November 23, 2011
It’s almost time for Thanksgiving. As we prepare to commemorate the Pilgrims who in 1621 survived their first, devastating winter in the new world, thoughts turn – unusually – to hotel ecommerce. Following last week’s PhoCusWright conference the blogosphere and twitterverse have been awash with stories about hotel companies and their relationships with their ecommerce partners. But this year something’s different. Change is in the air, and it portends an interesting 2012.
As the nation winds down to the annual feast of turkey, football and ghastly travel experiences, here are a few thoughts on the changing tide in travel distribution.
What to make of Google
During a strategy workshop this week, a client asked the question that seems to be on so many hoteliers’ minds right now: “When do you think Google will get into the OTA business?” Since its acquisition of ITA Software, Google has begun to make its presence felt, initially by doing exactly what it said that it was going to do: using ITA’s capabilities to provide better search content and drive ad revenue. But industry commentators continue to be suspicious of their aims.
Make no mistake, the Google/ITA merger is a big deal for the travel industry. But it’s possible that hotels are asking the wrong question about the impact it will have. The question brings to mind an excellent point that was made during the presentation of the Hotel Distribution Study in Nashville this summer. To paraphrase the panelist’s view: “All of these distribution providers add some value to our business. But as they try to monetize their products, distribution costs are becoming prohibitive. Our challenge is to understand how much their services are worth”.
This is precisely the problem that faces the industry right now, and it seems to get lost in the OTA-centric industry discourse. The chain of events that takes a prospective customer from initiating an enquiry to booking a hotel room is a value chain. That value chain has been growing in sophistication, leading naturally to higher costs. But there must be a limit. As hotels approach that limit, travel intermediary margins come under greater pressure, and that’s where the fun begins.
The agency paradigm has dominated the travel industry distribution for decades. The model survived the rise of the internet through the OTAs, but the value chain is now more complicated than it was decades ago. It can easily be argued that the task of processing reservations transactions has improved incrementally over the last 15 years, while search marketing has exploded in sophistication over the same period. Perhaps the services of the search engine that found the customer have grown in value relative to the services of the agency that closed the deal.
Google didn’t get where it is today as a transaction processor: its core business has always been search advertising. And in this light, the idea of a Google OTA offer seems strategically incoherent. Google can change the game in hotel distribution not by competing directly with existing business models, but by changing the economics of travel distribution. In other words Google can become dominant in travel by growing its core business, redefining meta-search, and squeezing the margins of the established OTAs, forcing them to work ever-harder to remain relevant to customers.
The market reaction to the Google/ITA merger also seems to foreshadow bigger changes to come. The long-anticipated IPO of leading meta-search engine Kayak.com has been put on ice. Expedia also announced plans to demerge TripAdvisor. This will create two businesses around two travel mega-brands, two distinct core competencies and – critically – two different revenue models (agency vs ad revenue). Battle lines are being drawn in a distribution market that seems destined to be dominated increasingly by the twin axes of Google and Microsoft. And note that we haven’t even mentioned Apple and Facebook, whose impact on the travel industry can only be speculated upon at this point.
But what about the niche players?
A recent piece by journalist Carlo Wolff discussed the prospects for two niche OTAs, both due to launch fully in 2012: My Best Hotel Rate – a collaboration between the Asian-American Hotel Owners Association (AAHOA) and Innlink; and Global Hotel Exchange, which is being launched by Magnuson Hotels. Both are potentially fascinating and disruptive new ventures.
Conventional wisdom suggests that it is now too late to create another OTA brand. But what's different and interesting about both AAHOA and Magnuson's ventures is that neither has to follow the conventional OTA model. Both have different opportunities and motives. For those unfamiliar with the US Lodging Industry, AAHOA is the most powerful ownership organization in the industry today. It may not have any history as a consumer brand in travel, but it has more than 10,000 members, accounting for more than 20,000 hotels. This is a bigger proportion of inventory than any single hotel chain.
That creates an opportunity: an AAHOA-backed OTA could bring its unique leverage to bear on suppliers of critical services like search marketing, for example. As a true representative of the largest hotel ownership block, it could define a more hotel-friendly OTA model, and could leverage its status as a membership organization to engage its customer base differently. AAHOA does not have to stick to the OTA playbook – in fact it has much in common with the successful brand.com initiatives of recent years.
Hotel chains have regained much of the share of web bookings that they lost to the OTAs years ago. This has been accomplished through a combination of improved ecommerce capabilities, and the use of marketing funds to drive bookings to brand sites. Large chains – unlike fledgling OTAs – can do this because the cost savings can underwrite the enormous costs of customer acquisition. When the organization behind the new OTA has as much scale and as much to gain from its success as AAHOA does, it seems unwise to dismiss its chances of success as the interviewees in the aforementioned article do.
The Magnuson venture is also interesting, but for different reasons, because it blurs the lines between OTA and Franchisor. Magnuson is a disruptive and so far successful new type of chain – a membership organization with a low-cost, simplified franchise offer. It competes for new member hotels with other chains and membership organizations. The move to distribute rooms on behalf of non-affiliated properties puts them into competition with a hotel’s own brand for reservations services. Again, while it’s true that it’s hard to bring new travel brands to market, Magnuson is currently successful selling its own members’ hotel rooms. So why shouldn’t it be successful selling other people’s?
Although some strong predictions are made in Mr. Wolff’s article, nobody knows how either venture will pan out. Just as nobody outside the Googleplex really knows what Google will do in the travel industry, less still the greater disruptions to come from other mobile technology and social media brands.
Those first, tenacious Pilgrims who survived the brutal winter of 1621 in an unfamiliar land eventually gave rise to the USA. Hotel distribution seems to be heading into new and unfamiliar territory too. Some business models will thrive in the new world, others will not. But those of us who like our industry to have strong intermediaries and strong franchisors should welcome all of these developments. They will freshen up the industry, keep the established suppliers on their toes, and bring new options to customers. And for that we should all give thanks.
About the Author:
Dom Beveridge co-founded Hotel Compete following a career in travel industry revenue management. Prior to joining Hotel Compete, he held senior sales and consulting roles with JDA Software, Capgemini consulting and Manugistics (formerly Talus Solutions), having previously held revenue management roles at Savoy Group, Forte Hotels and le Meridien in the UK.