The Definitive Oral History of Online Travel

Diener: I kept expanding [the HRN website] and in October of 1997, which we considered the industrial revolution of the Internet, the Internet became interactive. We were on the IBM mid-frame system. In October is when the technology was released that made the Internet interactive which means someone communicating with us could get an instant confirmation of their hotel booking. That was huge. That almost instantly doubled to tripled our business. In 1997 we were still fairly small, I'd have to look at the revenues at the time. We're talking fairly small numbers. It was in the tens of millions of dollars, not hundreds of millions, I believe.

Every hotel we approached loved it because it was new technology, it was a new source of business. The way we negotiated with hotels they were more than happy to give a better rate for this channel because it was a new channel. The expenses were less because we didn't need call centers; the cost of processing the transaction was a fraction.

Expedia and Travelocity did not negotiate their own hotel deals, they just took what was in the GDS system. We negotiated a deal with Travelocity where we became their source of hotel rooms and we ran the hotel program for Travelocity on a private-label basis using their UI. We were the back end for Travelocity. Remember when they had better values on hotels? People eventually started to realize that there's a lot of hotels, it's a big industry, it's a profit source, and so they started to do it like that. There was a company called Travelscape, which was just doing business in Las Vegas on a model similar to ours. Expedia ended up buying that company. Through that purchase, that was [Expedia's] gateway into the merchant model.

Barton: Priceline was just turning from kind of a glint in Jay Walker's eye into a reality with what I would call an interesting, gimmicky, Name Your Own Price thing, which was interesting for sure, but we never took it all that seriously because we thought it was probably rather market-limited.

That's how it stacked up initially. Expedia really began to pull ahead once we started becoming a marketing spender and once we shipped this new Best Fare Search, this new faring technology, which enabled users to shop for the first time, they could shop price, and schedule at the same time. Not only did we pass Travelocity, we started to really lap them.

Walker: As soon as Priceline launched, Expedia copied, at the time, our Name Your Own Price service and put it up on their site.

We sort of said, 'You can't do that guys.' We had patented the business process of securing a unit of demand with a credit card for an irrevocable offer and eventually we settled and then they stopped doing it, but they never thought it was going to be very big anyway.

Karl Peterson, who was founding CEO of Hotwire and currently is a Sabre board member and managing partner and head of Europe for TPG: I joined Texas Pacific Group (TPG) in 1995. I was working in the early days of private equity, and we were always doing things off the beaten path, which was one of our themes or investment strategies. We came up with the idea of starting an online business with a bunch of industry partners because we thought they had all the entrepreneurial spirit of two kids in a garage. It was interesting. But, given the fact that we knew a bunch of big corporates, we could bring a team of investors and corporate partners together to have an advantage over the two guys in a garage, but that we would run it independently.

We went around to a bunch of different players in different industries, and because of what my founders at TPG had done first with Continental Airlines, taking it out of bankruptcy, and then America West not too long after, we had a pretty good understanding of how airlines worked. We had a pretty good understanding of this anomaly in the marketplace, which was Priceline.com. It had given a huge stake in the business to Delta and negligible, if any stakes,to anybody else.

At one point in time, Delta's ownership of Priceline was worth more than the airline itself so we used that strange phenomenon to rally the rest of the industry together to create Hotwire.

You know Larry Kellner was at the time chief financial officer, I believe, and maybe becoming chief operating officer of Continental. They're thinking was you've got Expedia and Travelocity doing all of the traditional retail distribution online, and Orbitz was going to play there and to make sure that supplier power becomes great. Although, now it's ironic that they're all owned by the same enterprise [Expedia Inc.] Again, at one point in time the airlines wanted a big piece of Expedia.

They called it T2, the Travelocity Terminator, which was Orbitz. It was the same business model, but just with a lower-cost distribution scheme, which made it a little bit harder to get the customer acquisition right. When you gave your own business [Orbitz] a tougher starting hand, which is how much you're going to make per transaction, they had to do smart things but it got a lot of traction.

Hotwire was the analog saying, well, if Orbitz is to be the Expedia or Travelocity rival, Hotwire is to be the Priceline rival. It was just a different class of inventory, the deep, distressed inventory that had to be sold in a very different way to allow the traditional retail pricing channel to be less effective. The opaque channel [Hotwire and Priceline] is what we all called it. Back then, pre-9/11, the airlines had structurally much greater excess capacity than they do today, and the way that they could optimize the revenue management was to sell a few more seats on all these flights by using the opaque channel.

It was the combination of the airlines wanting to get an investment in the [distressed inventory] channel, and they were not going to get it from Priceline. Remember, Priceline made it's living – pre-Booking.com – on this pricing gimmick of you tell me what you want to pay and after you've figured that out, I'll tell you whether or not that works or not. For a while it took a long time to respond. We used to say that there was the triple whammy. If you had to do the research, you didn't know whether or not you were going to get it [the reservation] once you did the research. And then oftentimes if you did it, you probably paid more than the minimum price … With the help of the airlines, we came up with a model that said we'll just tell you the price that we're willing to offer you for this. As a result, we were able to catch Priceline on air volumes relatively quickly with a fraction of their marketing spend.

Walker: The airlines resisted us because Bob Crandall didn't really like us. And so the airlines resisted us and they kept themselves in check for six months or so until, one day, Delta Air Lines blinked and said, 'How much business could you write on us?' I think the number at the time was about $200 million we had that could flow over the Delta network at good yields. Eventually, Delta Air Lines said, 'You know what, if you give us enough business, we will break ranks here,' and also Delta wanted warrants. They wanted stock in the company because that was at the beginning of the Internet craze. So, at the time, everybody sort of said, 'Wow, you have to have an Internet company.' Delta said, 'Hey, if we get some stock in this company, we not only sell a lot of airline tickets but, guess what? We can also probably make some capital gains.' Sure enough, Delta made a billion dollars on its Priceline stock.

In fact, Priceline was worth more than the entire airline industry pretty quickly. At the time, the airline industry wasn't worth much. The airlines were in brutal fare wars, they were losing money, and so Priceline had a market cap in the billions relatively quickly and the airline industry as a whole didn't have a market cap in the billions. Delta got warrants for being the first airline to actually give us real inventory at real prices in their system. We then subsequently gave warrants to every major airline.

