Online Travel: The Race Is On!

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IAC, by contrast, a relative upstart with $5.4 billion in annual revenue, increasingly is focused on online commerce — and its travel portion generates 31% of revenue and 61% of operating profit. IAC also owns LendingTree, dating service Match.com, local online resource CitySearch and the largely offline cash generators Ticketmaster and Home Shopping Network (HSN). Diller's strategy: use the cash from Ticketmaster and HSN to promote his online ambitions, and be there as consumers migrate from all manner of traditional services to the Web. "We fundamentally believe that more and more things are going online," Diller says. "We are experts in bringing businesses online and we're just going to keep doing it category by category, hopefully to infinity."

Right now Diller's focus is on travel, and it's easy to see why. The overall industry is growing less than 5% a year, but the online component is taking share swiftly and growing more than 20% a year. This year 1 in 3 U.S. travelers will book online, up from 15% in 2002 and 20% last year, says research firm PhoCusWright. "Henry (Silverman) was at a big disadvantage" before the Orbitz deal, says Larry Haverty, managing director at State Street Research. Now he not only can share in the industry's robust growth but also use Orbitz to promote and protect his franchises.

While online services may get better with Silverman and Diller driving the industry, don't look for a price war that would make travel a lot less expensive. "They will compete intelligently," says Haverty. "Price cutting is not how you get Wall Street to give you" a higher stock price. IAC shares have lagged as investors at first puzzled over Diller's plan and then were disappointed with financial results that fell short of big expectations. Cendant has performed better. But some investors haven't forgotten a disastrous acquisition and accounting scandal six years ago.

The real test for the online agents may be how they fare against the hotels and airlines, which have begun trying to drive bookings to their own websites with guaranteed lowest rates and amenities like a free spa visit. "The Holy Grail for online travel firms will become dynamic packaging," says analyst Christopher Gutek at Morgan Stanley.

It's no big deal to book a rental car, flight or hotel stay. The future is in adding dinner reservations, event tickets, customized tour information and an appointment with the masseuse. "Packaging the thousands of things attendant to travel is the way to compete," and Expedia is on its way, Diller says. Orbitz puts Silverman further down that road too, and if it all leads to better service for consumers, this is a battle, it seems, that everyone can live with.