Wotif.com: A dominant business or one cruising for a fall?

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The internet has been one of the few truly transformative technologies. The ability to share information across large distances almost instantly has changed the way we communicate, learn, shop and interact with the world.

It's not too much of a stretch to compare the rise of the World Wide Web with other world-changing innovations including the industrial revolution, the motor car and the invention of the computer itself.

New business models
The internet has allowed us access to unparalleled amounts of information from around the world. It has put immense computational power within reach and has provided consumers with access to global retail opportunities.

The emergence of our newly hyper- connected world also allowed new business models to flourish.

Amazon.com (Nasdaq: AMZN) began in books, and has expanded to be a true hyper-mart. eBay (Nasdaq: EBAY), which started life as a virtual auction house for second-hand goods has pushed deep into retailing new products and has organically created PayPal, a payments system that is rapidly encroaching onto Visa (NYSE: V) and Mastercard's (NYSE: MA) turf.

Australia has had its share of internet success stories. Leading the pack have been Seek (ASX: SEK) the online recruitment provider, which has had a significant role in taking advertising dollars from metropolitan newspapers, as well as REA Group (ASX: REA), the business behind realestate.com.au.

Australian-based accommodation aggregator Wotif.com Holdings (ASX: WTF) offers rooms across Australia and around the world as well as a flight comparison service in wotflight.com and the accommodation and experiences website lastminute.com.au.

Network effects
The best internet businesses gain supremacy and hold their ground courtesy of a virtuous circle known as the network effect. This phenomenon is created when an existing network becomes attractive for others to join, thus strengthening the original. This newly enlarged network is then even more attractive to potential members due to its larger numbers, and the cycle repeats.

One of the more recent examples of a network effect is eBay itself. In the company's early years, there were a number of competitors to eBay, all offering similar services.

Through marketing, price and customer experience, eBay started to win the tussle, attracting more buyers to its site. As more buyers started to shop on eBay, sellers figured they had a better chance of getting the price they wanted by selling on eBay instead of its competitors. More sellers meant more products – so buyers headed to eBay first when looking to buy. Rinse and repeat.

Wotif you need a room
Which brings us to Wotif.com. Wotif has carved a nice little niche for itself as the 'go to' site for last minute accommodation bookings for Australians, and has even lengthened the timeframe so you can often book a month or two ahead. There are other sites out there, but Wotif has done a great job with both marketing and user experience to make itself the default option, beating all comers so far.

The latest kid on the block – so far only in the US – is Roomkey.com. What separates Roomkey from the rest is that it is owned and run by some of the largest accommodation chains on the planet. The likes of Hilton, Hyatt, Intercontinental and Marriott are behind the new venture. All of a sudden, the companies who were (and still are) Wotif's suppliers may now become its competitor.

I'm not sure if Roomkey will have what it takes to knock Wotif from its perch. Many have tried before, and failed (some of the partners in Roomkey actually tried the same thing a few years ago with travelweb.com), but you can be sure that while ever there is money to be made in accommodation aggregation, there will be heirs presumptive trying to take the mantle.

Foolish take-away
There are a couple of watch-outs for investors when thinking about businesses like Wotif.com.

If the internet has taught us anything, it's that previously some insurmountable brands and business models are much more fragile than we believed. Music retailers, book retailers, newspaper publishers and home entertainment retailers like Harvey Norman (ASX: HVN) and JB Hi-Fi (ASX: JBH) have come under siege from competition online.

Secondly, a valuable and defensible network effect is easy to claim, but harder to actually deliver – and is almost always more vulnerable than it may appear. While eBay benefits from large groups of mutually beneficial buyers and sellers, Groupon and its ilk have no particular pull on exclusive groups of either suppliers or customers, and hence have less defence to the next competitor with deeper pockets or the next disruptive technological change.

At this stage of the internet's development , the spoils still go to the entrepreneurs and rule-breakers. Eventually, the rule-breakers become the old guard, and the next generation come to besiege them.

In the mean time, Wotif has taken a lead and is defending its turf. If history is any guide, the hoteliers will be better accommodation providers than internet entrepreneurs, but complacency is the enemy of the business and investor alike.

Wotif you are looking for a growing business paying a 5 per cent plus dividend yield?Look no further. Motley Fool readers can click here to request a new free report titled The Motley Fool's Top Stock For 2012.

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Scott Phillips is The Motley Fool's feature columnist. The Motley Fool's purpose is to educate, amuse and enrich investors. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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