For a long time, the hospitality industry has managed to convince business travelers that they should pay extra for high speed internet access (or HSIA in industry parlance) in four and five star hotels even though the same companies offer it for free in their lower tier brands.
Four Points, Courtyard, Fairfield, Hyatt Place, Holiday Inn as well as newer brands such as Aloft and Indigo have all offered free HSIA to all guests for some time. However, their higher tier cousins such as Westin, Sheraton, Hyatt, Marriott and Intercontinental have long charged at least $9.95 (per day!) or more for the service.
Why?
Well, because they can. With a majority of their travelers staying on business where someone else is picking up the tab, upper-tier hotels have been able to get away with this. In contrast to the value oriented chains where the target is more leisure and small business clients (who may be paying the fees themselves) the big guys are targeting large corporate and group customers.
But holes are appearing in the "everyone pays for HSIA mantra"
During the peak of the lodging boom 2-3 years ago when hotels commanded pricing power, the upper-tier chains largely refused to negotiate on HSIA access charges for large corporate buyers. It was a sacrosanct rule at many chains to refuse to give it away as part of a negotiation.
Oh how the world has changed. Recent discussions with several of the largest corporate travel buyers have shown that free HSIA is now a very common component of rate negotiations. A quick check of many large corporate rates at several metro 4/5 star hotels yields similar results.
Don't work for a major corporation but have hotel loyalty program status? Free HSIA may be in store for you as well.
Hyatt started the trend last year when they began offering free HSIA to their top-tier (Diamond level) Gold Passport members globally.
Starwood fell into line beginning March 1st for Platinum members, again on a global basis.
And today, Marriott announced a similar program for not just top-tier members, but mid-tier members as well. Marriott, while covering more members, covers significantly fewer hotels however. Marriott's offering does not include hotels outside of the U.S. and Canada or even Marriotts located in Hawaii. (Maybe Marriott is trying to tell us something when we are on vacation?)
So, will HSIA revenues at upper-tier hotels go the way of phone revenues (picked up the phone in your room recently?) Between the growth of wireless cards and relentless competitive pressure, we think this revenue stream is toast. Even when lodging comes back in 2011, we doubt any of the chains will be able to convince customers that they should start paying for HSIA again. And by then, we may not be traveling with laptops anyway.....
Just heard Ctrip CFO Jane Jie Sun speak here at the Goldman Sachs Technology and Internet Conference in San Francisco.
Obviously, as we all know, Ctrip has been growing like crazy and sees lots of room to continue those numbers - and for good reason. A few snippets in no particular order:
Only 2% of travel in China is booked online today - and Ctrip has 50% of that market
80% of air travel is sold by agents - and airlines are generally happy with this "outsourced" distribution model
High speed rail presents a minimal threat because main stations are located far from the city center, stations themselves have few amenities and the trade-off just isn't there yet on a time or money basis
In fact, CTrip sees rail as a growth opportunity - not from selling train tickets but from selling more hotels as rail travel increases
Ctrip feels that at least 50% of hoteliers would pay more than the average 15% commission they currently ask for but Ctrip believes this is poor for the long-term partnership
The Shanghai World Expo is expected to be very positive because, unlike the Olympics, it is a six-month long event. The Olympics were so concentrated that many people stopped traveling to Beijing. The opposite is expected for the World Expo - business travel will continue into Shanghai and Ctrip expects large amounts of domestic tourism, particularly families with children to visit during the Expo.
The Chinese government in general "likes travel" and has designated travel as a "pillar of economic growth" which is always nice
But the biggest take away, however, was her discussion of Ctrip's recent investment in lodging operator Home Inns. If you are not familiar with Home Inn, you should be - they operate nearly 600 moderate hotels in China.
She said the investment has allowed Ctrip to gain access to deeper inventory and that Ctrip and Home Inns are in the early stages of connecting their systems to allow electronic distribution. She also mentioned that she saw this reservations connectivity and inventory management as a catalyst for other domestics chains - as Home Inns goes, so goes the industry.
We've known that business in China is different for a long time, but can you imagine if Expedia was to invest in Intercontinental Hotels? Or Choice? Even back when Cendant owned Wyndham and Orbitz/Cheaptickets etc, many in the supplier community thought that back door dealings were probably going on. (I've been since assured that Cendant was way too dysfunctional for that to actually happen.)