Ellen Lee, who co-led the initial business planning of Orbitz.com while at Delta Air Lines and currently is senior vice president, global digital, at Hyatt Hotels: If you remember, if you were alive back then – you were, but a lot of your readers probably weren't. Back in 1997, 1998, if you remember, Delta and United were investigating a codeshare. It never came to be, but what it kicked off between the two parties was a series of conversations. And one of the conversations we had with them was about IT. I was working in Delta technology for Charlie Feld. It's when Charlie Feld was CIO at Delta. And we went up to Chicago a couple times, United came down to Atlanta, and we would just talk about IT topics. As one of the offshoots of one of those discussions it was United that said, 'Hey, we're investigating this concept for a supplier-all travel agency.' I don't remember the exact thing. 'Would you like to help us go at it?' Delta said 'Yes.' Charlie said, 'Yes.' And, then, I was assigned to the project, so then it was handed to me to work on.

It started with United, yes. I'll tell you where I believe it came from United. McKinsey was in United prior to 1998, so let's say 1997, and they did a study for United called 'Distribution 2000.' This is all hearsay from my perspective, because I wasn't at United. It suggested this idea of a supplier route -- if you can't beat them, join them type of travel agency strategy. Because online travel was taking off. The airlines felt that they had lost control of the offline distribution channel at that point, and they didn't want the same thing to happen online. And, you had players in there that were sort of growing that. One, Expedia, was owned by Microsoft, and the other one, Travelocity, was owned by Sabre [and American Airlines]. So they were looking at big companies. Then, you had Preview Travel that was kind of swimming out there too. So you had these big companies owned by even bigger companies. That we believed there was a risk that they could come in and dictate terms of distribution, and we didn't want that to happen.

Everybody had a website. But we knew you are going to get your loyalists and this is still true to this day, although maybe less so, is that you're going to get your loyalists. And, we knew that Delta.com was very strong in Atlanta, in our strong markets, but Delta.com is not going to be the first place that a Chicago customer goes to. So there's always a play for some aggregator of product. Get your loyalists on your own channel, which I think is still very much the strategy today. I think the airlines have done a much better job than the hotels. Then, you got to play in the other channels to get at the non brand loyalist, or non-core market customers. It was a fear that that not only would get away from us, but would get into the hands of players that were very strong in terms of negotiation.

Lenza: United and Delta had been working on their version of Orbitz. And Continental and us [Northwest] had been working on the same thing in parallel without knowing about it. We first, Continental and us, tried to get it through ATA [Air Transport Association of America, now called Airlines for America] to try to get an industry approach to owning this new OTA. Eventually, we realized that nothing but smaller numbers [of airlines] is going to work. American, of course, was not invited because they still owned Sabre and Travelocity.

Jeremy Wertheimer founder and former CEO of ITA Software and currently vice president, engineering at Google: In '92, so I knew about Sabre, I had heard of it. I basically wrote some software for my friend who was a travel agent. Simple stuff, just to earn money. One of the things I initially said was, 'By the way, this is like an ancient system you use.' 'Oh, no, this is state of the art.'

I said, 'That might be, but it's kind of ancient; it's not how we do things.'

Jeremy Wertheimer's software gets the attention of several travel agencies and by the summer of 1996 he gets some funding from Middlegate, a startup that later changes its name to Biztravel.com and is trying to build small-office travel agencies. Wertheimer and his partners get forced out of Biztravel.com in a corporate power play and Wertheimer starts showing his software, which is the first comprehensive search for fares and flights, to people at American Express, Carlson Wagonlit Travel, Rosenbluth International, Microsoft, Expedia, and Travelocity. It is the beginning of the groundwork for the founding of ITA Software.

Wertheimer: The short story is eventually I end up meeting the airline guys through a bunch of more machinations and United and a bunch of other airline guys. Then eventually through the airline guys, because they kind of didn't know what to do with us, they introduced us to the global distribution systems. Fine. We meet with the GDSs. Long story short, by '97 we're talking to the GDSs. This is where I met everybody at Sabre and everybody at Amadeus and everybody at Galileo. But basically Sabre kind of blew us off a little bit.

We had two computers because I built them. It was what I could afford. These computers, I had to build them by hand because I wanted to fit them in a carry-on piece of luggage and yet they had to have a ridiculous amount of memory for the day… So I had a Pentium Pro computer with like 512 megs of RAM, which at the time was a king's ransom. I built two computers by hand. One for me, one for Carl [ITA co-founder Carl de Marcken] and this is what I would literally take around, this thing just fits in a carry-on and we'd bring along a little terminal. We'd borrow a terminal, like a CRT or eventually we went to a flat panel over the years.

Basically the United guys introduced us to the Galileo people, and we did this demo for the [Galileo] guys in Chicago and they brought the United guy. This meeting was a wonderful meeting. I still remember it. The United guys were sort of friendly. Then during the course of the meeting, you could see the Galileo people got it and they got very, very concerned.
They got very concerned that we were with United, so they kind of like tried to, if I remember it, they tried to edge United out of the room. United, who had been paying attention, once they understood that signal then, said 'No, we are [staying]'. So very funny the way it started off. I remember joking at the time and saying something like, 'Well if there's a lot of turbulence over Chicago [the headquarters of United and Galileo], we might end up deferring and landing in Nice.'

Which is almost exactly what happened, basically.

In August 1998, we do a deal with Amadeus. I suspect, on the one hand, they were interested in new technology.

I think on the other hand, since what we were doing was in the U.S., it was probably less threatening in the short term because if we were disrupting we'd be disrupting the U.S.

Basically it was a combination of a bunch of things. It was a 10-year licensing deal. Amadeus guaranteed the revenue. It was paid per search basically with a guaranteed floor for 10 years. Plus they invested in a 20 percent stake of the company but to me, well the thing is I went from basically being a grad student, newly married and funding this out of credit cards and a wing and a prayer, to I had guaranteed funding with which I could hire 10 people easy, and it was guaranteed for decades.

When we did the deal in August 1998, Amadeus had a trade show and they had a bunch of PCs. They were going to show off their new technology; they were mostly a mainframe shop. What ended up happening was when they signed us they basically put our software on all the machines. That's what everybody looked at; that's what everybody talked about. They were going to use it throughout their system. The supporters of the deal were Philippe Chereque, who's the head of strategy in Nice. And obviously the U.S. Amadeus guys in Miami were very supportive of us. There was a German data center guy who was highly supportive, and CEO Jose Antonio Tazon in Madrid was supportive.

