Orbitz, Expedia: Stockholm Syndrome Meets the Web

In this economic downturn, Expedia (EXPE) and other Online Travel Agencies (OTAs) are desperately trying to generate incremental revenues, including advertising on their sites, to supplement their decreased margins. Sales pressure from the leading OTAs such as Expedia, Travelocity and Orbitz (OWW) has intensified tremendously over the past year. In addition to banner ads, in 2008 Expedia introduced TravelAds, a pay-per-click advertising program. Expedia proclaims that “similar to traditional search engines, this pay-per-click auction model is great for any budget”. The only caveat is that when users click on the sponsored listing, they do not go to the hotel website, they go to the hotel page on Expedia to make the reservation. In other words: advertising cost plus Expedia’s margin equals a total cost to the hotel of as much as 30%-40% from the booked hotel revenue.

Does it make good business sense to pay OTAs (who already make hefty profit margins from hotel’s net rates in the so called merchant program) to profit even further from hoteliers’ own inability to properly utilize the Internet and to damage even further the hotel brand and price integrity? We firmly believes that this is yet another proof of the existence of a new kind of disparity in the hospitality vertical: between smart, Internet-savvy OTAs on one hand and web-illiterate hoteliers on the other.

The OTA’s merchant model has greatly injured the hospitality industry and has done long term damages to the hotels’ brand and price integrity. You do not more proof than that; just look at the diminishing ADRs. The so called “rate parity” is in fact acceptance of the merchant-discounted rates as the hotel rack rates. The hotel’s discounted rates on Expedia have become de facto the hotel’s published rates. Though claiming to be “free of charge”, these merchant services cost hoteliers dearly. They cause long term damage and downward pricing pressures (both online and offline) beyond repair.

Paying to advertise on the OTAs, on top of these long-term damages, simply doesn’t make much sense. HeBS considers hotel-advertisers on OTAs as being the web reincarnation of the “Stockholm Syndrome” where the kidnapped victims (hoteliers) fall in love with their kidnapper: Expedia and the rest of the OTAs.

Disclosure: no positions

Comments

[Scott7777:]

Hi Max,

If there is an uncommitted traveler out there searching Expedia and a hotel wishes to gain more visibility then their competition how is this any different then bidding on a keyword term and offering a discounted promotion to increase conversion? It doesn't make sense that this is "brand damaging" when in fact it is building awareness of a particular hotel / brand even when a guest does not chose to purchase.

Additionally, you mention rate parity as putting out discounted rates as rack rates. If the rate is equal to the brand rate, how is this discounted except for the contracted discount that the hotel can chose whether or not to accept when signing up for an OLTA in the first place? Those in the business know that a true "rack" rate was a rate on a card that very few guests actually bought.

As far as "diminishing ADRs" you are probably aware that all ADRs including online ADRs have been increasing throughout the years and only recently have started to decrease. When only a small portion of rooms are booked through OLTAs how can this result in an across the board ADR decrease in all markets and why is it only happening now?

Finally, you cite "long term damage and downward pricing pressures (both online and offline)". You are correct that OLTAs have increased availability of accurate and easy price information and therefore that may cause pricing pressure. However it is naive to think this was never going to happen in the Internet world. I suppose one could make the same argument regarding any other major online retailer or product meta-search site.

If OLTAs were not to exist then you may have guests doing what you envision and doing Google searches for hotels by city and then going to every website individually to find a rate. This would certainly help your business. Or maybe they would start to call traditional travel agents with only 10% commission. However, I do not see many guests wanting to go through these hassles when information is already open and readily available.

As is usual, your articles are self-serving to your own business without regard to actual facts or thinking about the customer. Please think about all the facts with as much thought as you spend designing the catchy titles for your fluffy PR pieces.

2008 Dec 05 06:47 PM

[Alan4242:]

Scott-

You nailed it - Max does this merely to promote his business. As a hotelier we have been running a campaign on Travelocity with HUGE results. Not only via Travelocity but due to the way it was positioned we have vision into some significant direct business that came from our having display advertising on Travelocity.