It will be interesting to watch how this relationship develops - but I'm not looking for it to be replicated here anytime soon.
While trolling around Delta.com this afternoon looking to burn some of our hard-earned SkyMiles we came across a new (or re-launched) feature called the SkyMiles Marketplace. SkyMiles members can search for hotels and cars and then use SkyMiles to pay for some or all of the cost of the room or rental. The redemption rates can be a little dear but hey with air redemptions getting harder and harder, it is nice to have another option - particularly one without capacity controls and the like.
A little sleuthing shows that this is another website powered by ezRez. ezRez has been on a terror of late, launching similar pay with miles/points programs with the likes of Starwood, IHG, and United.
One of the coolest features is the slider bar that allows members to choose the mix of miles to cash they want to pay for the hotel or car.
At the rate we've been earning miles lately, it is great to have another way to burn them that doesn't rely on the whims of revenue management!
In Part Two of our Ghosts of the Internet Past interviews, we caught up with former Expedia executive Spencer Rascoff.Spencer is now the Chief Operating Office of real estate website Zillow.com but was ran hotel supplier relations during the IHG/Expedia stand-off six years ago. Prior to Exedia, Spencer and I worked together at Hotwire.com where Spencer ran the hotel side of that business and I brought him coffee and donuts.
TomBotts:“Spencer, first off, do you miss travel?”
Spencer Rascoff: “Well, of course I miss travel.Real estate is fun – things are going very well here at Zillow.But I still follow the travel industry closely – several of us who were at Expedia during the IHG smack-down have been emailing back and forth and reliving the old days.”
Tom: “So, has anything changed this time around in your opinion?”
Spencer: “The biggest change is that the suppliers have developed much stronger direct selling capabilities.Six years ago, the brand sites were pretty much second class sites.That has changed radically.The brand sites are a lot more reliable alternatives to the OTAs now and the brands have developed tactical marketing capabilities to successfully drive traffic directly.”
Tom: “When it comes to the current breakdown between Choice and Expedia, what you see as the major issues based on what you know?”
Spencer: “It seems that the negotiations are almost exactly the same as they were six years ago - you can copy and paste “IHG” for “Choice”.So little has changed.Amazing that the industry has changed so little that they are arguing about the same 3 issues – LRA, sell rate and margin – it’s been the same for ten years!”
Tom: “Does it make a difference this time around that it is Choice rather than IHG?”
Spencer: “In my opinion, IHG was more important in 2003 than Choice is to Expedia in 2009.I would give the edge to Expedia in this bout.The dirty little secret out there in the OTA space is that they don’t really need all hotels for leisure consumers.They need to have a good mix of star levels and locations but they don’t need every single hotel for this customer base.The OTAs are focused on the key cities that make up the bulk of their business and there are several key properties – about ten or so in each that are fundamental must-haves.For example, you can’t sell hotel rooms in New York and not have the Waldorf=Astoria.IHG has (or had) many of these key assets – I’m not convinced that Choice is in the same position of strength and brand power.
Tom: “Does an OTA need to have all hotels for business customers?”
Spencer: “Yes, business travelers are a different breed – they book much more on location, loyalty program, habit and of course negotiated rates.If all of a sudden the hotel where their company has a negotiated rate is gone this presents a major issue for the supplier, the company, the TMC and the traveler.”
Tom: “So when IHG pulled GDS inventory from what was Expedia Corporate Travel (now egencia) how big of a deal was that?”
Spencer: “It was a nuclear bomb – we didn’t see it coming and it took us and our mutual customers by total surprise.It was the one thing that really brought Expedia back to the negotiating table.I don’t think Choice has the same amount of leverage, however.Their hotels are just not as important to the corporate travelers that use a booking tool as the IHG properties were and are.”
Tom: Any other key levers you see either player having in this game?
Spencer: “The other lever is understanding how much control the franchisor has over the franchisees when it comes to distribution.Negotiating with IHG was a three legged stool between corporate, the owners and Expedia.Jim and IHG did a great job of ensuring that the franchisees would toe the corporate line.The franchisees were unhappy but IHG was really effective at keeping them in line.I’m not sure Choice has the same power.”
