The emergence in the past 20 years of online travel agencies as a distribution partner has had a profound effect on the hotel industry. That relationship continues to grow and change.
GLOBAL REPORT—In October 1996, Microsoft quietly launched a product that would forever change the way consumers research, plan and book travel, including hotel stays. The effect on the hotel industry of the founding of that first online travel agency, then called Microsoft Expedia Travel Services, has been both profound and often changing.
“While I would include other intermediaries like Google and TripAdvisor, it’s true the emergence of the OTAs has been one of the most significant things to happen in the hotel industry in the past 20 years,” said Mark Lomanno, partner and senior advisor with Kalibri Labs. “It has completely changed our business model.”
Some hotel executives see the OTAs’ commission structure as an impediment to profitability, but others believe these intermediaries bring value to the industry.
“There certainly are some real pluses and real minuses to the OTAs, but to me the pluses outweigh the minuses,” said Robert Rauch, CEO of San Diego-based management company RAR Hospitality. “For one, they have done a phenomenal job of marketing, and they are so far ahead of (the hotel industry) in terms of technology. They also have a tremendous grasp of what’s coming down the pike in social media marketing, channel management and use of the internet. They understand this space better than any hotelier does.”
Since its launch 20 years ago, Expedia has grown organically and through acquisitions to become the largest OTA in the industry, followed closely by Priceline Group and Chinese-based Ctrip.
The birth of Expedia and subsequent OTAs came as the internet was beginning to penetrate the professional and personal lives of people. But its creation was more than just a function of technology, according to sources.
“It was a convergence of things,” said Henry Harteveldt, founder and travel industry analyst at Atmosphere Research Group. “Just as Amazon saw an opportunity to sell books online, the early OTA pioneers thought they could take advantage of this new technology and sell travel services online.
“In reality, traditional travel agencies had been engaged in electronic commerce through the (global distribution systems) for decades. So the OTAs simply took that GDS platform, built websites and created a transactional environment. Then they continued to evolve by creating new business models.”
A lifeline during crises
Several global crises—the 9/11 terror attacks and the recession starting in late 2008—served as springboards to boost the OTAs’ share of hotel distribution.
“There is no question the acceleration in the number of bookings through intermediaries, and OTAs specifically, was greatly accelerated by each of those downturns,” Lomanno said. “Both times, the industry got caught in a vortex of declining occupancy and demand and declining rates, not knowing how to fill the hotels. With the advent of OTAs came what they believed to be a mechanism that could help drive that business.”
According to Lomanno, prior to 2001, between 1% and 1.4% of rooms were booked through intermediaries; shortly after 9/11, that percentage grew to between 4% and 6%.
“It plateaued until it got to 2007-08, and then there was another big jump,” he said. “Each time there was an economic downturn, regardless of the cause, the percentage of rooms booked through the intermediaries jumped precipitously and then flattened down after that.”
A recent report from Kalibri Labs on hotel distribution indicates that, in recent years, OTAs have gained a 40% share in hotel bookings: In 2011, there was one OTA booking for every 4.3 direct bookings; in 2015, there was one OTA booking for every 2.7 direct bookings.
Michael Tall, president and COO of Charlestowne Hotels, believes the inability of some hotel companies to leverage technology was another reason OTAs were able to rapidly gain share during the recent recession.
“In 2008, it was slightly different (than post-9/11). The (hotel) companies that were positioned with technology were in a better situation than those that were not,” he said via email. “A lot of the brands, as well as the independent hotels that were managed by sophisticated management groups, had the expertise regarding the reach of solid (customer relationship management) platforms, the technology behind their proprietary websites, as well as the tracking systems to measure targeted marketing efforts. Those that were not in a position to manipulate these tools to their advantage turned to the OTAs who did, and their profitability suffered.”
Harteveldt places some of the blame with hotel brand companies.
“During the recession in 2008 and 2009, I consistently heard from managers of branded hotels that OTAs were more responsive and easier to work with than many of the brands themselves,” he said. “The brands had limited email marketing capabilities, very rigid processes, very limited targeting capabilities for customers. Many of these hotel managers told me they would call up their brands asking for help and they would hear, ‘We can get you out in our next newsletter in six weeks.’ Meanwhile, within 24 to 48 hours, once they agreed to the business terms, email marketing from the OTAs would go out and the reservations would start to flow quickly.”
Over the years, the OTA sector has grown, consolidated and changed some of its strategies. And other intermediaries and disruptors such as Google, Facebook, TripAdvisor, metasearch sites and Airbnb have further complicated the hotel industry distribution landscape.
In the past year, hotel brand companies, including Marriott International, Hilton Worldwide Holdings and others, have launched campaigns to promote direct bookings through their loyalty club programs.
While these book-direct efforts hold the promise of lower guest-acquisition costs, not all hotel executives seem them as a panacea.
“In the short term, the direct book brand initiatives are creating the same problem hotels started to see with the OTAs: the dilution of the net rate to the hotels,” Charlestowne’s Tall said. “The hotels are the ones that suffer when a brand offers 10% or 15% off the lowest rate to their loyalty members, or on their website. When that is rolled up with the other marketing fees, it could potentially be less of a margin for the hotel than from an OTA.”
He sees hope in the long-term, however, if chains can lure guests back into their proprietary channels and then use pricing leverage to increase rates.
“The bet is that the ‘cost’ of this campaign will pale in comparison to the gain—time will tell,” he said.
Other sources believe Google might emerge as the powerhouse in hotel distribution.
“I am concerned for OTAs and hotels alike about what Google could do if it continues to bias search-engine results in favor of Google direct content, whether it is hotel pricing shopping, or Google ratings and reviews, or booking or anything else,” Harteveldt said. “Everybody in the travel space will have to keep their eye on Google because they are so large and so powerful and there is a serious potential threat there.”
Lomanno of Kalibri Labs sees recent industry consolidation as at least in part a reaction to shifts in the distribution environment.
“For the hotel industry, the basic operating economic structure is no different than it was 70 years ago. That model has to evolve,” he said. “The hotel industry knows it and that is part of what is driving some of the consolidation, like Marriott buying Starwood. While these companies try to figure out what their operating model is going to be in the next five to 10 years, the short-term strategy is to get bigger and more powerful while you figure out how this world is going to evolve.”