It’s been a dozen years since online travel agencies became a regular part of the hotel industry’s lexicon. Most of the years have been contentious as a number of OTAs have figured out a way to make a lot of money from hotel reservations while not accounting for the needs of the bricks-and-mortar aspects of the business.
Expedia, Inc., which includes the Expedia, Hotels.com, Hotwire, Egencia and Trivago brand names, is among the OTA behemoths that emerged from the 2001-2002 downturn. In the aftermath of the 9/11 terrorist attacks, hoteliers eager to fill rooms any way they could jumped on the OTA bandwagon and later convinced themselves they made a deal with the devil.
Hoteliers have long complained about exorbitant commissions charged for rooms sold through the likes of Expedia. Those same hoteliers have, for the most part, no obligation to provide rooms to these OTAs but do so because they want to increase their occupancy rates.
During the last 12 years I’ve crossed paths with a number of hoteliers who said they love what OTAs bring to the table but don’t like the cost of doing business with them. I told most of them that when the chance arose, I’d point-blank Expedia’s top executive about the commission structure. I got my chance last week.
For full disclosure, Expedia paid for my airfare and hotel stay during the company’s partner conference at Caesars Palace. I didn’t come away drinking the Expedia Kool-Aid, but I do have a better understanding of what the company is trying to accomplish.
That starts with how it makes money—most notably through commissions from the sale of hotel rooms on the various sites it owns. When I got my five minutes with Dara Khosrowshahi, Expedia’s CEO, late Thursday afternoon, we dove right into the topic of commissions. My question: “How do you respond to hoteliers telling you the commissions are too high and what can be done about it?”
Khosrowshahi’s answer was a mix of corporate script, common sense and unexpected candor:
“You don’t have to pay a nickel up front to get exposure to 60 million eyeballs on a global basis. You’re able to reach consumers all over the world … Chinese consumers, European consumers, Latin American consumers, U.S. consumers who it would take a fortune for you to otherwise market to.
“Whether it’s marketing to them or building a local language website, or building payments, etc., we only get paid when we bring you the volume. We believe that there are many, many circumstances when consumers come to our site, find a hotel, read about it and go directly to the hotel website. We’ve shown over and over the billboard effect of the traffic a hotel gets directly to their website from us. And we think when you take that billboard effect into account, when you take into account the global nature of our audience the fact that there’s zero up front marketing costs—it’s success-based only, we think it’s actually a pretty good deal.
“The market value of a good is based on the value that that good brings. If we weren’t worth the commission that we have then we wouldn’t be able to charge that commission.”
Expedia’s marketing costs are staggering. Mark Okerstrom, Expedia’s EVP and CFO, said during the opening general session that the company spent $2 billion on sales-and-marketing efforts during the previous 12 months. There’s no way to accurately gauge it, but my guess is that maybe, just maybe, the hotel industry as a whole spent that amount.
Fostering relationships
So, is any marketing good marketing? I believe it is, and I also believe there is some billboard effect. While I don’t buy into some assertions that the advent of the OTAs has in and of itself created incremental business for hotels, I do 100% believe the OTAs have fostered a better relationship with consumers and an ease of use for them. Okerstrom said Expedia’s technology spend for the past 12 months was about $500 million. The thought leaders the company has put in place to help develop and improve technology platforms can’t be underestimated.
The results speak for themselves. According to Okerstrom, Expedia’s gross bookings during the third quarter were up 15% over the same time last year. That comes on the heels of a 13% jump during the second quarter and a 16% increase during the first quarter.
But the conversation surrounding hotels and Expedia always comes back to commissions. The scuttlebutt is that InterContinental Hotels Group and Expedia are going toe to toe in its current contract negotiations—and to no one’s surprise, the commission structure is the biggest obstacle. It will be interesting to see how it plays out. Given Khosrowshahi’s comments, it’s hard to imagine Expedia giving in too much. Whether the commission rate is 15% or 30%—or somewhere in between—is a big difference for someone’s pocketbook. Who will blink?
It wouldn’t shock me that at some point sooner than later, one of the smaller hotel brands decides to team with an OTA rather than compete. The day a 300-property portfolio decides to use an OTA as its sole distribution platform isn’t so farfetched. Outsourcing is a normal business practice, and with every brand saying their most important mission is the guest experience, it might make sense to outsource the distribution platform and get rid of the headache of trying to keep up with the Joneses.
Many executives in the industry are waiting for a distribution-platform cost analysis report to come out in 2014. Cindy Estis Green of Kalibri Labs has alluded to such a report on several occasions this fall, and being able to have an acquisition cost for each booking on each distribution platform will be a help for hoteliers. But as always, the end game comes down to managing rate effectively—something that’s not lost on Khosrowshahi.
“I do think we bring a revenue management challenge to a hotelier, and I think the hoteliers who manage our channel very aggressively and then as they’re building in demand drive their (average daily rates) aggressively, those hotels do very, very well,” he said. “If you use us as a passive channel, then I don’t think we bring quite as much value. But when you work your ADRs and your book of business and you use packages and you use last minute, etc., and you actively manage us, we think we’ve seen hoteliers have great success.
“Hoteliers are starting to appreciate the role of revenue management more,” he added. “The smart hoteliers are getting more aggressive. It’s not enough to have two rates: off season and high season. You can choose to do that but you’re going to be selling yourself short. It is a world where change is upon us on a daily basis. If you manage through that, and especially if you revenue manage through that, you can have great returns.”
While it might not quell every argument and end the love-hate relationship between OTAs and hoteliers, a good revenue management plan goes a long way. Commission structures might not be the most advantageous for hoteliers, but if they are planned for, if inventory is property disbursed to various distribution platforms and if solid revenue management techniques are employed, they really shouldn’t be a major deterrent to conducting business.
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