Moreover engagement on these display ads via click through was better on Travelocuty than anywhere else we placed media dollars.

Max- Perhaps Expedia or Travelocity should do a sales call on you as you obvisouly have no idea the implications nor benefits of the OTA channel as it pertains to marketing.

2008 Dec 09 08:08 AM

[jesstyr:]

While agree with the previous posters on the PR-hungry tactics of HeBS, I also agree with many of the insights Mr. Starkov presents. The OTA model has done serious damage to the hotel industry, both in their opportunistic timing and their discounted model.

OTAs spur very little incremental demand, plain and simple. There is no arguing this point. What they do is creating pricing clarity for travelers (which is a great thing, holding hoteliers accountable/responsibl... but at what cost? 15%-25% margins are unacceptable in an industry where the brick and mortar is the only way to experience the product.

Successful marketing on OTAs equals share growth for single hotels, not revenue created. When the industry is being attacked by economic collapse it is of primary importance to increase demand, and not succumb to less savvy hoteliers and their short sighted strategies. Buy those ads now - we do the same thing - but this is not a sustainable competitive advantage.

A savvy hotelier needs to look beyond the results of individual campaigns and into the long-term strategy of their business. Promote on independent or meta-search channels that do not eat away at your profit margins with high commissions. Find ways to attract new customers. Re-establish the importance of customer service in attracting loyal, repeat business.

It's easy to toss Starkov's theory aside, but don't forget it when your neighbor outbids you on TravelAds or Travelocity. When do you cross the line of paying too much?

2008 Dec 09 10:50 AM

[abschow:]

As a search marketer, I find serious issue with the argument being put forward by you here your argument Max. If it were truly the case that the hoteliers were not deriving benefit from advertising on OTA websites, they would not being doing so. I think you are not giving enough credit to the community here - hoteliers are not internet illetrate any more.

If your argument were to be carried forward almost all brands would have a problem with advertising through Google. Lets face it they do because Google has traffic and it has traffic because it offers the searchers a valuable service. I believe the OTA's also fulfill a customer need and therefore hoteliers need to present on their sites. If in fact they dont they may be at risk of not following the natrual evolution in the market place.

2008 Dec 09 12:01 PM

[Edward123:]

Max is completely self serving and without merrit on more occasions that I can count. His inaccurate statements and negative commentary on new industry technology is embarrasing. This article is from the same guy that says Flash based booking engines like TravelCLICK and Synxis are not as effective as HTML. Despite customers like Trump Entertainment Resorts seeing online brand site revenues go through the roof! He is correct when he states that the cost of advertising + OTA margins cut into the overall profit. I wouldn't go as far, as Max suggests, to say that if you advertise on OTA's that you are a "web-illiterate hotelier". Advertising in any form should always be analyzed for an acceptable ROI and used to suppliment the other marketing initiatives of any brand or property. Come on Max, you know better than that!

2008 Dec 09 12:34 PM

[Santa Fe Va...:]

I would like to know why the hotel industry is not doing more to crack down on illegal vacation rentals.

2008 Dec 09 01:14 PM

[AreYouKiddi...:]

Not to pile on, but...I'm perplexed. I grow weary of industry talking heads that either don't know what they are talking about or are purposely distorting facts for their own financial gain. While it is obvious that the trend is for direct bookings, we cannot lose sight of the fact that the OTAs play a very critical role in the continued growth in online distribution for the hotel industry, especially for small brands and independents.

This article makes the same arguments from 2001; back when the merchant model was truly out of control. I will spare you the lengthy history lesson but the hotel industry saw the problem back then and responded in kind. They regained control over their brand, pricing, and inventory integrity through initiatives such as the hotel backed joint-venture Travelweb, the initiation of best rate guarantees, and through automation of the merchant model booking process. The merchant model is not the industry scourge it once was due to the collective and visionary efforts of hoteliers that I would not describe as a "web-illiterate" bunch.

