OTAs and Hotels: Friend or Foe?
July 27, 2017 4:34am
by Ryan Sikorski
The relationship between online travel agencies (OTA) and hotels exists along a spectrum ranging from that of cooperation to one of acrimony. The tenor of interactions has historically shifted over time and has done so in each direction. The relationship between the two recently appears to be shifting away from cooperation toward antagonism and this shift perception is supported by recent hotel initiatives and potential legislation.
Hotels losing increased control of their bookings as OTAs gain booking share and rising related transaction costs are primary drivers in the change of this relationship. In terms of historical scope, OTAs remain a relatively recent entry into the global marketplace, considering they were first introduced as a tool of travel agents in the 1980s and 1990s, becoming a well-recognized stand-alone entity in the early 2000s. However, like many online forces, what OTAs lack in historical significance they more than offset in terms of current significance. For example, trivago predicts that online bookings will surpass offline bookings by 2025, or at most 10 years. Phocuswright also reports that at least half of online U.S. hotel guests already use search tools, often through OTA websites, while booking rather than directly booking at a hotel in question. They also report that in 2016 OTA bookings in the U.S. surpassed direct hotel bookings for the first time. Generational trends indicate that this trend should continue to shift toward OTA bookings. Also, according to Phocuswright, more than half of millennials, as compared to 1/3 of those who are older, prefer to utilize a search engine when booking a room. OTAs now serve as a de facto first search engine for many travelers, especially younger ones.
Siphoning from a Hotel’s Bottom Line
OTA bookings constitute a considerable expense to hotels, who typically pay 10% to 30% commission to booking sites for each reservation and also command room prices that are positioned lower than those offered at similar properties via other booking avenues. It is ironic that many hotels initially expressed support for OTAs in comparison to traditional travel agents due to the expected lower cost of OTAs as compared to traditional travel agents, when in fact, OTAs now charge similar or higher costs in terms of percent of room revenue than travel agents previously did. Considering hotels often operate on a 25% to 40% profit margin, OTA expense is quantifiable.
OTAs also put a significant strain on the infrastructure of hotel websites as they pull rates with each search request. In fact, Marriott established a partnership with metasearch engine website, DerbySoft, in 2016 hoping to buffer itself from sizeable data requests made by OTA websites. In this case, DerbySoft’s software limits requests for room rates in the event rates at a hotel have not changed. This aims to reduce the strain on the hotel website infrastructure that dozens of requests per searching guest requires. In 2015, Marriott also made a well-publicized move away from its legacy systems to an open source system, hoping to “better compete in the digital economy” and “improve service delivery”.
An Industry Disrupting
Increased OTA costs, along with the hotels’ desire to both control the relationship with and the data of guest, have propelled hotels to make several changes to directly engage potential guests online for business. Most hotels have significantly increased their online presence and improved their digital infrastructure, hoping to book more online business. InterContinental Hotels Group (IHG) has steadily been introducing a new on-site upgrade (IHG Connect) for its guests at each property. IHG Connect hopes to gain guest integration by promising streamlined Wi-Fi access across its properties to loyalty guest users. Additionally, IHG will offer the industry’s first cloud-based reservation system. Hotels are also offering preferential services to guests who book direct including free Wi-Fi and room upgrades. Rewards memberships are now increasingly favoring travelers that book directly. Those rewards are not available to those booking through an OTA. For example, Hilton introduced a new marketing campaign called Stop Clicking Around, which will encourage customers to use their website. This campaign was reportedly one of Hilton’s largest. Another example is Marriott expanding its customer loyalty program to exclude travelers which OTAs to book their rooms.
Tension between OTAs and hotels reached heightened levels recently with Hyatt Hotels threatening to exit Expedia’s platform by July 31 if commissions are not reduced. This is a significant move as it is estimated that 10% of Hyatt’s business is derived from Expedia bookings. It is unclear if other hotels would follow suit if Hyatt executes this move.
Legislative bodies are considering measures to either regulate or limit OTAs, some of which may be the advantage or benefit of hotels. The 115th Congress is currently considering the Stop Online Booking Scams Act, which will require OTAs to clearly disclose their lack of affiliation with hotels. The stated aim of this act is to reduce the reported 15 million fraudulent online bookings that occur each year on rogue websites. Opponents of the bill maintain this estimate of fraud is overstated and that such a disclosure will provide a new advantage to hotel websites.
In addition, states such as Wisconsin are hoping to collect sales tax on OTA activity, which they do not currently do, and are proposing that these directives are enforced through legislation. Other states are approaching the same issue through the courts. Officials in 34 states have filed lawsuits against OTCs in order to apply hotel occupancy taxes to their services. Courts in 23 states hold that OTCs are not subject to these taxes while six have ruled that they are required to pay these taxes. In 2016, the California Supreme Court ruled in favor of OTCs over San Diego after San Diego charged a hotel occupancy tax to the OTC.
Earlier this year Chicago lost a $29 million appeal by Expedia over these occupancy taxes. Currently it appears that the argument over the application of occupancy taxes to OTCs is mixed and will continue to vary across states until the federal government gets involved. Laws are changing internationally as well. In 2015, the EU updated its rules to regulate OTCs including that hotels can propose lower prices and offer more favorable conditions to OTCs.
Due to their size and offerings, OTCs are expected to remain a primary force in U.S. Hospitality. In many ways, hotels continue to benefit from OTCs due to increased bookings and related efficiencies. However, gauging where the relationship between OTCs and hotels rests, and shifts along the spectrum towards cooperation or defiance remain to be seen.
Ryan Sikorski is the Valuation Services Director of the Milwaukee office for Colliers International Valuation & Advisory Services. Ryan has significant experience in markets throughout Wisconsin providing valuation and advisory services for investment real estate. Ryan specializes in the valuation of hospitality and leisure properties.
Contact: Ryan Sikorski
+1 414 727 9800
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