Pretty soon after we did the deal, the head of development in Nice, a fellow named Jacques Lignieres basically went – and we heard this from many, many sources – and protested to Philippe, Antonio and the works council, went and said we're not going to allow you to displace 400 French programmers with four Americans. Anyway, the outcome of that was Amadeus basically is not really being totally supportive of us so what we decide is, well, I guess we need to roll this out on our own.

Jacques Lignières, who was senior vice president for development at Amadeus in Nice: I'm out of business since 2004, and my memory becomes a little bit lazy. I apologize if it's the case. But regarding the ITA case, I remember perfectly!

I can understand the position of Jeremy, but I must say that it did not happen like that. First of all, in 1998, I had no more than 100-120 people working on fares, and not 400. To reallocate 100 people to other tasks should not have been a problem considering the growth of the company. In fact, Philippe Chérèque and David Jones had been very much impressed by the user interface done by ITA (and I agree that it was very nice) but both of them had no clue about the true engine (especially for international fares) necessary behind the user interface and moreover the value of this engine. They convinced the CEO José Tazon to do something with ITA even if José was a little bit reluctant.

The truth is that, when I discovered the terms of the contract negotiated by Philippe, I realized that it was the kind of partnership where you pay a guy in order that he can fuck your wife, drink your wine, and sell your home. I must confess that Jeremy was much more clever than Philippe and made a good negotiation from his point of view.

Wertheimer: The short story on the Orbitz piece is so on November 4, 1999 – I know the date, it's my sister's birthday – we roll it out at PhoCusWright. We basically built it and I spent all my money on my first ad. It was the back cover of the brochure at PhoCusWright. We had a picture of our screen and we said, 'Today we revolutionized travel planning, one click all the answers.'

People I knew at United came by and said, 'Oh, you built that thing you were talking to us about years ago.' I said, 'Yeah,' and they said, 'Oh, well, we're doing this website.' At the time we're thinking do we do our own website? Do we do something with somebody? Whatever. They said, 'We're doing this website and you should power it.' I said 'OK. You guys at United?' They're like, 'Yeah and some other guys you know. Delta.' 'Oh really?' I said, 'Delta, wow, that's interesting. Anybody else?' 'Oh, Al Lenza at Northwest.' 'Anybody else?' 'Oh, yeah, Steve Cossette at Continental.' Basically by and large, I was like yes, fine. We decided OK…

Then we sort of independently established [our own] software but I think once we had encountered Orbitz that same day that we launched, it was clear to us, at least the decision we made was, yeah, we should just go with these guys. We could do a similar thing but this is backed by four of the five airlines. Then later with American, it was quite a lot; then five of the five.

They [the founding Orbitz airlines] then did some RFP. They didn't have any choice at the time and I wrote them a one-page answer. This was like December 31 or January 1, 2000 or something like that. Then they came back with one of the clarifications, and I added a sentence, and they said, 'Fine, OK.'

Alex Zoghlin, who was employee #1 of Orbitz and is currently head of technology at Hyatt Hotels Corp.: We were building the thing [Orbitz] from the ground up and one of the most important pieces – probably the most famous – was ITA Software. When we were looking at how can we really execute on price and actually come up with every [fare] possibility, the only real solution that existed that nobody used, and didn't really work at the time, was ITA. But it was clear to me and Jeremy that the issues that ITA had technically were all solvable. Even though Amadeus, I think, invested in ITA they kind of trashed it to us. Sabre trashed them to us. Worldspan, which was our GDS partner, so to speak, also trashed them. But it was very clear to me that if we were to kind of realize that dream that we had thought so long ago at Travelocity [as a consultant] to really provide a customer with transparency of an entire market, that ITA would have to be part of the solution. They had some pricing issues, but those were actually pretty easy for them to fix. They just never had a customer that was kind of driving the feature set.

The first issue was they had never built scale. They could get it to run on a PC, but they could never figure out 'That's great if one person's asking, but what if a thousand people asked for the lowest prices at the same time?' So we actually did almost a Manhattan-like project to take the software, and figure out how to scale it over ... You know, now it looks exactly like a cloud system. I knew it was possible because we knew Google was doing it. We just didn't know how. We said 'if we just take thousands of computers off the shelves, and figure out how to automate the distribution of the software and the data in real time, we could make this work for thousands of people.'

Wertheimer: It [ITA] was not only known but it was sort of validated. Not only did Amadeus like us but these guys – Orbitz liked us – and actually put it out there. It was better. We had a better mousetrap and everybody got to see it. For us, what happened was … the first one was America West, was Doug Parker and his team. They essentially said, 'Oh, we should have this on our website,' and if I remember, I remember doing the deal with Doug Parker, which was crazy. We were in their box at the stadium in Phoenix. He was watching the basketball game or we were at the baseball stadium with his whole senior team. We did a deal and it was great. At the time, it was all very new to me and I sort of watched this crazy young executive and if I were smart I probably should have predicted he was going to eventually take over US Airways and American because he was very gung-ho and that's fine. Anyway, so we launched with America West and then we started picking up airlines.

I tell young entrepreneurs, basically it took five years to get our first airline and five years to get the rest of them. I mean we powered American, Delta, United, Southwest, and a whole bunch of airlines that merged into different airlines. We pretty much got them all, the very big ones. We've had them, we still power these guys.

Brad Gerstner: At Harvard Business School I got introduced to two guys who were providing angel funding to some of my classmates, and those two guys happened to be Joel Cutler and David Fialkow. I met with them and at the time they were running a startup called FC Capital, Fialkow-Cutler Capital. I was the token lawyer helping a few teams that were pitching them on ideas. David pulled me into the other room and said we are not going to fund your friends but we'd like you to come work with us.

David and Joel had partnered with Ron Fisher of Softbank. It's funny, Softbank is on top of the world again. Softbank's had a wild ride. But in 1999 Softbank was the hottest venture firm in the country because they had funded Yahoo, and Yahoo was the hottest company in the country. And so Joel and David were talking with Ron Fisher about opportunities to partner on an idea and the area they kept coming back to was online travel because David and Joel had started a company called Lastminute Travel that was the predecessor company to NLG [National Leisure Group]. And they ultimately sold that company to a consortium that sold it to America West Holdings, the airline.

