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Musical Chairs

A History Behind the LodgeNet Bankruptcy
This article is from the Spring 2013 issue of Hospitality Upgrade magazine.To view more articles covering technology for the hospitality industry please visit the Hospitality Upgrade website or to request a free publication please call (678) 802-5307 or e-mail. Click here to view the Spring 2013 digital edition.

By Mark Haley

April 5, 2013

On January 28, 2013, the music stopped for LodgeNet Interactive, at least as we knew the firm. That was when LodgeNet declared bankruptcy, with a plan for recapitalization under new ownership, Colony Capital. The stockholders lost all of their equity, but the stock was priced for that, having traded at less than five cents per share since December 31. Major shareholders that bore the brunt of the bankruptcy filing included officers and directors of LodgeNet as well as a secretive Boston hedge fund called PAR Capital Management, the largest shareholder.

That is too bad for the owners of the stock, who took a financial risk and lost. But, also feeling the pain were numerous LodgeNet employees forced to move on to the next phase in their careers. These people and their families have had to bear the disruption and anxiety of an unplanned job change, typically after many years of service at LodgeNet. The hundreds who remain at LodgeNet also experience a great deal of anxiety and dismay seeing long-time colleagues exiting, by choice or otherwise, and wondering about their own jobs.

On a positive note, LodgeNet customers are not reporting service problems or major changes in customer-facing personnel. Projects and initiatives are going forward and priorities are in place. Kudos to the many professionals that by all accounts are doing a great job taking care of customers, despite the disruptions.

As difficult and painful as the downward spiral has been for LodgeNet’s employees and owners, it is worth taking a moment to reflect that this is not the first time the hospitality technology industry has seen this process play out in this exact space. In the 1980s, Spectradyne, affectionately known as Speedy, created the in-room entertainment business using a rack of video cassette players to show blue movies at scheduled times. Over time, it became a corporate standard for most upscale and luxury brands and spun cash out of videotape, Marvin Davis’ modern version of Rumpelstiltskin.

Spectradyne’s success led to a couple of leveraged buy outs (LBO), putting the rich cash flow under a crushing debt load. The features that attracted the LBO firms spawned competitors and validated the revenue-share business model, for right or wrong. These competitors included On Command Corporation and Satellite Movie Company.

On Command, with an engineering-driven Silicon Valley culture, brought a better mouse trap to the game: the ability to watch the fine theatrical performance of your choice whenever you wanted, rather than at scheduled show times as Speedy offered. This capability won “OnCo” relationships with Marriott and Hilton. Satellite Movie Company morphed into LodgeNet Entertainment and wrested ITT Sheraton’s business away from Speedy. This set the stage for some truly bruising competition. In addition to competing on technology, the three firms were “buying the business” aggressively with free televisions for hotels and fat rebates for management companies.

Between its shrinking customer base, fierce competition and the debt load, Spectradyne ran out of cash and put itself up for sale. LodgeNet passed on the opportunity, with one former executive musing at the time “We don’t need to buy a hunting license. We can go after their customers without paying a penny.” On Command did not show the same restraint and acquired their wounded competitor, taking on the challenge of integrating Speedy’s personnel and operations and replacing the now-outdated technology as contracts expired. Spectradyne’s people experienced the same sense of disruption and anxiety then, as LodgeNet’s people have gone through. The music stopped and they didn’t have a chair.

Along the line, OnCo was acquired by Liberty Media. Over time, the On Command-LodgeNet duopoly settled into a see-saw of technological advancements and shifting customer relationships. Most observers agree that LodgeNet’s relatively low cost of operations, stable leadership team and outstanding ability to execute allowed it to gradually pull ahead in the marketplace. Eventually, Liberty forced a sale of OnCo to LodgeNet. The music stopped for OnCo, too.

On Command’s people went through the disruption of the acquisition and LodgeNet assumed the burden of integration and maintaining two distinct technology platforms as the existing contracts wind down. Where there were three, there is now one competitor of scale left. No disrespect to the several smaller competitors in the domestic marketplace, but none have achieved significant size to date.

One might think that a monopoly of a single large player with deep relationships with the major brands would create profits forever. However, take rates deteriorated in the face of online entertainment, where travelers could find online entertainment of any stripe without incurring a charge on the folio to explain in an expense report. The once-rich cash flows withered and LodgeNet’s famously stable top management team were replaced in recent years. After an interim CEO, a new chief executive came on board for about 100 days, long enough to pre-package the business for bankruptcy and exit courtesy of Colony Capital, a significant investor in hotel real estate assets.

Curiously, in the 1980s, Colony Capital founder Tom Barack worked at Robert M. Bass Group. Bass was invested in the LBO group that sold Spectradyne in the late '80s, with $575 million in debt, to oilman Marvin Davis. So the music plays on, at least for Colony Capital. In the meantime, some of the smaller competitors in the market can take advantage of opportunities presented by the LodgeNet bankruptcy to grow to meaningful scale and let the music continue.

Mark G. Haley is managing partner of The Prism Partnership, LLC, a marketing and technology consulting firm serving the global hospitality industry:

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Geneva Rinehart 
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Hospitality Upgrade Magazine 
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