Travelzoo Inc. - Company Profile, Information, Business Description, History, Background Information on Travelzoo Inc.

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History of Travelzoo Inc.

Travelzoo Inc. is one of the few Internet media companies to survive the dot-com meltdown of the early 2000s and achieve profitability. Even so, the travel-related business has not skirted controversy or avoided regular predictions of its demise. Based in New York City, Travelzoo recommends the best available deals on airline tickets, hotels, cruises, and vacation packages on its web site, the Travelzoo Top 20 e-mail newsletter sent to nine million subscribers, and the Newsflash e-mail publication. The emphasis is on advertisers' current specials. Subscribers do not actually book tickets on the Travelzoo site. Rather, they connect to the travel company itself. Travelzoo acts as a clearinghouse and makes money from its more than 500 advertisers, which include travel agencies as well as stalwarts of the industry such as American Airlines, Avis Rent A Car, Caesars Entertainment, Liberty Travel, Marriott Hotels, and United Airlines. Travelzoo is known to be scrupulous about the offers it recommends from advertisers, portraying itself as a consumer advocate by making sure there is enough product and "test booking." Representatives, for example, call to see how long it takes to reach a sales agent. Travelzoo also has been known to lobby a travel company to make more product available. The company does business in North America and Europe, maintaining offices in Chicago, Las Vegas, London, Miami, Munich, Silicon Valley, and Toronto. Although Travelzoo is a public company, listed on the NASDAQ, it is 80 percent owned by founder, Chairman, and CEO Ralph Bartel.

Company's Founding in 1998

A native of Germany, Bartel earned a number of degrees before launching his business career. He received a master's degree in journalism from the University of Eichstaett in Germany, and a Master's of Business Administration from Switzerland's University of St. Gallen, where he also earned a Ph.D. in economics. He earned a second doctorate in communications from the University of Mainz, Germany. In 1996 he went to work as a managing assistant at Grunner und Jahr, the magazine division of the Germany media giant Bertelsmann AG. In 1998, according to the New York Post, "He hit upon an idea for an internet-based travel business that in retrospect looks both obvious and brilliant: start a Web site containing nothing but advertisements for the one thing every traveler wants to know--namely, what's the cheapest flight (or car rental, or hotel room, or package tour, you name it) to anywhere."

Bartel chose the odd but memorable name of "Travelzoo" for his business, and registered the company in the Bahamas for $850. Then using a personal computer at his parents' home in Hamburg, Germany, he set up his web site. Bartel's next task was to build a subscriber base in order to attract advertisers. What he devised was a gimmick that became the subject of Internet newsgroups, chain e-mails, and media scrutiny: He offered to give away three shares of Travelzoo stock to anyone who submitted their first name and e-mail address. He also promised not to sell the information, and to perhaps one day pay dividends. There were questions about the legality of the free offer, prompting a cursory look by the Securities and Exchange Commission (SEC). In general, it was dismissed by virtually everyone as a mere stunt. There was no chance, experts maintained, that Travelzoo would ever declare a dividend and make good on its promise. Nevertheless, the ploy at the very least generated interest in Travelzoo and Bartel had a base of subscribers with which to work. The people who signed up for stock would receive Travelzoo's newsletter of travel deals and be urged to at least check out the deals as a way to enhance the value of their stock in Travelzoo. Altogether, about 5.2 million "Netsurfer" shares were given away.

Bartel "soon found out, however," wrote Business Week, "that building an audience was the least of his problems. His Web site was virtually empty, and he had no experience in the travel business. ... 'I was too busy to think about that,' says Bartel. 'In the beginning, we had lots of problems just keeping one server up.'" Later in 1998 he established Silicon Channels Corporation in California to run the Travelzoo web site, with Mark Foster serving as president of the operation, setting up shop in the former headquarters of Lotus Corp. in Mountain View, California. To drum up advertisers and populate the web site with content, Business Week reported, he hired a former account executive from Budget Rent-A-Car, who offered free trial advertisements. The free offer worked well enough that Travelzoo soon began to attract paying customers. From May 21, 1998, when the web site first engaged in actual business through the end of the year, the company generated sales of $84,000. It was not enough to allow Bartel and Foster to quit their day jobs, but a promising beginning, nonetheless.

Business grew at a steady clip in 1999 and Bartel was now joined by his brother, Holger Bartel, who took over as vice-president of sales and marketing. He held an M.B.A. in finance and accounting and a Ph.D. in economics from the University of Gallen. In the early 1990s he came to the United States to serve as a research fellow at Harvard Business School, and then in 1995 went to work in Los Angeles for the consulting firm of McKinsey & Company before being lured away by his brother. By the end of 1999 Travelzoo had signed up more than 150 travel companies as advertisers, including American Express Vacations, American Airlines, Radisson Hotels, and Hilton, as well as local travel agents. They paid about $200 a month to post as many as ten deals on the Travelzoo site. To help them determine the winners, Travelzoo introduced a software program called Hitmaster, which provided real-time information on how many people were clicking on a particular posting. Advertisers could access the information on a password-protected web site and then adjust their postings to improve performance. Airline tickets were the top draw for the company, but Travelzoo also did well on cruises and Caribbean and Hawaiian vacations. In 1999, Travelzoo added a ski category, which quickly proved popular with consumers. When the year came to a close, Travelzoo recorded more than $950,000 in sales and net income of $105,000.

