News for the Hospitality Executive
The Growing Tensions Between Hoteliers and Online Travel
The Prisoner’s Dilemma, the Stockholm Syndrome, or a Case of Both?
By Max Starkov, Ocotber 19, 2009
This Just In
I have just heard through the industry grapevine that Expedia has cut off negotiations with Choice Hotels and has removed Choice properties from its sites, which include Expedia.com and Hotels.com. Choice Hotels, similar to all other major hotel brands, has been working consistently to negotiate a renewal of a brand-wide wholesale agreement with Expedia.
For some time now, we have been hearing from many industry sources that during renewal negotiations Expedia/Hotels.com has demanded new terms and conditions that are against everything the hospitality industry stands for: last room availability, guarantees that the best rates are only found on Expedia/Hotels.com sites, penalties to properties that do not use their sites 100% of the time, etc. These contract renewal “negotiations” have been described to us by some participants from various hotel companies as “here are our terms - take it or leave it”-type of meetings and “practically lack of any essence of a real negotiation,” etc.
In other words, these new terms and conditions demanded by Expedia will effectively take away hoteliers’ rights to manage inventory and rates at their own hotels, destroy channel management and rate parity, and will eventually lead to a long-term erosion of hotel brand and price integrity in the same manner it did after 9/11 in 2001.
Hoteliers should learn from their past mistakes and prevent history from repeating itself. The Hospitality industry should applaud the fact that finally someone is standing up and supporting its franchisees and hotel owners. Similar to Choice Hotels, hotel companies should take a bold stand in support of their long-term interests, and tell Expedia that they wouldn’t sign an agreement that would give Expedia the right to become hospitality industry’s sole revenue manager and ability to manage hoteliers’ decisions on rates and inventory.
Is this Another Case of the Stockholm Syndrome?
Back in the spring of 2003 in the article Brand Erosion, or How Not to Market Your Hotel on the Web, I argued about the existence of a new kind of disparity in the hospitality vertical: between smart, Internet-savvy OTAs on one hand and Web-inept hoteliers on the other, and characterized some hoteliers as being the Web reincarnation of the “Stockholm Syndrome” where the kidnapped victims (hoteliers) fall in love with their kidnapper (OTAs).
Is this a repetition of a post-9/11 déjà vu? Does Expedia believe the hospitality industry has forgotten so quickly the tremendous damage done to hospitality by the online wholesale discounters (now called Online Travel Agencies - OTAs) in the months and years after 9/11/01 and the “billion dollar leakage” that went to OTAs in the form of abnormally high markups and commissions? Is this another case of the “Stockholm Syndrome,” where the abuser - in this case Expedia - expects the abused (hoteliers) should feel allegiance to Expedia and accept its new anti-industry terms and conditions?
Certain OTAs have realized since then that this is a business built on relationships; agreements between hotel companies and third-party channels must be win-win. Various hotel clients have noted that some OTAs, such as Travelocity and Orbitz, are much more amenable to negotiating mutually beneficial agreements within the industry.
Why Has Expedia Become the Market Bully?
Online Travel Agencies (OTAs) have traditionally charged airline ticket booking fees ($5-$7 per ticket). Back in the spring of 2009 the top 3 U.S. OTAs (Expedia-43% market share, Orbitz-26%, Travelocity-22%) followed Priceline’s example and removed these booking fees permanently. When Priceline removed these fees back in 2008, they quickly gained market share: from 7% in 2007 to 9% in 2008 (PhoCusWright).
Over 54% of the OTAs’ U.S. domestic reservation volume (44% of the OTA
total gross booking volume) comes from selling airline tickets. The airlines,
by default, do not pay any commissions to the OTAs or the traditional travel
agencies for that matter.
So how are Expedia and the other OTAs making money?
The OTAs rely heavily on the hotel industry for the bulk of their revenues. Hotels contribute to 37% of all U.S. domestic bookings via the OTAs, which is a little over 30% of the OTA total gross booking volume. At the same time, hospitality contributes to more than 60% of OTAs commissions/booking fees!
In its latest 10-Q SEC filing, Expedia acknowledges that in 2008, over
60% of its revenue came from transactions involving the booking of hotel
reservations, with less than 15% of its worldwide revenue derived from
the sale of airline tickets.
• ADR: $275/nightThis distribution cost is 4000%-$6000% higher compared to the $2-$4 cost per booking on the hotel’s own website.
Online Packaging (Dynamic Packaging):
No wonder all OTAs are heavily promoting their packaging services! Yet, this segment contributed to less than 16% of the OTAs total gross booking volume in 2008. This year, its share is expected to increase to 18% and remain flat at that level in 2010.