Joel and David had this idea that we could build the first cruise and vacation package booking engines. A start to that, because you needed to have all the contracts with the cruise lines and the vacation packagers and whatnot, [they thought] that we ought to go buy back this company NLG from America West and then we could put money in on top of that, OK, to build out the technology. Then we could effectively go license that technology to Expedia, Preview Travel, Travelocity, Yahoo and Priceline, and we could effectively power the cruise and vacation tabs for those various websites that were all growing very quickly. Even before I graduated from business school, I thought that sounded like a pretty good idea. In my previous legal work I had helped a travel agency buy up a bunch of American Express agencies so I knew a little bit of something about the business and I set out to help them – this is pre-General Catalyst – help them along with SoftBank buy this company.

America West, much like Allegiant Travel is today, always had a progressive view of what an airline was and ironically the guy at America West who we interacted with on this deal – and became very good friends with over this deal – was Scott Kirby, who's now the president of American Airlines.

The guy who was my partner on putting this deal together was Aaron Gowell [who became co-CEO with Gerstner of NLG; Gowell is now co-founder and CEO of SilverRail]. Aaron's background: He had been at Bain Capital and then he joined David and Joel when they were still FC Capital, Fialkow-Cutler, and he worked on a deal with them there, and so he and I ended up kind of working side by side on the acquisition of NLG.

Cheryl Rosner, who was director of marketing at Kimpton and eventually became president of Hotels.com and Expedia Corporate Travel: What took me to what was then 1800hotel.com and Hotel Reservations Network was when I was at Kimpton Group we did the alpha and beta for [Priceline.com's] Name Your Own Price around 1998. At the time Tom LaTour, who was our president, was the one person on our team who was really interested in all this stuff and said, 'Let's turn it over to her,' which happened to be me.

The reason why I'm so interested in it at the time was we were bumping up against the same problem as a boutique hotel group, which was it was very difficult to merchandise hotels to the travel agent, to the consumer, to any intermediary, or customer without a flag.

We were sitting at the time with a total of 23 hotels – 16 that were in San Francisco – that were all under different names. As the director of sales and marketing at that time, for me it was like how do you merchandise all these different hotels? The only thing that we had that was a common thread was the 800 number. Kimpton Group at the time was locally, a very strong brand in San Francisco, but in the outside world nobody knew it. In talking with the Priceline guys I was like 'Huh, this is really interesting.' The idea of the Internet as a way to merchandise the hotels felt very interesting. And in going through the process with them, it became very apparent that it was a very interesting path to selling hotel rooms. But the way that Priceline was doing it was commoditizing a product that shouldn't be commoditized. A unique product that should be un-commoditized, basically; it was not the way to go. And so that experience was awesome, and I'm forever grateful to have had it. That's what led me to then start to say, 'OK, who else is thinking about this in the space?'

Along with HRN, there was Las Vegas Reservation Systems, which became Travelscape, which then became part of Expedia. There were a bunch of players that were kind of like what you would think of as regional that were starting to think about the Web as a way to transact and sell hotel rooms. Everybody was thinking about the Web in that way on the sales side except for the hotels.

Then, with Andy Pells, who was at HRN with Bob Diener and Dave Litman at the time, I started to talk with them about what's the power of this. What can you really do to drive bookings. Andy and I sat and talked for awhile, and at that point what I started discussing with them was the idea of an extranet portal option for the hotels because the idea of faxing allocations – which everybody was doing at the time – it didn't make sense to me. If you are going to use the Web to transact why wouldn't you use the Web to update inventory … That was the conversation I ultimately had with Dave. I'm using first names because it's like family. I just said to Andy, 'Hey, if you can prove that you guys can really move inventory I'll get on a plane, and come and see you next week instead of you seeing me, and we can talk through, not only a long- term contract, but also some thoughts around extending the products, so it makes a lot more sense for the hotelier.' The power of HRN was unbelievable at that point.

Diener: We expanded it greatly through '98, '99. Our expansion was tremendous. During that period other sites started to see the technology and catch onto it. We had tremendous growth. We had started discussions with a company called InterActive Corp. Actually, it later became InterActiveCorp. We sold the company to InterActiveCorp. in late 1999. We still had a terrible name, Hotel Reservations Network.

Dara Khosrowshahi, who was vice president of strategic planning at USA Networks, and went on to become CEO of IAC Travel and is currently CEO of Expedia Inc.: For me, one of the lessons is you never know where you're going to be inspired, you never know where a great idea is going to come from and we heard about this company, Hotel Reservations Network. It was 1-800Hotels. It was a sales process being run by, I think, CSFB [Credit Suisse First Boston] and it was a company that was founded by Bob [Diener] and Dave [Litman], who when we met and thought were just absolutely terrific entrepreneurs. They were clearly moving a telephone-based advanced reservation system online. When we looked at the deal — it wasn't a matter of our getting the deal cheap because we were the highest bidder for the auction – but our bet was that this move online was going to be faster than anyone expected it to be. I'm going to say this was in June or July 1999. We thought Bob and Dave were superstars. We thought that their business was going to go online really fast and we wanted to make a bet with them.

I think Bob and Dave's genius was finding out that if you had directable traffic, if you had directable volume, volume that didn't necessarily want to stay in a particular hotel, or wanting to stay at a hotel in a market and wanted a great deal, there was money in that. And, there was scale in that. Then you recognize that – and what I think none of us understand was – just how big a business that was going to be. How healthy a margin business it was going to be and how fast it was going to come online. It was an area that was completely ignored by traditional travel agents because they were in the air business and there was lots of commissions to go around there and there were lots of fees to go around there.

Brad Gerstner, former co-CEO of National Leisure Group, founder of Room 77, former Orbitz Worldwide board member and founder Altimeter Capital: [National Leisure Group] started negotiations with Expedia. Then we meet Diller; and Dara Khosrowshahi had bought a company for Barry Diller in 1999 called Hotel Reservations Network. Remember Barry's background: He owned the Home Shopping Network so he understood this idea that you could have a phone number that people could call and you have a catalog or you have television to drive the demand and everybody calls this phone number, and you have real scale economies and commerce. Using that same model he sees this company called HRN, or Dara sees it, and they had 1-800-HOTELS. Hey, you don't know a travel agent call 1-800-HOTELS. We'll get you a better deal on hotels. That was the business.

