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Important insights into the OTA-supplier debate
November 29 2011

An objective journalist poses two questions regarding the OTA-supplier relationship: 1) Who ultimately is the “supplier?” and 2) Is the relationship stymied by a generation gap?

By Jason Q. Freed
Contributing Editor, Tech Impact Report

If there’s been one constant since I began learning and writing about the hotel industry five years ago, it’s that hoteliers and third-party intermediaries have struggled to form an ideal partnership. HotelNewsNow.com’s Jeff Higley wrote recently that there will be a full-blown battle over the issue sooner rather than later.

Similarly, if there’s been one constant that has stuck with me as a journalist throughout my career, it’s that there are always two sides to every story. The notion that OTAs charge deep commissions and place unfair demands on hoteliers has been driven home time and time again at industry conferences and events. This year, in particular, I made an effort to learn the other side of the story—to step into the shoes of a third-party travel distributor—and learn the successes and challenges that drive them.

I helped culminate HotelNewsNow.com’s thorough Special Report on the topic in January, wrote extensively about Google’s foray into the space,  covered the PhoCusWright Conference in Hollywood, Florida, earlier this month and will attend Expedia’s annual customer symposium in Las Vegas in a few weeks.

One process I haven’t been privy to is how suppliers and OTAs negotiate terms of contracts; oh to be a fly on the wall during those talks. So, without that insight, I can’t profess to know all the intricacies of the communication breakdown between hoteliers and OTAs.

However, I have developed two important and insightful questions regarding the OTA-supplier debate that I’d like to propose: 1) Who ultimately is the “supplier” and where does he or she fall on the spectrum?; and 2) Is the relationship stymied by a generation gap?

Who is the supplier?
HotelNewsNow.com recently wrote similar pieces quoting Richard Solomons, CEO of IHG and Paul Brown of Hilton, about how each of the franchisors plans to take back control of hotel-room distribution. But, dare I ask, is it really IHG and Hilton’s supply to take back? Last time I checked, IHG and Hilton each owned very few hotel rooms. They take commission just as the OTAs do—albeit a smaller percentage—to brand, market and sell rooms for the businessmen and businesswomen who’ve invested, built and managed the hotels from the ground up. 

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Each time I speak to a ground-level hotelier—whether it be a single-property owner, a GM or a management company—I ask candidly about their relationship with OTAs. The response tends to be spoken with a lot less distaste; OTAs typically aren’t viewed as the enemy but rather another way to get heads in beds.

In fact, one anonymous hotelier recently spoke out against brand leaders’ constant push to limit OTA resources and hold rates, essentially saying that owners increasingly are facing financial struggles and even foreclosure. “If hotels hold rates and don’t use OTAs, will the brands forgive some of their royalty fees when they don’t have any guests?” he said.

I applaud the brands’ aggressive goals to increase marketing spend and drive direct bookings, but  until the brands are gaining bookings share rather than losing it, shouldn’t we continue to educate the suppliers on the best channel mix yet ultimately let them decide where to sell rooms?

Is there a generation gap?
As I analyzed the OTA-hotelier debate this year, one common theme stood out: The hoteliers taking a hard stance against the involvement of third-party intermediaries tended to be long-time hoteliers who had built their business a generation ago while the developers and proponents of third-party distribution systems tended to be younger, tech-savvy marketers. Dara Khosrowshahi, for example, was 35 when he became the CEO of Expedia in 2005.

The debate bears a striking resemblance to a quarrel that played out in the music industry nearly a decade ago. Entrenched record executives wanted control of the music supply and wanted to sell the music via their channels. Along came Napster, invented by Northeastern University programming student Shawn Fanning, and verified Napster use peaked with 26.4 million registered users worldwide in February 2001. Strong Napster opponents included longtime artists Metallica and Madonna, as well as the age-old record companies. Proponents included younger independent bands such as Radiohead and Dispatch and college students, who admitted to obtaining the music for free but argued the music distribution service led them to purchase albums and attend concerts (billboard effect!).

Here’s the difference: It took the music industry less than a decade to get it figured out. Today, Napster is owned by Rhapsody and is a pay service where the artist, the record company and the third-party distributor get a fair share of the profits. Since then, a slew of competitors have emerged, including the gigantic Apple iTunes.

To solve the hotel-room distribution dilemma, it’s going to take similar concessions from both sides. Brands need to realize that travelers today are shopping for hotel rooms in different places, and having those rooms available via third parties actually makes business sense. Third-party intermediaries are going to have to realize the profits they made in 2002 are no longer justifiable and the commissions need to be fair for all parties.

The opinions expressed in this blog do not necessarily reflect the opinions of HotelNewsNow.com or its parent company, Smith Travel Research and its affiliated companies. Bloggers published on this site are given the freedom to express views that may be controversial, but our goal is to provoke thought and constructive discussion within our reader community. Please feel free to comment or contact an editor with any questions or concerns.

COMMENTS   Show All
Brad
12/7/2011 12:06:00 PM
The OTAs also fail to educate the guest about their policies as well as the hotel's policies. Too often guests are surprised by upgrade charges, pet fees,or cancellation policies. Even worse, most of them don't even understand what run-of-the-house means and don't seem to hear the part in the commercial where they say the Hotel uses OTAs to sell rooms that would be left empty otherwise. Not sell the rooms the OTAs customer wants at any time. As a result Hotels are also left to act as the OTA's customer service department and then left at the mercy of the reviews. OTAs benefit from the ignorance of their customers and Hotels pay.
my problem
11/30/2011 9:13:00 PM
my problem is not with OTA persay, I do think that they need to take a reasonalbe commission. My problem is with sites like hotwire...if it were not for these sites, people would pay published rates. More and more companies are requiring their employees that travel to use these services. So now accounts that were solid are now weak because of these sites.
Tim Peter
11/30/2011 10:49:00 AM
Jason, Thanks for the thought-provoking article, but I think the parallel between the music industry and the travel space is flawed. Hotels aren't opposed to third-party distribution and aren't unwilling to pay for that distribution. They are opposed to losing control of pricing and inventory. The record industry has lost half its revenues and profits in the last decade due to a shift from physical to digital delivery of their product; hotel consumption still requires a guest to visit the property. The question at hand is what it should cost to acquire that guest. If a "generation gap" indeed exists between hotel marketers, it's more likely due to experience gained during earlier periods, when some OTA's (certainly not all), leveraged market conditions to encourage hotel operators to give away the baby with the bathwater. Your reference to "the profits [intermediaries] made in 2002," underscores the imbalance that existed, and in some cases, continues to exist. This is not a question of "tech savvy" youth being more open to digital distribution. Plenty of distribution pioneers have no issue with using OTA's as part of an overall distribution strategy. It's more a question of ensuring agreements with OTA's benefit both parties equally, something that hasn't been true far too often over the last decade.
idisagree
11/29/2011 9:30:00 PM
nice try to defend the OTAs who are taking absolutely no risk in the distribution equation. The only concession that needs to be made is for the OTAs to take 10%, maybe 12, commission on each room they sell. they are getting rich and have no exposure to risk whatsoever.
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