Jan 18, 2017 – from Social Intelligence

The Travel Booking Battle Boils Over

Travel booking websitesHilton, in the midst of a marketing campaign designed to encourage direct bookings, recently agreed to list its rooms on TripAdvisor’s Instant Booking platform. While the deal seems counterproductive, it illustrates the complex relationship that hotels have with online travel agencies (OTAs) and metasearch engines. Third-party bookings are a valuable source of publicity and revenue for hotels, but also carry huge commission fees. Over the past two years, hotels have turned up their efforts to win back control over the point of sale. Yet OTAs keep on growing—and likely will keep growing for some time. Unlike brand-loyal Baby Boomers and deal-seeking Generation Xers, Millennial travelers would rather have one easy booking option than countless loyalty memberships.  

In just two decades, the travel booking landscape has been completely upended. Prior to 1996, travelers had two choices: book direct or speak to a travel agent. But that all changed when Microsoft spun off its subsidiary, Expedia, in 1996. Priceline was formed by entrepreneur Jay Walker the following year. While these OTAs originally were limited to hotel bookings, today they can help consumers book a cruise, rent a car, or find a flight. The ensuing rise of so-called “metasearch engines” like TripAdvisor, Kayak.com, and Orbitz gave travelers a one-stop shop on which they could find the best deal, period—whether that deal was available via direct booking or through an OTA.

Today, two enormous players control the vast majority of the OTA and metasearch universe. The clear leader is Priceline, a $76 billion behemoth that since 2012 has acquired brands such as Booking.com, Kayak.com, and RentalCars.com. All the deal-making has vaulted Priceline stocks to a lofty $1,500 per share, making it the S&P 500’s single priciest company. Because of Priceline’s size and its massive exposure abroad (80 percent of its 2015 revenue came from outside the United States), some analysts maintain that the stock is worth every penny. U.S.-based heavyweight Expedia, worth nearly $18 billion, boasts an equally impressive portfolio of brands—including Hotels.com, Travelocity, and Orbitz.

How do these firms make money? OTAs operate under one of two business models. The first is the “agency model,” whereby the OTA lists deals and makes a cut of each transaction. Priceline generated 93 percent of its gross bookings through its agency segment in Q1 2016. Though this model gives Priceline little control over inventory (rooms, flights, etc.), it frees the company from inventory risk—one reason why Priceline regularly attains annual operating margins above 35 percent of earned revenue. Alternatively, Expedia relies more heavily on the “merchant model,” whereby OTAs purchase inventory and resell it to travelers. Though merchant OTAs face high upfront costs (the price of buying a block of hotel rooms) and high inventory risk (the prospect of not selling those rooms), they are free to repackage and resell the rooms however they want.

For years, OTAs and hotels enjoyed a valuable synergy. OTAs raked in profits without having to spend anywhere near the overhead of hotels, while hotels could move unsold inventory and enjoy an instant popularity boost. In fact, a 2009 Cornell University study found that an Expedia listing can generate as much as a 26 percent boost in direct bookings. In the early days of OTAs, when commissions typically averaged just 5 percent, the partnership was a no-brainer for hotels.

Since 2015, however, the story has changed. Not only is the number of transactions booked through an OTA rising, but so is the commission rate per booking. By 2015, 27 percent of all hotel bookings valued at $100 per night or more were carried out by a third party—up from just 19 percent in 2011. As a function of growing OTA market concentration, companies like Priceline and Expedia have ramped up their commission rates to as much as 30 percent of each transaction. Combined with slowing hotel revenue growth, these rising commissions have seriously eaten into hotels’ bottom lines. In 2015, hotels experienced 10 percent YOY growth in commissions and wholesale transaction costs—far above the industry’s 7.3 percent revenue growth.

In response, hotels are fighting back. Many have embarked on expansive direct-booking marketing campaigns encouraging loyalty signups. Though “rate parity agreements” bar hotels from undercutting OTA prices, these contracts only apply to rates offered to the general public. Hotels can offer lower rates to a select group of customers—say, loyalty members—without violating rate parity. In 2015, Marriott became the first hotel giant to try this tactic with its #itpaystobookdirect campaign advertising its lower member rates. Last year, Hilton released its largest-ever marketing campaign, “Stop Clicking Around,” which extended direct-booking discounts to all loyalty members, while Hyatt announced a 10 percent discount for Hyatt Gold Passport members who book direct.

