Since its advent, the Internet has been touted as a tool that would revolutionize the way the hotel industry does business, primarily by providing additional distribution channels. The lodging industry has not been exempt from this expectation. In particular, the greatest impact on the lodging industry has been in the arena of guest reservations.

With "Internet bookings" coming into existence approximately five years ago, the pace of online hotel bookings has grown exponentially. For the most part, two major types of players service the online reservation industry: i) hotel companies ii) third-party travel companies.

For hotel companies, the online booking business is a logical extension of their central reservation networks and brand support. It is in the arena of third-party travel companies that we find unique product offerings, innovative business models, and along with them, challenging decisions for hotel operators as to how and when to use these companies. These companies include the likes of Hotwire, Priceline, Hotel Reservation Network (HRN), Travelocity, and Expedia, among many others.

Companies such as HRN and Expedia are designed after "brick-and-mortar" travel agencies, and as such can be serviced by the hotel operators the same way they do other travel agencies. It is companies such as Hotwire and Priceline, which exploit the Internet to its fullest and offer innovative "name-your-price" type products, that pose interesting benefits and challenges to operators everywhere.

The events of September 11th, and the subsequent drop in travel, coupled with the overall economic slowdown, have resulted in a tremendous increase in the pace at which hotels are participating with companies such as Hotwire and Priceline. Hotwire is currently unavailable in Canada.

Companies such as HRN, Travelocity, and Expedia are referred to as "non-opaque" companies, as visitors to these websites can see the names and prices of hotels for the days that they have searched. In contrast, Hotwire and Priceline, the "opaque" companies, hide the name of the hotels until the buyer has committed to purchasing the stay. Although HRN is "non-opaque," its modus operandi resembles one of a large travel wholesaler, which can offer discounted rooms that have to be prepaid, and usually involve high cancellation fees. Interestingly, because of its non-opaque nature, hotel companies' own websites are in direct competition with HRN and its distribution channel. Travelers often find lower rates at HRN, but must prepay their purchase. Given its size, and wide distribution network, most hotels find it beneficial to participate with HRN. 

When booking through Priceline, the hotel at which a guest will stay is only shown when the buyer purchases his or her stay (opaque). The buyer indicates the date, the class of hotel, and the price he or she is willing to pay for a room. If accepted, the buyer's credit card is charged, and the name of the hotel is revealed. Internally, Priceline uses a "randomizer" program that picks one of many hotels within its system that indicates availability, and matches the class requested. If this randomly selected hotel's offered rate allows Priceline to secure a 7.0% margin, that is, if the difference between what a consumer is willing to pay Priceline and what Priceline has to pay the hotel is greater than 7.0%, the transaction is completed. However, if the selected hotel's price does not allow for the stated margin, the program runs a second "randomizer," but this time the odds are weighted toward a hotel that has been picked in the past. According to Priceline, this randomizer program ensures that every hotel that participates with them has a chance of getting demand; nevertheless, properties that offer lower rates are definitely more likely to sell the most rooms. Anecdotal evidence indicates many travelers getting rooms for under $100 for upscale, full-service hotels in major downtown locations on Priceline. Even though hotels are selling inventory through Internet channels at rates significantly below their average rates, it benefits the hotels as it allows them to sell rooms that may have in past gone unsold. The major Internet travel companies commonly refer to these unsold rooms, close to the arrival date as "distressed inventory."

Priceline relies primarily on their own staff and other sources such as AAA and guest feedback to classify hotels into different star categories. Furthermore, it provides hotels with immediate payment through a credit card. Another major benefit for hotels is the ability of Priceline to sell rooms with extremely short lead times, an area in which most non-highway hotels struggle. Priceline claims that nearly 10% of itsrooms sold are for same-day arrival. One can argue that Priceline is actually creating new demand, as consumers are willing to travel to nearby locations if reasonably priced rooms are available. One other major benefit for downtown hotels in large markets has been the ability of Priceline, and for that matter other players such as HRN, Travelocity, and Expedia, to sell rooms on weekends, traditionally a slow period for most urban properties. Priceline claims about 15% of its rooms sold involve a Saturday stay.

Although the benefits of having the ability to sell "distressed" inventory quickly and cheaply are great, the process may pose numerous long-term problems for hoteliers. Questions that property and reservation managers need to ask include:

• Are my traditional guests finding cheaper alternative ways to book rooms?
• Are clients going to pay non-discounted rates when occupancy levels return to normal levels?
• Is any new demand being created in the market as a result of lower pricing, or is money being left on the table?

Another major area of concern has been whether or not hotel companies will view the third-party travel companies as competitors to their own websites and central reservation offices. For now, with major hotel companies forming partnerships or affiliations with Priceline, it seems that they view these channels as additional ways to sell inventory, and not as a threat to their own distribution channels. Lately, the airlines have been aggressively pushing their own web sites as the preferred way of selling air tickets to consumers. They have achieved this by eliminating commissions paid to travel agents and offering incentives and discounts to travelers who book on the airlines' web sites. More recently, several major U.S. carriers have jointly formed their own travel website called Orbitz, which is intended to compete directly with the likes of Expedia and Travelocity. Not to be outdone, several major hotel companies have announced that they have formed a partnership to market hotel rooms through their own website.

For now, at least at the property level, the benefits of participating with these third-party vendors may greatly outweigh the broader disadvantages. However, individual hotel managers need to measure and monitor the performance of the third-party channels with great scrutiny. They need to ensure that the bookings generated by third-party reservation channels are new and unique and would not have necessarily come their way through more traditional booking channels. They need to monitor production from third-party sources not only during peak periods, but also more importantly, during shoulder and slow periods. Given the fact that most bookings made through third-party Internet channels yield extremely low rates, properties need to undertake detailed analyses of what the incremental cost of selling a room is, to ensure that their own pricing is motivated more by cost rather than by competition. Priceline provides participating hotels with detailed reports on how their prices compare with their peers, and, more importantly, the sales activities at different price tiers. Thus, even if a hotel does not end up selling rooms through the third-party Internet channel, the wealth of market data provided justifies participation. As with most technology-related concerns, changes and evolution are a given. As we go forward, property operators need to constantly evaluate their own situation in regard to third-party Internet booking sources. Operators also need to keep abreast of their competitors and the broader marketplace in terms of pricing and market penetration of bookings through the third-party Internet channels. They should be constantly monitoring new and innovative product offerings that may evolve, and furthermore be willing to quickly embrace them if such offerings prove to be in their advantage. Hotel operators that can successfully monitor these trends should be able to keep ahead of their competitors.