The Bottom Line:
Now that they have removed the airline booking fees, Expedia and the OTAs can survive but only at the expense of the hospitality industry.
Having realized that in this economic environment the only option for survival is to find a way to increase revenues from the hospitality sector, Expedia has adopted increasingly aggressive market behavior toward the hospitality sector, fueled by the following factors:
• Desperation within Expedia and the OTA ranks:Due to the “No Booking Fee” for airline tickets policy adopted recently by all OTAs, hospitality remained the only serious source of revenue for Expedia and the OTAs. Hotels contribute 37% of all U.S. domestic OTA bookings, yet hospitality contributes to more than 60% of OTAs commissions/booking fees! In 2008, 44% of Expedia’s global revenue came from the sale of airline tickets, which brought less than 15% of the company’s global revenue. Now that the ticket booking fees are gone, airline ticket revenue has further eroded and will have a single digit contribution to Expedia’s bottom line.
Simply put, the Expedia and the OTAs have no other choice but to go after the hospitality sector for their mere survival.
• Desperation within the hospitality sector:The industry as a whole has been hit hard by the economic recession. Smith Travel Research projections paint a very grim picture in the hospitality industry: in 2009 ADRs will drop by 9.7%, RevPAR will be down 17.1% year-over-year, and occupancy will drop 8.4% to 55.4%.
Many hotel companies (including some major brands who should know better) have exhibited a typical “knee-jerk” reaction to the deteriorating economic environment by embracing the indirect online channel (OTAs) to compensate for decreasing business. These hotel companies have been willing to accommodate the OTAs with bigger discounts, unique promotions, etc., thus jeopardizing their direct online channel and destroying years-worth of achievements such as rate parity, best rate guarantees and more.
In other words, some hotel companies have literally betrayed the industry by succumbing to the temptations of the indirect channel and demands of Expedia, some of them doing this in a particularly unintelligent way.
Hoteliers and Expedia: The Prisoners’ Dilemma
Expedia has been quick to exploit this new situation in which hotel companies are increasingly becoming desperate for more business. This OTA has successfully deployed an economic approach to the industry, originally tested with great success by Hotels.com back in the post 9/11 period. By playing one hotel company against the other, Expedia has been able to extract further discounts and concessions from the weakened hospitality sector, unthinkable until just recently.
In game theory and economics, this approach of dealing separately with each industry player, twisting their arms and getting concessions by playing hotel companies against each other is called “The Prisoners’ Dilemma.”
In its classical form, “The Prisoner's Dilemma” is presented as follows (Concise Encyclopedia of Economics, Wikipedia, Britannica Concise Encyclopedia):
Two suspects are arrested by the police. The police have insufficient evidence for a conviction, and, having separated both prisoners, visit each of them to offer the same deal. If one confesses and the other does not, the one who confesses will be released immediately and the other will spend 20 years in prison. If neither confesses, each will be held only a few months. If both confess, they will each be jailed 15 years. Each one is assured that the other would not know about the betrayal before the end of the investigation. Prisoners cannot communicate with one another. Given that neither prisoner knows whether the other has confessed, it is in the self-interest of each to confess himself. Paradoxically, when each prisoner pursues his self-interest, both end up worse off than they would have been had they acted otherwise. How should the prisoners act?In today’s world, Expedia acts as the police who have imprisoned hoteliers, and has been playing them against each other by extracting concessions which would be unthinkable in any other situation.
We have seen this happening this year all over the industry:
As mentioned earlier, the industry should follow Choice Hotels’ example and take a bold stand in support of their long-term interests, and tell Expedia that they wouldn’t sign an agreement that would allow Expedia to become the de facto “Rate Police” of the whole industry and dictate its inventory distribution and revenue management decisions.
Furthermore, hoteliers should develop a robust strategy to decrease over-dependence on Expedia and offset loss of business from this OTA:
1. Direct Online Channel: Invigorate the push in the Direct Online Channel on unprecedented levels. Even in dire economic times like these, characterized by sharp declines in travel demand, a comprehensive ROI-centric Internet marketing strategy can help hoteliers continue to generate much-needed incremental revenues and out-smart their competition.Note: Jason Price, EVP and Mariana Mechoso, Director eMarketing Services at HeBS also contributed to this article.
About the Author and HeBS:
A diverse client portfolio of over 500 top tier major hotel brands, luxury and boutique hotel brands, resorts and casinos, hotel management companies, franchisees, independents, and CVBs has sought and successfully taken advantage of HeBS’ hospitality Internet marketing expertise. Contact HeBS consultants at (212)752-8186 or firstname.lastname@example.org.