Hotels & Online Travel Agencies (OTAs): Friends or Enemies? How about Frenemies!
September 9, 2016
Two seemingly conflicting articles made their debut in two respected publications this week. First, Harriet Edleson of The New York Times detailed on September 5 how hotels are enjoying record occupancies and are steering business away from OTAs. Hotels are fuller than ever and don’t need the business from OTAs – which comes attached with high commissions – to fill their hotels. She argued that hotels are turning their backs on OTAs that helped them get through crises and finding ever more creative ways to offer lower rates on their own website than they give to the OTAs – thus exacerbating the fierce competition for the customer’s attention. The next day, Skift, an industry insider publication announced that Expedia is helping Marriott sell more rooms, on Marriott’s own website. There is no Expedia branding (although the look and feel is the same), and no doubt it comes with Expedia’s hefty commissions, but the goal is to drive bookings through the Marriott's website via an Expedia driven platform, signaling that the two were cozying up to each other in collaborative ways. So which is it? Friends or enemies?
The travel industry landscape has changed incredibly quickly in the past decade – a true testament to globalization in more ways than one. First, growing wealth across the world has lifted millions into the middle class with more disposable income than ever before. Second, air travel has become easier, cheaper and safer prompting vast populations of people to want to see the world. Third, as the world becomes richer, people move from satisfying material needs to more personal and experiential needs with travel being the most rewarding expression of this desire. Fourth, technology has become cheaper and literally brought the world in to homes with cheap internet only fueling the desire to travel. The result is an explosion of this true global phenomenon. No one, not even the OTAs renowned for their speed and agility have been able to grow as quickly as the world has shrunk and take advantage of this trend in a true global fashion. Hotels have struggled to grow their footprint in emerging markets – the rush to get into China in the early noughties can evoke images of wild tigers fighting to get a bigger share of the kill. Global airlines can’t be regional airlines in every part of the world too. So, amidst this chaos, travel providers from the world over have sprung up and have been successful in capturing a piece of the global travel pie. If there is ONE underlying sentiment that drives any company in the travel business, it’s market share. With travel being a commodity more than ever, the only real advantage that any travel industry business has is its stronghold on customers, a leverage which has enabled the likes of Expedia and Priceline to command high commissions in the first place.
So what’s changed?
Since the downturn of 2001, twelve of the past fifteen years have been marked by tepid growth at best and the most crippling depression at worst. The short lived heyday of 2007 was the only spark that the travel industry had going for it. So the only way for companies to grow faster than the organic growth of the market was to steal marketshare from one another. Hence this long tug-of-war between hotels and OTAs. They lived happily together in this perennial state of give-and-take, leveraging each other’s strengths where necessary. All this while things were getting better in occupancy and hotel supply had also started to grow. Fast forward to 2016 and occupancies are at a record high, more people are traveling than ever, low oil prices have made tickets cheaper, and it looks like more new customers are coming into the travel marketplace than ever before. This has heated up the frenzy once again to capture as much of the pie as possible and with hotels and OTAs trying to solidify their position as the market leader in customer acquisition. More importantly, watching these eye-popping numbers of travelers, many outsiders are jumping in, with innovative ways to build on previous successes, or capitalizing on finding newer business models to satisfy the on-demand travel economy. Not to mention that the likes of Airbnb, HomeAway and onefinestay have completely turned the concept of hotels on its head. Increasingly, the established players are facing threats in their own backyard like they’ve never faced before. The very ground under their feet they used to soar previously is starting to soften.
The evidence of this can be found in Expedia’s own 10K filings where they summarize their very first risk factor – competition by admitting, “… increased competition has resulted in and may continue to result in reduced margins, as well as loss of travelers, transactions and brand recognition”. Hotels on the other hand, have had their hands full with servicing their customers, growing their footprint, operating efficiencies and shifting from a real-estate heavy model to more management contracts. This left a gap in customer acquisition based on new technology that hotels have not been quick to adapt to. Using systems that were built decades ago – hotel companies have somewhat of a reputation of adapting slowly to technology innovations anyway.
The Perfect Storm
With newer entrants chipping away at both hotels’ and OTAs’ strong positions, both have had to re-think the tumultuous relationship of the past fifteen years. They’ve realized that in-fighting will cost them a lot more in the long run than it is worth. The need of the hour is to fight off the new threat. How do you do that? You leverage each other’s strengths. Expedia is at the forefront of technology innovation – it’s the first strategic way of growing that Expedia mentions in their 10K filing, while hotels need a better way to package products that they do not own but form a comprehensive travel package aka. air travel. What you’re seeing is a careful dance between the OTAs and hotels to see how much they can trust each other, and benefit from each other’s expertise. Neither has committed to, nor should you expect to see them collaborate in their core competitive area of selling just hotel rooms. That’s where they still compete, and will, unless an existential threat greater than today’s forces them to do something more radical.
The New Normal
OTAs know that if the suppliers ever ganged up on them, they would be in trouble – their ability to keep the customer is only as good as the leverage they enforce (via parity clauses and such). So the real sustainable advantage they have is if they create innovative technologies that the suppliers were forced to use for better conversions. Hotels on the other hand won’t have to spend millions into technology improvements that are specific to their brand and doesn’t further an industry wide standard. It’s in both parties’ interest to create synergies that keeps other newcomers out of the game. Does this mean they will stop being enemies and be bosom buddies? Unlikely. With customer acquisition costs high for both parties, they will continue to vie for the customer but with many forecasting an imminent downturn in the industry soon, the new normal that the industry will settle on is the middle ground and become ‘frenemies’!