How The Curse of the Internet Unexpectedly Afflicts Hotels

I remember the ill-concealed delight with which hoteliers and other travel suppliers greeted the fledgling internet when it first started appearing in the mid 1990s; indeed, it was my concern at how the internet would interfere with my ‘old fashioned’ travel company that had me accelerate plans to sell it in 2000.

Travel suppliers saw the internet as replacing ‘costly’ middlemen with a new free way for them to reach out to potential customers, everywhere in the world.  No longer would they have to reluctantly pay travel agents 10% commissions for referring guests/customers to them; instead, they could simply build a website and the world would beat a path to their doorstep.

The slightly more far-sighted suppliers understood that there would still be intermediaries, but with an internet rather than a bricks and mortar type presence, and thereby, having lower costs of doing business and not needing as much commission.  And, of course, the concept of ‘free’ was unrealistic and ignored the costs of creating and maintaining a website.

So there was no downside and an awful lot of perceived upside to the internet, and formerly loyal travel ‘partners’ rushed to severe their relationships with long time travel distributors, wholesalers and retailers, sneering at them as being so ‘last-century’ as they rushed to create new arrangements with new types of travel companies.

So, what has actually happened over the last 20 years?

The Many Become the Few

Sure, we initially saw an explosion of new internet type travel companies, and indeed, there’s now a three-letter acronym to describe such companies – OTA, meaning an online travel agency.  But the initial explosion and profusion of OTAs has been followed by an implosion and a paucity of such companies.

Which internet site did you last research or book a hotel room through?  Sure, you might perceive there to still be an abundance of choices, and plenty of competition, but if that is your perception, you’re sadly and utterly wrong.  I laugh when I hear people arguing the merits of Brand A and Brand B, when both are owned by the same company and probably selling from the same inventory.

Here’s an interesting table listing most of the major OTAs and showing how they all belong to one of just two different corporate blocs.

You probably don’t even notice the many other names that have now disappeared and been subsumed into these remaining names.

For example, VRBO.com, the original leading vacation home rental site, is now a part of Expedia (under the HomeAway brand).  Lastminute.com, another pioneer in a different type of new travel product (discounted sales of hotel rooms by hotels with too many empty rooms, in the last three weeks before each night’s stay) was bought by Expedia (then under the Sabre/Travelocity brand), subsumed into their product, then the remains of the brand name sold on to another company.  Or Travelweb, now disappeared without trace into Priceline.

There are other smaller groups too, of course.  For example, TripAdvisor (which for a while was part of the Expedia group), which has 25 different brands, including ‘stealth’ sellers of travel such as Cruise Critic, Seat Guru and Airfarewatchdog as well as more obvious ones like BookingBuddy and SmarterTravel.

So what, you might say.  Who cares if there are few or many middlemen.

The Shift in Market Forces

Well, we all should care about this more than we do.  Although simplistic, it is somewhat fair to say that if hotels lower their costs of securing reservations, then they can trade more profitably and either sell their rooms at lower nightly rates or alternatively, the high profits in the industry will attract new hotel development, which again will lead to lower nightly rates as well as more hotel choices.  So an efficient distribution system benefits us as travelers.

The dream of lower distribution costs has unfortunately turned out to be just that – an illusory dream.  Instead of grudgingly paying 10% to travel agents, hotels are now finding they are having to pay two or even three times that much to the OTAs.  Yes, instead of 10% to a full service travel agency, they are now paying sometimes 25% or even 30% to an OTA.

And instead of a market typified by many travelers, many travel agencies, and many hotels, which means great competition and reasonable equality of bargaining power, we now have a market with two major players.  Expedia alone is thought to have a 75% market share in the US for online travel bookings, and, yes, that does give it enormous bargaining power (some would unkindly say that rather than ‘bargaining’ power, it has dictatorial power).

This also creates an interesting marketing challenge.  When Expedia advertises one of its brands (and Expedia has an enormous advertising budget, larger than Pepsico, and the 30th largest in the US), this means that almost 75% of the business that the advertisement creates for the advertised brand is coming from other Expedia brands.  It is only creating a thin sliver of new business, most of the response is just shifting from one Expedia brand to the other.

One can’t start to comprehend how it is possible for advertising to be cost effective on such a basis.  But what is the alternative – to have a large asterisk and disclaimer on such ads ‘Please ignore this Trivago ad if you are already a customer of Hotels.com, Hotwire, Orbitz or Travelocity’!?

The power wielded by the near duopoly of the Expedia and Priceline companies is clearly seen by their ability to command commissions of up to perhaps 30%, and in other not so obvious forms such as how they dictate terms limiting the ability of hotels to offer favorable or better deals through other travel channels.

What Happened to Price Competition?

Have you ever noticed or paused to wonder at how it is that if you’re comparing hotel rates on several different websites, the same rate magically appears on every different website?  You know that if all websites are selling the hotel at the same price, then by fundamental definition, there is clearly no competition at work at all.

Many of us may have even forgotten what now perhaps can be looked at as ‘the good old days’ when travel agents would have selective access to some hotels at which they had negotiated special low rates, better than anyone else would have.  That was a cornerstone of my business – competing on price as well as service.  We’d negotiate great rates with hotels, keep our margins slim, and pass the savings on to our customers.

But now, while companies will still negotiate the best rate they can get, the hotels insist that the public rates the rooms are sold for are the same as everyone else is selling the same room for.

Here’s an interesting article analyzing the marketplace at present.

The strangest part of this, and it is a part that is entirely of the hotels’ own making, is the number of times that you’ll find cheaper rates through an OTA than direct from a hotel.  I’ve lost count of how often I’ve been told by a hotel reservation staff member ‘You should book through (Brand X) because they have better rates than we can offer you ourselves’.

Where is the sense of that.  Imagine a situation where a hotel is offering a room at $250 a night, and an OTA is offering the same room for $230 a night.  If we say that the OTA is getting a $50 commission, that means the hotel is netting $180 a night when selling its room through the OTA.  Why would any hotels with any measure of rational sense prefer to have a guest buy a room through the OTA, for which it receives $180, when the same guest is offering to pay $230 to book it directly?

Using OTA ‘Recommendations’ to Your Advantage

The key point in the article cited above is for us as bookers of travel is to change from an OTA’s default display order of ‘recommended’ hotels first, and instead to choose a sort order that makes sense for us (try price order, for example).

The article points out that ‘recommended’ is usually a synonym for ‘these are the hotels we get the biggest commissions from’.  On the other hand, the recommended hotels are also the hotels who are paying most dearly to be featured prominently on the OTA site, so may also be more amenable to negotiating a deal directly with you, particularly if you are offering them a block of room nights or a corporate contract.  You know, by seeing their recommended status, that they are probably paying 25% – 30% to the OTA, and so should be keen to create direct relationships with guests (and their companies) at comparable or lower costs.

The Hotels Got What They Wished For.  We Didn’t.

I’m not blaming the OTA’s for desiring to make as much money as possible for themselves and their shareholders.  That’s as much a cornerstone of the free market as is competition.

It is the hotels who have created a rod for their own backs, and are now suffering the consequences.  They should have been more careful what they wished for.  None of us have benefited from the outcome.