Expedia, Travelocity and Orbitz walk into a bar. 

“We do not serve second and third rate Online Travel Agents here,” says the bartender.

“Well, they are now with me,” answers Expedia, “and the drinks are on me!”

The room erupts with joy. Drinks are flowing.

When Expedia bought out Orbitz within a few weeks of gobbling up Travelocity, it was great news for a lot of stakeholders. But it’s probably not so great for the hotel industry, which relies heavily on online travel agents (OTA’s) for their revenue and profits. Read on before you raise your glass.

First, A Trip Down Memory Lane

One of Expedia’s greatest assets was its first batch of market managers and directors. While Travelocity, Priceline (before booking.com) and Orbitz fumbled, Expedia built strong relationships with hotels and hotel personnel. Aggressive but likable market managers went out in person and made one exclusive deal at a time, pushing its competitors onto the sidelines.

Fast forward to 2015: Expedia acquires the remaining (and still flailing) OTA’s. Meanwhile, Priceline acquires Booking.com, a miracle move that puts Priceline in its own league of awesomeness. It’s shaping up to be a showdown of epic proportions.

Why This Is Bad News for Hotels and Travelers

Travelers, hotel brands and hotel operators all have good reason to fear this sort of consolidation in the OTA market. Let me explain why.

Higher Costs for Hotels

Orbitz and Travelocity lost out to leaders Expedia and Priceline a while back. Still, they had their market share and their contracts in place with hotel suppliers. With this latest consolidation, the option of selling your rooms on a different channel is gone. Your new “Expe-Orbit-Ocity” contract now will contain much higher margins for hotels because there’s nowhere else for hotels to go.

Now, why do hotel brands and operators need Expedia? I’ll say it one more time. Because they do not dominate the search engines, nor do they have a particularly good grasp on their own marketing, direct revenue and ecommerce. Just remember… if you don’t like Expedia, now you can also forget about Travelocity, Orbitz, Wotif and Trivago (all now owned by Expedia).

Airlines, on the other hand, do not have much to fear; they just walk out on the OTA’s like clockwork every year and then get back on board when the margins are corrected.

Industrial Style Customer Service

Supersizing things is generally not a healthy choice. This is especially true when it comes to larger enterprises and customer support. Try calling the ultra-consolidated United Airlines, American Airlines, Comcast, Vonage, UPS, or Network Solutions when you need assistance (as I’m sure you all have). All of these companies have grown through acquisitions, and every step has been a nightmare for their customers. This is yet another reason why Expedia’s shopping spree does not translate into anything good for the hotels that will now have to deal with a behemoth team.

Higher Prices for Travelers

Let’s not forget about the travelers. We all learned in Econ 101 that less competition breeds higher prices. Anyone checking the airfares since the Continental-United and American–US Airways mergers knows what I am talking about.

So what happens the next time you need a hotel room? Sure, go to Booking.com ( rooms only) or Priceline ( Room + Air) and check the rates or  go to Expe-Orbit-Ocity that’s the choice. Even with the astronomical growth of Airbnb, you still might require an airplane to get to your destination. You see? Owning the travel cycle is the name of the game.

Of course, several industry experts are not convinced about price increases for the end customer because travel is such a big market. It may take a longer time for these acquisitions to impact hotels than airlines, but the rise is coming.

“Coke vs Pepsi” for the Hotel Industry

First things first: Priceline’s acquisition of Booking.com under the leadership of Jeffrey Boyd still stands as the greatest acquisition of all time. It should be required reading for all business and hotel schools worldwide. Taking Priceline from a loss of $19 million in 2002 to a profit of $1.1 billion in 2011 is legendary.

Expedia’s acquisition strategy clearly reflects its need to stake out a strong market position in relation to a formidable adversary that started in Europe and is now giving them a run for their money in the US and Asia. It’s disappointing to see Expedia mismanaging its Air Asia partnership in the Asia Pacific market. Having people in the US and Europe manage Asia Pacific is a pitfall that a lot of US-based companies fall into. (APac expansion by a non-Asian company or hotel group is something that deserves its own article.)