We're talking about the future Hotels.com, but at the time it was all telephone-based. Diener and Litman those guys are amazing entrepreneurs but they weren't at the time necessarily in the technological vanguard in the way that Rich Barton was. But Dara had bought the company for Diller and it was exploding, it was growing so fast. Dara understood that this was all going to move online and this company was just going to be huge and if you remember, HRN's massive breakthrough was their partnership where they ran the hotel business under private label for Travelocity. Travelocity outsourced all hotels to HRN which was an incredibly positive move for HRN but probably signed the death knell for Travelocity. Because while Expedia went on to develop all their capabilities around hotels, Travelocity never did because they outsourced. They let HRN do it and by the time Travelocity understood strategically many, many years later that they had to do it themselves, they were too far behind.

Barton: [Hotels were] not yet a big part of the picture in 1999 or 2000. We knew it was coming, though. We had seen Priceline launch with the Name Your Own Price thing for hotels. We also were becoming smarter about the wholesale business through tour operators so we knew there was another model. We started really pushing on that. There was Hotel Reservations Network, HRN. There was one called LVR, Las Vegas Reservation Network, too, which was actually Travelscape. Yeah, they were the tour-operator model coming onto the Web. We took notice of that, and we were pretty excited about that model because we were only making 15 or 20 bucks an airline ticket at the time, I think. On a per-hotel-reservation basis, these kind of wholesale or tour operators who were selling unbundled hotels were making big multiples of that on a per-reservation basis. We ended up playing around at building some stuff, and then we ended up buying Travelscape [in January 2000], which maybe you remember, maybe you don't, but that was the way Expedia got into the ...Oh, my gosh, how can ... merchant model. I couldn't remember the name [laughter].

Yeah, the merchant-model hotel business. We bought it for about $100 million probably in 2000, and we integrated it really quickly onto the golden path, what we called the golden path, which was the path that the user took through our store on the way back to get the milk at the back of the store, the milk being the airline ticket. On the golden path ... You know how a grocery store puts the milk at the back of the supermarket because they want everybody to walk through? That's what they come in for, and they want everybody to walk through the aisles and pick other things and put it into the basket, so right along the golden path we placed merchant hotels, and it was a really big success really quickly.

Tim Poster's Las Vegas Reservation Systems, which changed its name to Travelscape in 1998, recognized the power of Microsoft and was advertising and working with Expedia, which was featured on the MSN homepage. Rich Barton's Expedia was independent of Barry Diller's IAC at the time, and Dara Khosrowshahi was not yet affiliated with Expedia, but was IAC's deal-maker. Expedia would acquire Travelscape in 2000 – but first came some bad blood and a thwarted deal around October 1999 between IAC and Travelscape.

Poster: We were going to do a deal with Barry Diller. This part wasn't public, but now who cares? They were going to buy us. I think this was in the very early days of InterActiveCorp. They made an offer to buy us for $120 million. You've got to remember at the time that was like all the money in the world to me. We didn't have any debt; my partner and I owned the whole thing. We said, 'Yes.'

They had people out here in our offices for months, like counting every paper clip. It was just one of those grueling legal things. Every single thing was a fight over everything. It was like four months of that. My partner Tom [Breitling] and I, we were supposed to go to New York after this was all done, and we had spent like $300,000 or $400,000 on legal fees. Let's say we were supposed to be in New York on Wednesday, well, Tuesday afternoon I get a call from the guy who is now the CEO of Expedia, Dara Khosrowshahi. He called me and he said, 'Listen, I got to tell you, I've got some things that you're probably not going to want to hear, but actually if you hear me out, it's actually good news.' I say, 'Yeah, what's that?' He told me that, 'Well, we got everything done and we took it to our board, but the board just won't go for the valuation. We could only get approval for $90 million.' I almost died. I told him I'd call him back.

I went and got Tom and we called him back and he said, 'No, I know, I understand, we agreed to 120 and I know we had a deal.' We had a signed LOI [letter of intent] and everything, $120 million. He tried to convince me that this was still a great deal. He begged me to think about it. We were going to be on a flight to New York the very next morning to sign it.

This was after months of grueling negotiation. It was the hardest thing I ever had to do, but I told Dara that there would be absolutely no way that I would ever agree to anything less than 120. This was one thing I didn't like. They even had private investigators follow us. The one guy told us 'Well, everybody in Las Vegas that deals with the casinos, they're all connected to mafia guys and all that.' I remember telling Dara, I said, 'Well, I don't know what you think of Las Vegas people, but when we say we have a deal, we have a deal. We had a deal at 120 and you're not honoring it.'

One of the New York bankers from one of the New York firms, who I later became friends with, told me that he was in the room in New York when that phone call took place and so was Diller. Before [Dara] called me, [Diller] said, 'These guys are very young; $90 million is all the money in the world to them. Believe me, they're going to take the $90 million.'

Everybody in the room was saying, 'Yeah, but we made a deal with these guys for 120. That's the deal. We have a signed deal with them.' 'Don't worry. They're going to take the 90. Trust me, I know what I'm talking about. This is so much money, they've never had this much money in their lives,' which he was right about.

I told Dara, 'I don't know who else I'm talking to,' but I could tell I'm on the speaker phone, 'but all of you can fuck off. Unless you tell me now it's 120, fuck you.' That was it.

Diller said, 'Don't worry. He'll call back.'

I never called back. Trust me, I was sweating. Believe me. I felt like, 'Holy Christ, what did I just do?'

We didn't have to sweat too long because it was like three weeks later, Expedia went public and then they immediately wanted to buy us. We ended up doing the deal with Expedia, I think it was for $105 million, plus we had a little bit of debt, like $10 million or something like that. It was almost the same amount. What was ironic was that Barry Diller ended up buying Expedia a few years later, so he ended up buying Travelscape anyway.

Barton: In 1999, I was working directly for Ballmer because they didn't know where to put my group, and I went to Ballmer and I asked him for $100 million to spend on a brand advertising campaign. We built up Expedia into a nice little business with a decent amount of awareness, spending nothing on brand advertising, but it got to the point where I realized we had a potential tiger by the tail here, and I wanted to light it up. I went to Ballmer and I asked him for $100 million, and he got mad at me, kicked me out of his office, and said, 'Get out of there. We don't do that. You're not going to get that money.'

But I came back to him and I said, 'Look,you know, this is 1999. Dog food ... Pets.com is going … ' This is in the middle of Internet Bubble 1.0. Anything can get public, and the public markets will give us this money for basically free. I said, 'Let's do a little experiment and spin this out and raise some money in the public markets and see what happens.' And Ballmer thought it was an interesting idea, thought it was an interesting HR (human resources) idea, an interesting way to motivate people, and just an interesting experiment.