That being said, in my humble opinion, one of the larger issues facing the hotel industry today is the proliferation of online marketing companies that have made an industry of convincing hotels to spend thousands of dollars plus commissions per month on PPC campaigns with no expected return on investment. I believe if we line up the cost per booking on an OTA vs the all-in cost with these SEM campaigns plus commissions on top of the other transaction fees, hoteliers may start to think differently about the value proposition these companies really offer.

2008 Dec 09 03:06 PM

[notnervousa...:]

I love the idea that OTAS are some kind of reputable body representing the interests of the many hotels throughout the World. The reality is different, when you actually go and visit hotels you find distressed general managers playing Booking.com et al, as though it were a public auction house - it becomes more important to know how your property appears in relation to others in your category rather than the special qualities of what is in your offering. And let's not forget the hoteliers best friend Trip Advisor, a site so dedicated to supporting hotels that it won't ever link to your property, forcing its visitors to go through one of the same bunch of booking portals.

So, let's distinguish between an OTAS industry that is really only interested in generating affiliate revenues and forged special agreements and kickbacks tied to online advertising on hotel brand names, and the majority of hotels that are locked into this cycle until someone proposes something better.

2008 Dec 10 10:10 AM

[YillWen:]

Wow. Catchy title, ignorant article. I sincerely hope that your biased article filled with quarter-truths (that's less than half) for your own personal gain influences as few people as possible.

Maybe if you tried reading your "articles" over before publishing them, then you might be able to recall some of that trash before it makes it out to the world. "You do not more proof than that"

2008 Dec 10 11:27 AM

[Europeanview:]

This is really one very onesided article. I just want to point out that it was not the merchant model itself which was invented by said OTAs that lead to the diminishing online ADRs as Max wants to believe. It was something else what hoteliers have practised over the years and have failed to understand its impacts when online business started to take off. On the other hand, I disagree with jesstyr comment about OTAs ability to create new business. Of course this depends on the destination but looking things outside US I have to say that OTAs have really expanded many hotels markets in to the new territories.

2008 Dec 11 08:19 AM

[SF Hotelier:]

I found another post on this topic that takes an alternate view. Its part of eMarketing Muse on hotels magazine. www.hotelsmag.com/blog.... A multitude of voices will help drown out points of view like the one in this post.

2008 Dec 11 01:21 PM

[Marketing Exec:]

Kudos to all of you for finally calling out Max as the one-sided opportunist that he is. The only positive thing that I can say about this post is that at least you didn't recycle the same article I have been reading for five years one more time. Now all you have to do is come up with something insightful as well as original and you might have something worth reading.

2008 Dec 11 03:29 PM

[User 318063:]

Way to go Max! Burn those bridges with some of the most powerful channels in the online market place when hotels need them the most! I guess you forgot that 58% of ALL hotel market searches by consumers are first researched through the OTA's. Use them properly with a web only rate strategy and they are an invaluable resource. As always you completely forget about the big picture with you short sighted perception. Why any hotel will take your strategy is a mystery to me.

2008 Dec 12 06:53 AM

[Max Starkov:]

Just to clarify a point here:
Commissions/margins paid by major travel suppliers to OTAs for bookings via OTA websites:
• Airlines: 0 (zero commission)
• Car Rental companies: 0 (some pay $3-$5)
• Hotels: $54.26 (ADR $108.52 (expected average ADR in the USA in 2009 x 2 nights at 25% margin)
• Hotels in NYC: $125 (ADR $250 at 2 nights at 25% margin)

Hotels are paying an average 54 to 125 times higher “booking fee” than airlines via an OTA website and 18 to 41 times higher fee than car rental companies.
Does it make sense to pay for advertising on top of this abnormally high “booking fee”?
You be the judge.

2008 Dec 22 03:13 PM

[jimbob79:]

Where did you get the figure for car hire from? In Europe commission % for car hire for Euro OTA's is up there with hotels.

Jan 06 11:42 AM