A common theme for the two remaining OTA’s is their astronomical spending on online marketing. All this while, hotels (independent and brands) continue to bring a knife to an thermonuclear war. Even if you don’t want to admit it, you know that signing up for a $99- $599/month agency solution is not going to help you reach your full online revenue potential. Neither is hiring an agency with hundreds or thousands of clients.

According to CNBC, Expedia’s marketing costs (direct selling, Google Adwords, display, etc)  jumped 32% in 2014 to $2.26 billion. Priceline hasn’t filed its 2014 annual report yet, but in 2013 the company spent $1.8 billion on Internet marketing. This was a 41% increase from the prior year! Mark Mahaney, an analyst at RBC Capital Markets, estimates 90% of that went to Google. (To put that in perspective, I have worked with major hotel portfolios who balk at a yearly increase of $250/month in AdWords budget.)

For now, Expedia is like the Pepsi to Priceline’s Coke. It’s putting all its US-based failed adversaries out of their misery and playing desperate catch-up to mighty Priceline. As these giants fight it out, brand and independent hotels are just waiting to see what happens. They never took charge of building their own direct revenue and distribution, so they are at the mercy of whoever wins. Their marketing departments have fiddled with buzzwords like “millennial traveler,” shared “social media success” articles circulated by the hotel news media, and cycled through one internet agency after another in a race to pay less and less. As those activities have not done much to build their market share or revenue, hotels now have very limited choices.

So, would you like Coke or Pepsi to be your distributor? And, as in restaurants across the US, the answer is going to be “NO, we don’t serve both.”

Conclusion

In December of 2003, I visited the Dallas HQ of Hotels.com. The market management team had a funny cartoon pinned on their desks of a menacing looking Hotels.com valet using the Expedia.com suitcase to whack the Travelocity Gnome (which was lying sideways on the floor). I look back and realize I was getting a glimpse into the future.

I’ve been saying this for a while, but here I go one more time. It’s going to keep getting harder for hotels to make a profit unless they take control of their online distribution and dive into some real innovation. Instead of trend spotting, agency hiring and firing, and other hi-jinx the focus needs to be on owning and building your own digital assets and direct revenue.

 

 

How many times have I heard the hotel brands say they are going to “fight and win” the Internet battle against the big bad OTA wolves? It’s easy to see why the hotel brands are angry/embarrassed: those OTAs have done a massively superior job of marketing hotel rooms online.

So what have the brands decided to do? Unite and conquer. It almost sounds like a joke! “Hilton, Hyatt, InterContinental, Marriott, Wyndham and Choice Hotels walk into a bar…” The punchline is a website called RoomKey.com. It’s the hotel brands’ very own “OTA” response. Now at this point, I know a lot of you in the hotel industry already know about Room Key. But guess what? Everyday travellers have no idea what Room Key is. There are a few good reasons for that.

Here is why I think RoomKey.com has been set for failure from the very start.

Using Pop-Ups Is Not a Marketing Plan

I am shocked that Room Key’s core marketing plan got approved. I guess the brands had a few million dollars burning a hole in their pockets. The point is that the approach was discussed, approved and “built” (they acquired hotelicopter.com) and has been actively marketed.

You should know that you are setting yourself up for failure when your core marketing strategy revolves around pop-ups. Now this might have passed for an effective marketing play in… let’s say 1999. Today, pop-ups are so dead it’s not even funny. Really. Pop-ups really suck. The only reason we are still seeing any kind of pop-ups when we exit a site is that Internet browsers have failed to develop at the pace of the Internet (looking at you, Internet Explorer!). RoomKey.com gets the majority of its traffic from a “pop-under” that annoyingly appears when you close any participating brand website.OMG. I know, I am shocked, too! How did this get approved and then funded by the big hotel brands? Hypnosis, maybe? If spam (yes, “pop ups” are spam) is your big idea for traffic generation, imminent slowdown/backlash lies ahead.