In the middle of the roadshow, while Greg Stanger was CFO, and I and Greg Maffei at time, and Erik Blachford, as well, we were scurrying about the country pitching our stock to mutual fund managers. We got summoned to an office by a consultant whose name I can't remember, but I remember what he looks like. He was a Boston Consulting Group consultant and a lawyer, and they were working for a consortium of airlines, all of them, I guess. We were summoned to an office that was either in Chicago or New York City. I can't remember. Maybe it was in Chicago. So we take a break from our roadshow. We're supposed to be meeting with people, and we go into this conference room, and there's like 50 guys there in suits.

There are three of us, and maybe I pulled general counsel in, as well. It was like a scene out of The Godfather, no kidding. I was in a room, and they put two press releases in front of me, literally two press releases. Actually, one was a contract and the other was a press release, just Door A or Door B, and it was you either sign this deal here, or we're going to issue this press release in an hour. The press release was all the biggest U.S. carriers were banding together to create Orbitz to compete with Expedia and Travelocity. The code name was called T2, Travelocity Terminator, I think, because they said Travelocity was bigger than us at the time.

Ellen Lee: It never meant Travelocity Terminator. Never. We were simply not creative people and we called this project Travelocity 2 – like another online agency. It could have easily been called E2 [Expedia 2] or PT2 [Preview Travel 2]. There was no ill intent to the name.

But I loved it when it took that on.

In 2004, Alex Zoghlin and I then named G2 (G2SwitchWorks) as a joke and a take on this, and it simply meant GDS 2. T2 then became DUNC for DL, UA, NW, CO. In fact, my first Orbitz paychecks were from DUNC, LLC and then we informally called it CANDU when AA came on board and then just Orbitz.

Barton: It was really quite an incredible scene, something that, from an antitrust perspective, just like, you've got to be kidding me, but they did it through lawyers, whatever. They'd had plenty of experience with the antitrust regulators, and so they figured they were being clean. Anyway, it was the offer you can't refuse kind of thing, and the contract said, I think, that they would take a 50 percent stake. I can't remember exactly, but it was some ... Just like you said, some very large ridiculous stake in the company for a non-specific remuneration. It was just like, yeah, we'll continue to distribute product through you. Maybe more than that. Maybe we won't do our own online things.

I recall a dark day on the @Expedia IPO roadshow when a habitually collusive group of airlines put a gun to our heads. That gun was @Orbitz

— Rich Barton (@Rich_Barton) February 12, 2015

Anyway, it was pretty stressful. We said no, thank you. We love you guys, but we like actually controlling our own destiny in business. If we don't have you as partners, we don't have you as partners, and we'll figure it out. To conclude that, I just remember we went out of that and chatted with our bankers and lawyers and decided that this constituted a material risk factor, of course, so I have my first investor conference call even before we IPO-ed because everybody we met up to that point we needed to bring up to speed on what had just happened. I remember being in a phone booth, of all places. There were still phone booths then. I remember being in a phone booth in Chicago reading my first quarterly conference call investor script [laughter] to people who hadn't even bought my stock yet, but who I had already pitched it to, explaining this event. It was quite surreal in hindsight. Quite interesting.

I totally understand why those guys did that, and they held good. They launched Orbitz, and it did fairly well. They did issue the press release. They did it the next day.

Al Lenza: We had already announced Orbitz in '99. Then, we happened to be in New York, and Expedia, Rich Barton, was in New York. They were getting ready to do their IPO, and they were doing their roadshow. We had a meeting with Rich, and they offered us a de minimis equity share in Expedia if we killed Orbitz and just gave them all the content and all the stuff we were promising to do for the venture. They offered some ridiculously low number to partner with them exclusively and give them. It was in very low single digits for each of us [airlines], give them the free tickets and soft dollars and all the stuff we eventually gave Orbitz.

This came up, by the way, recently after Expedia bought Orbitz [February 2015 deal announcement], and I posted something in Twitter that it was justice. The incident Barton was referring to was when we told him, 'No, we're going to go beat you up. We're going to go create this and win.' Actually, we succeeded.

We wanted something huge, anywhere from 30 to 50 percent equity in Expedia. It was a big number. We wanted a lot of influence over the direction because we wanted to institutionalize the direct connect, and non-discrimination, and the per-ticket fee was very low. We wanted to basically define it as airline-friendly and go from there. In the end, kudos to them. You had 9/11 happen, and after 9/11, Orbitz came very close to folding before it succeeded. We had a board meeting maybe two weeks, a week or two before 9/11, and we approved a significant funding. If that meeting had happened a week or two later, there would have probably been no Orbitz because there would have been no more funding.

Steve Hafner, former Boston Consulting Group project leader, former Orbitz.com executive vice president, consumer travel at launch, co-founder and current CEO of Kayak: The genesis of Orbitz was basically a consulting engagement that two big airlines undertook to try to extract some of the value from Expedia's impending IPO in exchange for access to their fares. So they hired Boston Consulting Group to help frame a negotiating approach and then a few days before the IPO we went and pitched Rich Barton, who was the CEO of Expedia at the time, on the concept of, hey, these airlines will come together and give you exclusive access to their fares in exchange for equity in the company.

The tenor of the conversation depends on where you were sitting in the room. You know, I think there was perhaps a little bit of arrogance on the part of the airlines as their fares were actually that valuable or not [given] the technology and the technical underpinnings of what Expedia had already built. So I think there was a little tension there and I think the timing was a little bit aggressive too, given that these guys had put in a lot of work to go public.

Well, there was a carrot and there was a stick. And the carrot was, hey, here's a piece of paper that framed the basis of how we might trade fair access for equity, and the terms were meant to be negotiated, honestly. And the stick was a press release that we were going to put out the day of their IPO that said basically four of the five largest airlines were coming together to form a competitor against Expedia. We thought it might impact their valuation.

I think everyone was a bit surprised by that [Expedia didn't negotiate]. And what that really did – I mean it was really a pity for everyone all around – because it resulted in the creation of Orbitz, which was a little bit duplicative to what Expedia was trying to do. And it stiffened the resolve of the airlines to make Orbitz happen in a way that perhaps wasn't there before that.