Tom: “Do you think Choice can replace the demand through other channels?”
Spencer: “It will certainly be easier this time around but it is still really hard.One key fact that is hard to ignore is what we used to call the ‘billboard effect.’I’m not sure what the recent research shows but we found, back in the day, that for every booking that occurred on Expedia.com, the supplier site generated a direct booking as well.Consumers were exposed to the hotel on Expedia and then went off to book it on the supplier site.This demand generation is nearly impossible to replace.”
Tom: “Yes, we saw similar results in testing when I was at Starwood.So, does the lack of Choice hotels really hurt Exedia?”
Spencer: “I highly doubt Expedia’s conversion will take a hit.Consumers just book a similar hotel from a different brand.Now, this would not be the case if we were talking about a key marquis property – but for run of the mill hotels, consumers simply book something else.”
Tom: “Any parting thoughts?”
Spencer: “Well, in my mind, the wild card here is really egencia.It is very difficult to grow that business if potential customers see the TMC as at war with the suppliers. I’m not sure where things stand between egencia and Choice, but it is certainly Expedia’s Achilles Heel in this negotiation.”
As we discussed earlier, all of the relevant parties to the last major public flare-up between an OTA and a major brand (Expedia and IHG) have moved on to new challenges.However, we’ve tracked the two key witnesses down, and they both have agreed to discuss the current situation between Choice and Expedia.First, we are talking with former IHG SVP Jim Young.We’ll follow shortly with a discussion with Spencer Rascoff, former VP of Supplier Relations at Expedia, and now COO at Zillow.com
Tom Botts:“Jim, you lived through a similar situation a few years back when you were with IHG.What has changed since you went to the mat with Expedia?”
Jim Young: “It feels like the industry hasn’t learned a thing.Suppliers seek leverage in the good times when demand is high and Distributors take advantage when demand is low.I suppose you could argue that is just capitalism, but it sure isn’t sustaining and somewhat unproductive”
Tom: “Is the landscape still the same in your opinion?”
Jim: “Some things are different.I think there is greater price transparency and channel awareness with meta-search now in the mainstream.Hotels have greater ability to communicate with customers through social networks like Twitter and Facebook.Finally, I think that both hotel companies and OTAs have done a better job establishing their brand position in the market.
Tom: “Talk about the role of hotel brands in this puzzle”
Jim: “Hotel brands are in the business of franchising their trademarks, providing development and marketing expertise, as well as reservation services.They make money by charging fees, normally based on a percentage of total rooms’ revenue. Hotel owners sign franchise agreements in order to be part of a bigger system.It gives them access to services and scale they either can’t get or are too costly to procure on their own. As far as room distribution is concerned, the brand represents all their system hotels and negotiates the participation terms with all major travel sellers, offline and online and processes them through the reservation system. Some brands have very strong franchise agreements that clearly establish the brands rights to set the terms of these agreements. Other brands are just glorified representation companies with minimal design, quality, and compliance standards.
Tom: “What is the power of a brand in your mind?”
Jim: “A hospitality brand is a lot more than just the sign, the room decor and the attitude at the front desk. The brand is the market power you give to hotel owners to sell rooms.That is what it is all about, after all.If you are a 200 room hotel in a big city crowed with many competing properties or an 85 room hotel at an interstate exit with 5 other hotels on the same strip, having a strong brand is a big deal and it helps you beat the competition. If, however, an owner perceives that they can get better marketing, distribution and reservation production by going direct to the distributor, then the brands value starts to diminish.That is what keeps franchisors up at night.If they are not perceived as a strong well marketed brand, then they can’t grow their system”
Tom: “So, why now? Why is this fight happening at a time when most hoteliers are pretty happy to get any revenue at more or less any price?”
Jim: “Like I mentioned earlier, I don’t think the industry learned anything from the last exercise. The cyclical nature of the business constantly creates winners and losers in contract negotiations. Expedia’s timing is dubious – kicking hoteliers when they are down is a tough card to play.Choice and Expedia were operating under the previous terms of their agreement which had, apparently after a number of extensions, expired.It sounds as if Expedia saw an opportunity to bring Choice’s corporate agreement into the realm of what they claim is their accepted norm with other chains.Both would have been better served to build an agreement that would survive the normal cyclical nature of the business – building an agreement that survives good times and bad for both.”
