Gripes about OTAs are well founded

In Strategy, Hospitality

Working in the hotel industry, we hear a lot of gripes about OTAs (Online Travel Agencies) like Expedia, Hotwire, Booking.com, Hotel Tonight etc. And for good reason: since OTAs came into the picture over 20 years ago, their influence has grown considerably. Today, OTAs leverage their dominant position to extract bigger chunks of revenue from the relationships with hotels.

A typical hotel guest would not see that growing OTA margins ultimately result in higher travel costs. That, if the room rate was $100, and the OTA takes $25, it doesn’t leave a lot left over for staff, furniture, renovations or even Wi-Fi.

The relationship between hotels and OTAs has always been in flux, but in many ways, it feels like we’re in the midst of a breaking point.

Consolidation of major OTA players

It’s remarkable how quickly OTAs have consolidated. According to some estimates, Priceline Group (Booking.com, Agoda, Kayak, OpenTable etc.), controls almost 70% of the global market, with Expedia group takes up the rest. This is in contrast to hotels, who are still relatively well diversified in North American and European markets. Although the Starwood-Marriott merger could change potentially shake things up.

As noted earlier, this concentration in the market has allowed OTAs to negotiate increased commissions and dictate the terms on which they operate. Commissions, which started off at 5%, are now pushing 30% depending on the details of each individual agreement and the buying power of the hotel.

The rate-parity clause

For the interests of the consumer, the rate parity clause is the most problematic. Hotels are contractually prohibited from under-bidding the prices published on OTAs. This puts upward pressure on the price of a room as it removes the ability for hotels to compete on price. On top of this, OTAs have found novel ways to give the users the illusion of a good deal, and nudge them towards booking a room with the hotels that pay the biggest margins. This supports a widely held perception among consumers that OTAs have better rates than the hotels themselves, though the position and tactics employed by the OTAs are adding anywhere from 10-30% to the price of a hotel room. These are a few of the more common tactics:

This is what’s happening on the hotel side, magnified for smaller hotels who are at a greater disadvantage:

As OTAs now control the majority of platforms people book travel on, and spend such huge sums on paid advertising, hotels are no longer competing on a level playing field.

Consumer protection & taxation

Government organizations in Europe have begun investigating the businesses practices of OTAs to see if they conform to existing laws, and if they are ultimately good for business and consumers under legislation that governs anti-competitive and deceptive practices. This is happening in France, Italy, Germany, Sweden, and the UK. These actions will likely accelerate as OTAs continue leveraging their dominance in the marketplace to negotiate higher concessions from hotels.

There is also the issue of taxation, as OTAs subtract their commissions on booking before paying taxes. This denies governments a significant amount of tax revenue, and provides OTAs an unfair advantage over the hotels who are paying taxes on the actual price the rooms are sold at.

Fighting back

Hotels have begun fighting back. They’re doing this by promoting direct bookings through information campaigns and by offering perks and incentives through loyalty and rewards programs. These programs are one way the hotel can offer deals that fall outside the rate parity clause as they are “earned”. This includes things like room upgrades and amenities. It also allows hotels to establish a direct relationship with customers, which is invaluable as it creates the opportunity to market directly to them.

Hotels are also consolidating in order to keep pace with OTAs. This is simply a matter of scaling a business in order to run more efficiently, and to be more competitive. Marriott and Starwood have recently merged, overtaking Hilton to form the biggest hotel company in the world. And Blackstone is selling Strategic Hotels & Resorts, which will create another large player in the market.

Adapting to technology

Hotels have also been relatively slow to adapt to the market, a byproduct of the hotels and OTAs evolving at different speeds. This is because technology evolves exponentially, while traditional businesses do so in a linear way. Seriously though – when you look at the way people book travel, we’ve gone from faxing travel agents to browsing OTAs in a relatively short time. This has given OTAs a significant advantage in terms of maturation around technology. As a result, the OTAs are beating hotels at their own game, just like Uber is doing with the taxi industry.

Where we go from here

It’s not difficult to imagine a synergistic relationship between hotels and OTAs where parties benefit mutually: hotels rely on OTAs to sell excess inventory, and OTAs rely on hotels to provide their product and earn a reasonable commission. Both parties thrive. But as OTAs have consolidated, they’ve leveraged their power in the marketplace to a point where this relationship is becoming parasitic. And as OTAs ultimately rely on hotels to exist, this has some very bad long term implications for the industry as a whole.

Rather than managing the relationship and acting proactively in the interest of both parties, OTAs have used increasing amounts of leverage from their position in the marketplace. This has forced government organizations and consumer interest groups to act, while making hotels more adversarial in their relationship with OTAs. Ultimately this is not good for the consumer, and it’ll be interesting to see where this all leads to. But as long as the interests between them contrast so sharply with one another, I remain pessimistic.

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