Particularly, remember this was all in the context, the same time period of Priceline, who had gladly exchanged equity for exclusive opaque content. This comes on the heels of Delta, how much money Delta had made off of Priceline. Yeah, Jeff Boyd will have all the backdrop of this, but Jay Walker had given equity in the company to the airlines in exchange for providing him with content. He then turned it into a high-flying Internet company. Delta's CFO dumped those shares for $700 million paid, something like that, something outrageous.

Zoghlin: God, I hate to admit this and Al Lenza probably already told you all this, but the idea was not to create Orbitz. The idea was to create a paper tiger, and scare the crap out of Expedia or Travelocity and convince them to play ball.

Lenza: I don't understand how some folks can say that Orbitz was just a scheme to get Expedia to give the airlines half of the company and the airlines never really meant to start a company from scratch. The truth is that plans to announce and build the company coincided with Expedia's IPO plans. We thought we'd see if a partnership could work, just like Microsoft and Sabre talked about combining efforts at one time. When they balked, there wasn't a 'holy shit, we have to build now.' We had planned to build a business all along, just as with Hotwire.

Gerstner: We had heard that Boston Consulting Group was working with the airlines on a project to build an OTA and we had heard that the code name was T2, Travelocity Terminator. There were no employees but there were a couple of people in Boston Consulting Group working on it so I just told Joel Cutler [managing director of General Catalyst Partners], 'I'm going to fly to Chicago and I'm going to meet these guys from Boston Consulting Group because I'd rather get in early on this one, and by the way we ought to probably invest in this company as well out of General Catalyst in addition to doing the deal with them from NLG.'

I'll never forget I flew to Chicago, and I meet with this guy Steve Hafner. He was the only guy. Jeff Katz was on-board, as well, but Jeff was not in the meeting. I met Steve at the Boston Consulting Group offices and Steve basically said to me 'Why are you here?' I said, 'Because we'd like to run your cruise and vacation package business' and he said, 'Well, I need $1 million today and then I'll give you a deal.' I said, 'I'll write you a check for $1 million today. I need a five-year exclusive on both the cruise and vacation package business,' and this is before they had a website, this is before they had anything.

And I said, 'You know, that's a lot of money but I think I can get it done: five-year exclusive to both of these.' He said 'OK,' and I said, 'Well, you know, obviously I'm going to have to spend some time figuring out and evaluating these things.' He said, 'No, I don't think you heard me.' He said, 'I'm kind of bored, I need $1 million. I need to know now because if we're going to get the deal done then you and I can go to the bar and have a beer, and if not you've got to go home.' And so I pick up the phone and I call Joel and ask him if we can wire him a million bucks, which we did, and then Steve and I went out and had a drink to celebrate.

They were an important partner for us for a long time. Orbitz was a PowerPoint presentation. I don't even know if they have the PowerPoint presentation done but, yeah, they didn't have offices, there was no team. There were two to three BCG consultants working on it. I'll never forget that meeting and, of course, Steve and I have gone on to be friends and participate in a lot of things together over the years.

Hafner: Brad's a great guy and I've known him for a long time and this was one of our first meetings. At the time, I was running business development for Orbitz. My job was basically to monetize the heck out of the website. You know, we had flights, which was doing OK. We needed to get hotels and cars and vacation packages. At that point in time we had an audience but we really didn't have any functionality for vacations or cruises.

So I invited NLG in and a couple of other vendors and then just tried to bluff the best business terms I could get. And we were a little bit cash-starved at the time because we had to go to the airlines for capital. So one of my missions was to get cash in as part of any business development deal. So I basically went out to lunch with Brad and Joel Cutler, who's another amazing guy, who had bankrolled NLG, and I said, 'Hey, here are the business terms. We need a $1 million check at the end of lunch today to actually do business with you guys.'

We hadn't negotiated business terms. We didn't have a contract. We didn't have anything but I said, 'We need that check.' And Brad tried to play a bit for time because it was a completely unreasonable demand but Joel, to his credit, readily accepted the terms and then we shook hands and had a very nice couple of bottles of wine.

Zoghlin: We announced the formation of the company [Orbitz on Nov. 9, 1999] when, literally, I'm the only employee. There's no CEO. There's technically no company. I am on the Boston Consulting Group payroll at this point. Almost instantly, Sabre, you know, tries to sue us. They start filing some claims against us, some anti-competitive claims against us when we're literally one person, and a press release.

I'm thinking I should call Terry Jones because when we were doing this consulting work for Travelocity, he was actually complaining about Sabre at the time, and about how inflexible they were. We're kind of desperate for a CEO at this point, so me and Carl Rutstein, the partner from BCG get together and I say, 'I know Terry, let's give him a call.' We call Terry, and I say, 'Hey Terry, it's Alex Zoghlin, you know, from the new airline startup. I kind of go into the pitch, and remind him of all the [flight search] issues that he had, and that's what we're going to solve here. It's a solvable problem at this point.' It's possible that I'm giving him the hardest pitch in the world, about how great it's going to be. 'It's going to be a technical renaissance.'

He's silent after this pitch. He just sighs. He said, 'Alex, you don't need a CEO, you need Boutros Boutros-Ghali because you're going to have a board full of airlines, and nobody's going to be able to control them. Yeah, Terry said 'No.' He said no with a capital N.

Kind of fast forward, we fumble our way through it, and it starts to become increasingly more – I don't want to say the word – desperate. The technical side of the company is actually going pretty well, but the airlines on the board turned out to be an issue. He [Jones] was absolutely correct about that.

United, Delta, Northwest, and Continental announced in November 1999 that they intended to launch an industry-leading travel website but American Airlines wasn't initially part of the effort because American owned Sabre and Travelocity. When American spun off Sabre in March 2000, the opportunity arose for American to join Orbitz, but it didn't go smoothly at first.

Zoghlin: We couldn't get American, because American owned Sabre, and Sabre owned Travelocity. We had a really hard sell with them, and they were not really interested. When it was clear that they were going to spin off Sabre, they started to warm up, but then the other airlines – and I don't want to name names here – say, 'Well, if they come in late, then they're going to be second fiddle, and they're not going to get the same ownership.' It became a huge thing, and I'm thinking, 'You know, this cannot work this way. Everybody has to be equal. We have to get them. You cannot leave [them out.]'

They were, at the time, the largest airline. 'You cannot leave the largest airline out, if this is going to be successful.' Probably the most heated, and most difficult thing to do during my tenure was to convince the other airlines to let American in as a founding airline of equal value. They turned out to be one of our best partners, frankly, once they came in. They spun out Sabre, and literally, within two weeks we had them back in.

