would not allow us to take the same risks as venture capitalists.
But don’t your investors get cold feet when they see that Internet start-ups are snatching ever bigger slices of the pie?
Of course, the Internet has been digging a grave for entire sectors. Today, for instance, the record industry has basically disappeared because everything works via streaming and downloads. However, our investors do not have any reason to be concerned.
Because the online platforms are organised horizontally: As already explained, attract the largest possible number of users as quickly as possible. However, they have nothing to do with the provision of the actual service, i.e. the flight or the trip. Customers who have a problem with their hotel or want to cancel their flight will not find a contact person on the online platform. Our business is fulfilment, the actual service provision.
What do you lose if you outsource large parts of your marketing and sales activities to Google? This is the first place most people visit these days to inform themselves about their holiday, rather than TUI’s homepage.
If we were still a pure trading business only buying and reselling hotel rooms, online platforms such as Booking would be a problem for us. However, we have now transformed as a vertically integrated business. This means we continue our own marketing and sales activities, but we now generate more than 50 per cent of our profits from the actual service provision, i.e. our own hotels and cruise ships.
Does that mean that you do not depend on Google as a sales channel?
We currently spend a double-digit million amount on Google – not really much in relation to our turnover of 17 billion euros. And customers who have booked holidays in a Robinson Club will not need Google in future to find Robinson. By contrast, online platforms spend 30 to 80 per cent of their turnover on Google – an entirely different order of magnitude. We only use hotel booking platforms where we need them. For instance in the US, where we do not have our own sales team to fill our hotels in the Caribbean. This vertical strategy has made us very successful. In Jamaica, for instance, we have a market share of 60 or 70 per cent from Europe, and in Mexico 50 per cent.
While the federal government is seeking to accelerate digitalisation in Germany, it is also planning to introduce stricter regulation for online companies such as Airbnb, Uber, Facebook or Google. Allegedly there are even plans to set up an Internet Ministry.
Personally, I would certainly not be in favour of creating an Internet Ministry. Precisely because Internet start-ups depend so heavily on speed, passion and competition, Ms Nahles’ [B2] plans to first of all introduce the 40-hour working week in this area are toxic. If you want to be successful on the Internet, you need open markets, deregulation, consolidation, economies of scale and strong competition – but you certainly do not need a Minister for the Internet. If the federal government allows open markets, it will not need to worry about the financing of start-ups, they will emerge all by themselves.
Is overregulation to blame for the lack of German companies following the likes of Google?
In Anglo-Saxon countries, you immediate generate enormous economies of scale as they all use English as their common language. That is why Americans will always be strong whenever contact with consumers matters. In Europe, our strength is the B2B business, i.e. industrial production, engineering skills and Internet 4.0, machine-to-machine communication: This is where German companies such as Bosch, Siemens or Daimler will remain unbeatable. The only question is whether this will still matter in the future.
Why shouldn’t it?
We might be world champions in a discipline that would no longer be crucial? This far, customers have purchased German cars because they run very smoothly, have a lot of horsepower or offer great precision in steering or switching gears. In my view, these primary characteristics will play a less important role in future, above all in relation to electro mobility. Another example is the telecommunications sector – here, Nokia was unbeatable in terms of battery life. Today, nobody buys a mobile phone because of its battery life any longer, and Nokia has disappeared from the market. This means: Being the global leader in production alone isn’t everything. It can never fully replace success in the consumer area. Germany and Europe must not fully abandon this consumer area, and that is why free, deregulated markets are so important. They are also important because the blockchain technology will soon lead to a major reshuffling of the cards on the Internet.
Blockchain technology facilitates tamper-proof sharing of data and access rights on the Internet without having to go through a central intermediary. The blockchain-based virtual currency Bitcoin, for instance, can therefore do without central or commercial banks. What is the role blockchains might play in the travel sector?
The blockchain technology will fundamentally change the Internet – in all areas. This far, knowledge and information has been centralised in Internet nodes – e.g. Google, or flight booking portals. These companies are using their privileged position as data collection points to gain monopoly-like profits. The blockchain disrupts this asymmetry. In future, every computer in the network will have equal rights. Each one can have all the data. Central intermediaries will therefore no longer be necessary. Today’s Internet giants will lose their data monopolies.
Blockchain has this far been regarded as an experimental Internet technology hardly anyone seems to understand.
Almost every big company is currently dealing with this technology. The blockchain will not be on the Internet, it will be the Internet. This will create a non-hierarchical Internet. So far, there have been a few privileged and many ignorant users on the Internet. We are now talking about the democratisation of all information structures. The web nodes will be destroyed. The information in a blockchain is shared among all computers in a tamper-proof manner, and it is visible to all users. This revolution will happen very fast in the B2B sector. At some point, the rules in the B2C business will also change. Companies currently gaining monopoly-type profits by offering hotel accommodation on the Internet will have to get used to the idea that in future, every participant in a blockchain will potentially have access to all information about beds available.
Are you drawing any specific consequences for TUI?
Last year, we sold our Hotelbeds bed bank to financial investors for 1.19 billion euros. After all, if I bet the blockchain will be coming, this means that the business model of a database for hotel beds will change enormously. Back then, we decided to fundamentally reorganise TUI Group’s entire hotel bed portfolio and place it on a blockchain. This will initially help us internally, creating enormous efficiency enhancements in managing our hotel capacity. We do not rule out that it will also be available for use by third parties in future. Incidentally, we are also planning to exit running our own data centres.
Are you planning to entrust all TUI data to the cloud despite the global hacker attack last weekend?
There are very few large operators of cloud data centres worldwide, for instance Google, IBM, Amazon and Alibaba. These companies have highly sophisticated systems, are enormously efficient, reliable and very secure. Running your own data centres is very expensive. The size of the centres is based on the theoretical peak load – which in reality is hardly ever used. The cost of cooling TUI’s data centres around the globe alone totals almost one million euros per year. Our total IT spending amounts to 450 to 500 million euros per year - almost half of our earnings. We could easily cut this by 20 per cent and still be better. We are planning to end all IT write-downs by 2025. This means that we will no longer invest in proprietary systems from 2019. As a software engineer, the idea that we should continue to run our own data centres in future and thus directly compete with the cloud giants seems rather absurd to me.