Pop-ups for Life!

I had a wonderful opportunity to be on a panel with Room Key’s CEO, John F. Davis III. We met at the 2012 Lodging Conference in Arizona. I remember that I was pretty stoked to meet the founder of Pegasus! I am geeky like that. But what he told Tnooz in an interview that appeared in October 2012 is something that baffled me. John said, “Room Key’s business model was built on the concept of exit traffic, and for a business that is still quite new, only having removed the beta tag from our site 3 months ago, the scale of this exposure exceeds our initial expectations.” It’s pretty obvious to me that Room Key’s business and traffic model revolves around, well, pop-ups. Sadly, they think it’s something new and innovative. There is a reason why nobody has built a brand online using pop-ups. They are SPAM (we just covered this).

Farm to Table to Pop-Ups?

Room Key’s CEO also shared that “the easiest way to express Room Key’s unique position in the industry is to look outside online travel to another relevant consumer trend – in food.  We see real parallels with the farm-to-table movement.” Not sure the farm-to-table example is even close to what Room Key is doing. What real value is being provided to someone coming to your website by serving them a pop-up? There is nothing organic about that. What’s truly organic is traffic that you earn through providing valuable content. What’s organic is coming up with a strategy to provide value, build your brand, and attract repeat customers. What’s not organic is grabbing a one-time booking from someone stumbling onto your website via spam. Spam is not an organic food.

Okay, I think you get the parallel between the long-preserved nature of both pop-up technology and mystery meat. Let’s talk numbers.

Traffic Number Exaggerations + Compset Confusion

John Davis claimed to have “14 million visitors a month” in the same October 2012 interview. Compete.com shows their visits averaging 3.7 to 4.8 million; in other words, 10 million visits short of what they stated.

But hey, Compete.com is just an online tool. It can be off by a few million… right?

John also said that only 5% were direct visits (people who typed Roomkey.com into their browser window). Analytics 101 tells us that with 5% direct visits, the Roomkey.com brand is not actively building itself online. No conversion or revenue statistics have ever been shared. To quote John, “our conversion rates are very much in line with the objectives we set for the business and are meeting shareholder expectations, bringing millions of visitors per month into the Roomkey.com experience.” I really wish my shareholders were this naïve, happy and satisfied.

Another interesting example of cluelessness is this quote from their standard presentation: “Roomkey.com is receiving 7 times more visits than other recent start-up hotel websites like Hipmunk.com and Room77.com.” Comparing a pop-up catcher to awesome and innovative startups like Hipmunk and Room77  just highlights how clueless the brands still are.

Forgetting Something?

There is another fundamental problem with the site. The “beta” launch did not include any independent hotels. You can’t be a travel engine/online agent if you exclude an entire segment of the hotel industry. Launching with only the brands that paid for Room Key is going to come back to bite them, as they are now actively seeking to add independent hotels. Why won’t the independents want to join? Simple answer. Suspicion. How do independent hotels know that Marriott, Hilton and Wyndam hotels will not always be Room Key darlings? How can they expect to get fair representation? Not a smart move for an “innovative hotel search engine.”

Any Chance of Success?

Yes, there is always a way out of the darkness. A massive shift in policy needs to be implemented. The big brand shareholders need to come up with a better strategy. I would start here:

1. A better source of traffic than pop-up spamming .
2. Aggressive recruitment of independent hotels and resorts, especially in the international market.
3. Learning from successful OTA’s like Booking.com, Expedia.com, and also super-cool disrupters like Airbnb.com.

In today’s world of online travel, clinging to what’s comfortable is going to get you nowhere. It’s nice to see the brands trying to join the internet age, albeit a little late. But they’re still holding on to the edge of the pool. Understand why the market leaders are successful and build on that, or take it in a new direction. But you’ll never succeed using last year’s (last decade’s) online strategies.