Over the next two years Travelzoo continued its strong growth. Revenues increased to $3.95 million in 2000 and $6.15 million in 2001. Net income grew to $362,000 in 2000 and $364,000 in 2001. As could be expected, the company enjoyed a commensurate improvement in the size of its subscriber base, which increased to 700,000 in 2000 and 1.5 million in 2001.

One of the provisions in the 1998 stock giveaway required that Netsurfer recipients certify that they were U.S. or Canadian residents at least 18 years of age. After two years Travelzoo reserved the right to cancel shares that had not been properly certified. Although that two-year period had passed, the company did not yet move to cancel shares, a decision that would have repercussions later. In the meantime, Travelzoo took steps to become a U.S. public company. In January 2001 Travelzoo Inc. was incorporated in Delaware as a subsidiary of the Bahamas-based Corporation. Also in that month Silicon Channels merged with the new corporation. Next, in March 2002, shareholders, in effect Ralph Bartel, voted to merge Travelzoo Corporation and Travelzoo Inc., with the latter becoming the surviving entity. Netsurfer shareholders were given another two years to exchange Travelzoo Corporation shares for Travelzoo Inc. shares.

Going Public in 2002

On August 28, 2002, Travelzoo made an initial public offering of stock priced at $6.50 per share. It was then quoted on the OTC Bulletin Board, where it attracted little notice. Only 14,500 shares were traded on the first day. Travelzoo began to catch the notice of investors in 2003, however, as the business continued to grow. In addition to its Silicon Valley technical operation, Travelzoo established its corporate headquarters in midtown Manhattan, and then in May 2003 opened an office in Miami to better serve its important advertising clients in Florida, a key tourism state. Three months later Travelzoo opened a fourth office, this one in Chicago to provide a presence in the middle of the country. When 2003 ended, Travelzoo increased the number of subscribers to more than four million. Revenues also approached the $10 million mark and net income totaled $853,000. Moreover, in late December 2003 Travelzoo stock graduated from over-the-counter status and began trading on the NASDAQ Smallcap Market.

The price of the stock soared to incredible heights in 2004. By all accounts, Bartel had nurtured a respectable little business, but the price of the stock was clearly not in keeping with the actual value of the company. Shares started at $8.70 and reached $18.30 by early June. The company announced that the stock would be moving to the NASDAQ National Market and by the end of August the share price reached $41, meaning that the company now had a market capitalization of $730 million. When the price of Travelzoo stock reached $71 in the middle of September, Ralph Bartel was a billionaire, on paper, at any rate.

What was driving Travelzoo's skyrocketing stock price were shortsellers, investors who borrowed shares of Travelzoo in the expectation that the stock would fall. They sold the borrowed shares in the expectation that they could buy them back cheaper later on and return the borrowed shares. In this way they would pocket the difference between the price of the stock when they sold it and the price at which they bought it. As Travelzoo stock began to shoot up in the spring of 2004, short-sellers, according to the New York Post, "began to circle." The way the newspaper described it, they were actually stepping into a trap laid by a crafty Bartel, who announced "that of the roughly 19 million shares outstanding, more than four million were being cancelled because the recipients had never bothered to certify their ages and countries of residence. This automatically reduced the public float by 80%, lifting Bartel's control back to more than 87%, while causing suddenly anxious short-sellers to begin chasing the stock that still remained public in order to close out their positions, which of course simply caused the stock's rise to accelerate. It was the start of a classic short squeeze."

Stock Price Peaks in Late 2004

The price of Travelzoo stock peaked in December 2004 at $106, chalking up a gain of 997 percent for the year. The price would steadily deflate over the months to come as, in the words of the New York Post, "one short-seller after the next gets carried out, feet-first, reducing demand for the shares accordingly." Unconnected to the price of its stock, Travelzoo carried on its steady growth. Sales approached $18 million in 2003 and totaled $33.7 million in 2004. Net income improved from $2 million in 2003 to more than $6 million in 2004, and the number of Travelzoo subscribers reached seven million.

Travelzoo opened a London office in April 2005 to do business in Europe. Later in the year the company opened an office in Las Vegas. For the year, revenues increased to $50.8 million while net income approached $8 million. Expansion continued in 2006, with a second European office opening in Munich, Germany. In April Travelzoo opened an office in Toronto, part of what Bartel called a strategy to build Travelzoo into a global media brand. In the process Bartel may have been forging an exit strategy, making Travelzoo into an acquisition target for perhaps Google or Yahoo. On the other hand, those giant Internet companies could opt to emulate the Travelzoo format and use their heft to put the squeeze on Bartel, threatening the life of the Internet company.

Principal Subsidiaries Canada, Inc.; Travelzoo (Europe) Ltd.

Principal Competitors

AOL L.L.C.; Google Inc.; Yahoo! Inc.


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