The company [Orbitz] started as, its official name, was DUNC LLC for Delta, United, Northwest and Continental. Then we changed it to CANDU for Continental, American, Northwest, Delta, and United.

Jeff Katz, former CEO of Swissaire and founding CEO of Orbitz: I got contacted [in 1999] by a number of individuals who participated in the discussion process. I think it was even before it was much of a consulting project. Doug Hacker was the name I remembered. He was CFO of United at the time. And I actually not only thought it was a bad idea. I didn't think it would work. We had a few discussions about it, and then I was at Swissair. I was there washing my car twice a week and helicoptering around the country. I didn't see why I would want to go start up something to compete with Travelocity and Expedia. And so they went away for awhile, and I'm not sure they advanced the project. And over the course of almost a year I think they came back and it was a different recruiter. And then I started getting calls or having conversations with guys who are really important in the industry like Mike Dunn, who ran marketing at American, and Don Carty [then American Airlines CEO] and Larry Kellner, who was CFO at Continental at the time. Just really important people, you know. I can remember hearing from individuals who essentially represented 80 percent of U.S. air capacity. I thought, maybe they know something I don't. Maybe, they're that interested. Maybe it could work.

My first conversation was in '99, and then they went away, and I think in May of 2000, the calls and conversations started again. The story as I remember it, Larry Kellner was at a board meeting of the senior individuals around this project, saying we need to get a fox. We need a leader. It was your true committee project, and a consultant, Boston Consulting Group, did a good job, but their consultants are working billable hours, you know?

Ultimately, I decided, 'what the heck.' And I joined in July of 2000, and a year later, we started up. I always tell people when I came there were 10 guys and a bad PowerPoint deck. They had done a lot of work, as you know, consultants are getting out there to run a business, so it's starting itself. Anyway, that was my recollection of the conversations in '99 and I wasn't a believer, and then by the time 2000 came, I had had enough very senior-level conversations with the industry that I thought maybe there's something here. I decided to join.

Ellen Lee: Jeff Katz used to write a weekly email to the staff. Every week he would write what's going on, what his take was, and he'd end it with 'rock and roll!' We always used to joke about that, and I saved them all. I think I have every single one from soft launch February 2001 (when 200 invites when out to check the new site out) through February 2003. It's a stack of paper about one-inch thick.

Zoghlin: Swissair was about to go into bankruptcy. I think Jeff had two younger daughters, and wanted to bring them back to the States. It was really fortuitous. Jeff and I had a bunch of conversations, before he came over, and he said, 'So, Alex, what's the biggest issue here?' I say, 'Jeff, the biggest issue is the airlines. They created this subcommittee of their lower-level folks who are trying to dictate the product. They're creating a product by committee; it's going to horribly fail. You know, we don't have the right folks from the airlines to really ensure that this is going to be successful. That's issue one. Issue two is we have this DOJ [Department of Justice] investigation. The Senate subcommittee hearing is waiting for somebody to go there.' Changing the board, and the interaction … I think Jeff, like within his first week at the company, had to go testify at the Senate [on July 20, 2000].

He recruited, as our general council, the most senior lawyer from American Airlines, who was incredibly politically savvy. That was a guy named Gary Doernhoefer, who frankly turned out to be masterful at managing our DOJ investigation. We went from being on the defensive to almost being on the offensive, and vanquishing almost all of these issues against us.

Katz: The anti-trust issue turned out to be a red herring instigated principally by Sabre, Expedia or Microsoft, which is the holding company at the time. But, it was carefully designed to stay outside of any anti-trust limitations, which to say, anybody could sell their product in Orbitz. There's no exclusions. It was just a set of business rules that you had subscribe to, which was essentially,you have to treat ... The airlines participate in it, saw Orbitz as low-cost distribution, so if you were Expedia, you wanted the same deal, you had to do a low-cost deal. So it was carefully designed so it would exclude no one, really, and so that no conversations at Orbitz had anything to do with the airline operations; it was all about the Orbitz business. Although we did have anti-trust investigations before we even had a website. I was testifying at U.S. Senate, and it's kind of crazy to have 20 employees, and be testifying at the U.S. Senate as if you were a powerful cartel.

In fact, yeah. I don't even think we had 20 employees when I testified. I recall my snarky testimony with John McCain as the chair, and I had some line, like 'You have to understand, Mr. Chairman, that Orbitz is two guys and dog, but the dog has a really good idea.' We didn't have a line of code, we didn't have any website really, but that's the way government, lobbying, and competition was working there. It is today, but certainly then, that's what we say. We endured almost two years of Department of Justice investigation with all that it entails, in terms of testimony, depositions and lawyers, much of which happened before we had an Orbitz website.

Lenza: One thing you have to say, and I think anybody else should ask, is that we knew from the beginning that Orbitz and Hotwire were going to be litigated. People were going to complain. People were going to allege that we were doing bad things because we [major U.S. airlines] were doing this together. We got great advice from the very beginning. We were extremely careful to be fair and non-discriminatory, and they never found anything that could show that there was any kind of collusion or anything. We were extremely careful. Meetings always involved attorneys present.

Walker: At some point we said, 'Look, it's time to raise more capital to grow the business,' and a public offering was the right way to do that. We were the first company to have both Morgan Stanley and Goldman Sachs co-lead an IPO. It's never happened before and I remember they were pitching our business and I said, 'You know, I want you both to lead it,' and they said, 'We don't do that.' I said, 'Well then, nobody is going to lead it if you do that. I'll find somebody else.' We were the first time that Morgan and Goldman both co-booked, ran, and co-planned an IPO. We had gone to $1 billion in sales, a $1 billion run rate in 18 months. So the business was on a hyper-growth trajectory. I had recruited Rick Braddock, the former president of Citibank, to be the CEO, and I had recruited, really I think an excellent team, including many of the people who built Priceline to be the great company it is.

I deserve very little credit for that. Priceline is a great company because people like Ralph Bahna [former Priceline chairman], Jeffery Boyd [current chairman and interim CEO] and Paul Francis [former PricelineCFO], and others really made it a great company. And, of course, the company really, with its purchase of Booking.com, transformed itself into something much more than where we started as a demand-collection system. The acquisition of Booking.com and the subsequent transformation of the company is all to the full credit of current management. It has nothing to do with what I did.