Tom: “And so what of Expedia’s attempts to bypass Choice and go directly to the owners/franchisees?”
Jim: “As you said in an earlier post, ‘we’ve seen this movie before.’It is exactly what they attempted with IHG.We had tough guidelines in place that prevented our franchisees from deviating from the corporate strategic position.I’m not sure if Choice has those same standards in place.Going directly to the hotels is disingenuous if you really want to do a deal at the chain level.Expedia could drop a whole bunch of market managers if they focused on the chain level relationships rather than focusing on the hotels.”
Tom: “Choice has talked a lot about other efforts they are pursuing to replace the lost revenue from Expedia.Steve Joyce has placed the number at around $100M per year – not a small number given that it probably flows to a disproportionate number of hotels.You worked hard to replace the business you lost when you were dark on Expedia – did you make it up?”
Jim: “Well, we came pretty close.I can’t share exact numbers of course, but we were able to leverage some other key strategic partners to drive some pretty impressive numbers which demonstrated to its hotel owners the power of its brand system."
Tom: “So, could you have driven those numbers and retained the Expedia business for a net overall share gain?”
Jim: “Great question – the answer is probably somewhere in the middle.Some things are only possible when you switch allegiances and create the burning platform that forces everyone to react to the change – just look at Continental and SkyTeam vs. Star!I’m sure Continental will get an early benefit from being a full partner in such a large alliance.”
Tom: “Old airline guys (myself included) never get the Jet A out of our veins, do we? What is the net net of this situation?”
Jim: “I think, in the current state of mind of both hoteliers and OTAs, that this will end up as a giant, zero-sum game for both.Expedia will look a little less complete when their customers realize that Choice’s 5000+ hotels are missing from the display and Choice won’t have access to Expedia’s distribution reach. Something has to change.”
Tom: “What needs to change in your opinion, Jim?”
Jim: “I think there is a balance somewhere out there.In market segments where Choice has a strong brand presence and can easily tap the demand directly to their website, they don’t need to rely on the OTAs as much and should focus their efforts there.However, where Expedia can demonstrate that they can more cost effectively merchandise and deliver a room reservation to a hotel in a market that Choice is not as strong in or not targeting directly, then Choice should find a way to pay for that value delivered.”
If anyone thought things were getting better in the hotel industry, just take a look at the latest salvos the chain hotel loyalty programs are offering for stays this summer.
Starwood started the bonanza by offering 1 free night for every two stays until July 31st - a very rich offer - especially because the awards can be redeemed at some of Starwood's most exclusive hotels. Like all the chains, Starwood segments hotels into specific categories based on average room rate. Starwood starts at Category 1 (e.g. Four Points by Sheraton Saginaw) all the way up to a few uber-luxury hotels in Category 7 such as the W Resort Maldives. The free nights promo allows redemptions (with no blackout dates or capacity controls) as high as Category 6. The nights may be earned at any category of hotel. So, stay a couple of times at a Four Points and then you could redeem for a free night at the St. Regis Rome, the Westin Paris or the St Regis San Francisco. The only catch is that you can only redeem on Fri/Sat/Sun nights and you have to use them by the end of September.
Not to be outdone, Intercontinental Hotels has made a similar offer which offers a free night after two stays as well between now and July 3rd. However, IHG limits guests to earning four free nights (after eight stays) but they do allow redemption until December 26th. IHG allows redemption at all hotels worldwide (except a few in Japan) which makes this a great promotion as well.
Marriott jumped on board this morning with a similar stay and play offer which offers a free night after 3 stays between now and August 31st. The free nights can be used until the end of the year. Alas, Marriott is not allowing redemptions at their most elegant (and expensive!) hotels - only Categories 1-4 (out of a total of 8) are allowed for redemption. So, don't plan on earning your free nights in Cleveland and burning them in Paris.
Hilton has an offer of 1000 bonus HHonors points per night running until the end of June but we expect that they'll have something more exciting soon.
In the current environment, the chains are particularly concerned about losing even a tiny bit of revenue share from the road warriors who participate heavily in these loyalty programs. Hence, the chains are in a "me-too " battle - and the winners are clearly consumers who are still hitting the road.
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