14 February 2012 8:34 AM
By Patrick Mayock
- Lower-commission online travel agencies lack the critical mass or marketing clout to compete with established players such as Expedia and Orbitz, experts said.
- Several other low-commission models have failed in the past.
- Booking.com, which boasts 55% market share in Europe, is a major threat to the OTA merchant model in the U.S., said Max Starkov of Hospitality eBusiness Strategies.
GLOBAL REPORT—The launch of several “hotel friendly,” lower-commission online-travel agencies is unlikely to impact the existing commission structures of established players such as Expedia, Orbitz and Priceline, according to experts.
The founders of the recent entrants, however, are betting they can make a splash.
The past year has seen a swell of such low-commission players, including the Asian American Hotel Owners Association’s Mybesthotelrate.com, Tom and Melissa Magnuson’s Global Hotel Exchange and the brand-led Room Key.
Each has generated its fair share of buzz, but they lack the critical mass or marketing clout needed to compete in a crowded distribution space, said Max Starkov, president and CEO of Hospitality eBusiness Strategies.
What’s more, they lack the value propositions necessary to make an impact, he said.
“When you look at any such player in the distribution space … you have to look at it from both the travel-supplier perspective but also the travel-consumer perspective,” Starkov said.
The new platforms benefit suppliers with lower commissions or fees. Mybesthotelrate.com and Room Key charge commissions of approximately 10%, according to reports, while the Global Hotel Exchange is free to hoteliers—it’s funded by a US$2.99 service fee charged to consumers for each booking. OTAs can charge upwards of 20%, Starkov said.
But what’s the benefit to consumers?
“When I look at it, there are none at this point,” Starkov said. “That’s my main concern. If I am a travel consumer and over the past 17 years already I’m using Expedia or I’m using Orbitz … or if I’m brand-conscious and I’m very loyal to Marriott and I’m using Marriott.com, why am I using Room Key? Where is the value proposition?”
Tom Magnuson, who is CEO of both the Global Hotel Exchange and Spokane, Washington-based membership group, Magnuson Hotels, said the value proposition is in knowing exactly what customers want: simplicity in booking.
“People know what they want, when they want and how much they want to spend, and they want to get in and get out,” he said.
When travelers enter a search for a 3-star hotel in Cleveland within X miles of the Rock and Roll Hall of Fame and Museum, they don’t want 300 choices, Magnuson gave as an example. “I want five or six that exactly match,” he said.
But Starkov said simplicity might actually be working against Global Hotel Exchange and other low-commission OTAs.
Further amplifying matters is the lack of marketing clout, Starkov said. The heads of Mybesthotelrate.com, Global Hotel Exchange and Room Key have very publically outlined a route of frugality when it comes to TV and Internet advertising spend.
“It’s a very expensive proposition,” Starkov said of establishing a new brand. “We’re talking about multimillion dollars to even remotely establish any kind of brand, especially in the travel space, which is perceived as already overcrowded. I don’t see these guys having the resources to build brand awareness.”
Based on public records of spending from U.S. Security and Exchange Commission filings, Expedia and Orbitz spend approximately one-third of their revenue on marketing and selling, with operations being closer to 20% of revenue. This is in contrast to the amount a hotel spends, which is approximately 10% to 12% of its revenue on marketing and 35% to 40% on operations, according to the “Distribution Channel Analysis” study, which was published by the Hospitality Sales & Marketing Association International Foundation. STR, parent company of HotelNewsNow.com, provided data for the study.
But Magnuson points to other brands that have caught on without a major marketing spend.
“Marketing for Global Hotel Exchange is just going to be the idea,” he said. “Google didn’t need any marketing.” The same was true for Magnuson Hotels, which caught fire nearly a decade ago based mostly on positive word of mouth. The membership group now has 2,000 hotels in the U.K. and North America, Magnuson added.
And early signs suggest Global Hotel Exchange, along with its lower-commission peers, could experience similar growth.
But while momentum might be in the favor of the lower-commission players for the time being, previous attempts at similar models suggest the new entrants face a rocky road ahead.
Before Room Key, for example, several major brands joined in support of TravelWeb.com. Debuting in 1994, the platform was the first real-time hotel booking reservations engine online. The site was built by Pegasus, who in 2000 joined with Hotel Distribution Solution, a consortium of five major chains. Numerous factors led the site’s owners to sell the platform to Priceline.com a few years later.
WorldRes.com was another less-than-successful attempt. The distribution platform charged hotels approximately 5% commissions but lacked a value proposition to set it apart in the eyes of consumers, Starkov said. While WorldRes.com still is a functional site, it comprises an exceptionally low share of overall online bookings, Starkov said.
“They were merely online agencies that were friendly to the hospitality industry as opposed to OTAs. And where are they today? Nowhere,” he said.
OTA commissions holding strong
Executives at Expedia, for one, have no plans to lower the OTA’s commission structure, regardless of what new distribution platforms emerge on the scene.
“Expedia is committed to ensuring that our compensation levels are in line with the value that we deliver to our hotel partners,” said Melissa Maher, the company’s senior VP of global strategic accounts and industry relations.
That value includes more than just the ability to distribute rooms, Maher emphasized. Rather, it includes a high volume of demand, a vast international reach, multiple channels within in a single marketplace (Expedia offers several distribution methods, such as opaque, package, standalone and seasonal), marketing and support from dedicated market managers.
Factor in all of those services on top of the traditional 10% commission the hotel industry has adopted for third-party sales through all travel agents, and the OTAs feel justified in charging commission upwards of 20%, 25% and 30%, Starkov said.
The next big competitor?
While Mybesthotelrate.com, Global Hotel Exchange and Room Key attempt to cultivate their respective consumer bases, Starkov thinks the biggest threat to standard-commission OTAs is already flexing its muscle: Booking.com.
The Priceline-owned distribution engine is the biggest in Europe, with more than 55% market share of all online bookings in the region.
The site runs on a pure agency model: Guests search for hotel rooms on Booking.com, which passes credit card information and other key data to the hotel direct. The hotel charges the guest’s credit card on arrival and pays Booking.com a 15% commission after the fact.
The OTA’s success in Europe was bred from the region’s lack of brands. Without the likes of Marriott or Hilton providing hoteliers with global reservation engines, Europe’s independent hotel owners turned to Booking.com’s simple and affordable distribution platform to keep pace in the Internet age, Starkov said.
Booking.com already has expanded into the U.S., primarily on the West and East Coasts where international inbound visitors are most likely to travel. But the OTA’s executives have their sites on the entirety of the U.S.
“In the U.S., Booking.com is expanding its business rapidly with offerings that are very competitive with other online hotel reservation services,” Booking.com executives said via an emailed statement. “Many of the Booking.com hotels are offered on a ‘pay at the hotel’ basis, which is attractive to travelers who prefer not to pay for their rooms up-front. Also, many of the published-price hotels available on priceline.com are sourced from Booking.com.”
“If Priceline succeeds in that, this will automatically work against the OTA merchant model,” Starkov said.