OTAs have mostly downplayed the impact of these programs. In a Q2 2016 earnings call, Expedia executives brushed aside a question about whether direct-booking campaigns caused a YOY slowdown in booking growth. Industry forecasters claim that the impact of these programs is negligible. Consultancy Morningstar predicts that direct-booking campaigns will create headwinds of less than 2 percent for Priceline and Expedia through 2020. But OTAs are starting to show real concern. Expedia reportedly strips descriptive details (such as pictures) out of certain hotel listings, while Booking.com “dims” offending hotels by lowering their favorability ratings.

So how will the direct-booking war play out? Changing generational currents favor OTAs. To be sure, today’s Boomer and Xer travelers are heavy users of loyalty programs. According to a 2014 Deloitte study of frequent travelers, Boomers are the most likely generation to be members of four or more loyalty programs (at 35 percent). Armed with these memberships, relatively few Boomers would risk losing out on their Hilton points by scouring Kayak.com for a deal. Xer travelers, meanwhile, are looking for the best value—and could be drawn in by rewards programs featuring cash incentives. Additionally, Xers don’t mind scouring the Web themselves for the best deal—in other words, the entire function of an OTA—if it saves them money.

But Millennials are a different story. Expedia data reveals that OTA customers skew young: Fully 36 percent are between the ages of 25 and 39, a high figure for an industry heavily weighted toward older customers. Millennials simply haven’t shown much interest in loyalty programs: Deloitte found that only 55 percent have more than one loyalty membership, the lowest share of any generation. Meanwhile, Millennials are drawn into the simplicity of choice that OTAs offer. To them, a brand like Priceline that curates and automatically selects the best option is showing that it cares about consumers’ time. (See: “When Less is More.”)

To be sure, OTAs and hotels—particularly smaller, non-branded hotels that need the additional marketing—could peacefully coexist. Budget hotels reliant on walk-in bookings could withstand additional OTA growth. But the remaining hotel operators likely will have to contend with Priceline and Expedia for years to come. 

Takeaways

  • The rapid growth of Priceline and Expedia has hotel operators concerned. While OTAs were once just one more revenue stream for hotels, they have transformed into profit-eating giants at a time when profit increasingly is tough to come by. In response, hotel giants are going all out to attract direct bookings through discounts offered to loyalty members. But the future looks brightest for OTAs. While Boomer and Xer travelers are motivated by brand loyalty and finding the best deal, Millennial travelers are not participating in loyalty programs. Instead, they simply want a hassle-free travel experience—which is exactly what OTAs provide. 
  • Priceline’s heavy global presence insulates it from direct-booking threats. Of the two OTA giants, Priceline derives a much higher share of its revenue from abroad—80 percent, compared to just 44 percent for Expedia. Why does this matter? Because outside of North America, most hotels are non-branded and need the marketing that OTAs offer. In 2015, just 41 percent of European hotels were branded, compared to over two-thirds (67 percent) in the United States. The big brands like Hyatt and Marriott that Expedia disproportionately does business with are the ones pushing direct-booking campaigns—because they see vastly less value-added in what OTAs bring to the table.
  • The sharing economy is rapidly becoming the next battleground in this fight. Both hotels and OTAs are snatching up sharing-economy upstarts. Back in 2014, Hyatt invested in upmarket, U.K.-based firm Onefinestay through a joint pilot program and a round of funding. The company was then purchased last year by French hotel group Accor. Expedia, meanwhile, bought HomeAway for $3.9 billion in late 2015. These deals have completely reshaped the travel booking experience. Priceline-owned Booking.com contains 7.3 million listings’ worth of “alternative accommodations” (like apartments) that travelers can view alongside traditional hotel rooms. This is a nightmare scenario for hotels, effectively transforming the sharing economy from a niche alternative into a full-blown competitor.
  • Metasearch, now an irritant for OTAs, may become a serious competitor. Metasearch sites like TripAdvisor were once simple ad-supported price comparison sites that would send users to an external site to book deals. But many metasearch sites, like Orbitz and TripAdvisor, have blurred the lines between metasearch and OTAs by adding booking capabilities. Low barriers to entry make it relatively easy for young metasearch firms to strip away OTA revenue and force a buyout. Yet the number of metasearch firms continues to grow. Massive YOY revenue growth spurred Trivago to go public last month, while even Google now offers airfare forecasts and exclusive hotel deals through its Maps app.