They’re Attacking the OTAs Again

August 8, 2011 in Journal by Hotel Compete

August in Nashville: the temperatures are high and the air is thick with humidity, live music and hotel performance analytics.  Last week the third annual Hotel Data Conference was held there and once again it attracted a great crowd spanning brands, operators, ownership groups and financial analysts.  Jeff Higley and his team delivered great speakers and content, and engaging and informative discussion throughout – well done!

The centerpiece of this year’s event was a panel session entitled “Distribution channel analysis: How does the puzzle fit together?”   It reported interim findings of a cost and benefit analysis of hotel distribution channels, details of which can be found here.   The study, based on 2009/10 data from 24,500 hotels, involves multiple organizations, some of whom presented at this well-attended session.  It began with an extensive channel segmentation of the sample hotels, but soon took aim on one channel in particular, the Online Travel Agents (OTAs).

OTAs in the Dock

First, Tourism Economics presented its analysis of the trade-down from to OTAs from more profitable direct channels, and the impact of this shift on room rates.  The analysis concluded that the “cost” of the OTAs to the lodging industry in 2010 was $2.5 billion.  A big, eye-catching number to be sure, but beware: this presentation was light on detail and will need to expose its methodology and assumptions more fully before that number can be taken seriously. 

Why?  Well first of all, hoteliers are not stupid.  Any Revenue Manager worth their salt knows when deeply discounted OTA rates make sense for their business.  Wholesale and opaque rates, for example, can be appropriate at the right point in the booking cycle if a hotel has little hope of selling out.  Both – as smart Revenue Managers know – can stimulate demand that a hotel may not be able to capture without the OTA’s reach.  To make any commentary on trade-down associated with these products we must understand the local market demand conditions when they were sold.  It wasn’t made clear how these critical factors had been accounted for in this analysis, so we must await clarification. 

The presentation seemed also to rely heavily on market averages.  Price sensitivities – for example – were estimated based on 25-year chain scale ADR history.  ADR and price are – of course – not the same.  ADR is a composite of all prices associated with a stay night, hence it’s an unreliable basis for any conclusions about discounting.  The relevance of the 25-year perspective was also unclear: hotel pricing decisions are highly specific to hotels and their competitors, many of which would not have existed in 1986.  Presumably a more sophisticated approach was used behind the scenes and will emerge when the study is published, but in the meantime we should treat the $2.5bn estimate with skepticism.

Next up, Cindy Estis Green provided some helpful recommendations on how a hotel could establish a more profitable channel mix by understanding their ROI.  But not before taking a couple of shots at OTAs, based on two different pieces of analysis of some IHG data.

IHG is unique in that it severed its agreement with Expedia in 2004 and resumed it in 2007, providing a before and after demonstration of the impact of an OTA.  The analysis concluded that the decision to re-engage with Expedia has delivered “no value at all” to IHG since they signed it.  That’s a remarkable call: Apparently the study has captured and will publish solid evidence that one of the world’s largest hotel chains was mistaken in a major policy decision.  We await the reaction with interest.

Ms Estis Green also drew on the IHG data sample to address the controversial question of the OTA Billboard Effect.  This part of the presentation began by discrediting an earlier paper from Cornell (which can be accessed here), claiming that its findings could not logically be correct, and that while this latest analysis identified some billboard effect, it was much lower than the previous study had suggested.

Examining the Evidence

To recap the major points of the presentations: in 2010 the OTAs accounted for ~10% of room revenue, provided far less marketing benefit to hotels than previous research suggests, continued to deliver “no benefit at all” to IHG and overall cost the industry $2.5bn.  If you had come to Wednesday’s session knowing nothing at all about the travel industry, you may have thought that it was a case study about a failed business model which, after a few lucky years, was now on the wane.

But when we glance at the second quarter earnings just announced by the largest OTAs it becomes hard to take this evidence at face value.  How do we account for the continued growth and financial success of companies like Expedia and Priceline?  Are hotel companies really so dumb as to pay lucrative commissions while losing money hand-over-fist as this study suggests that they did throughout 2010?  Should we believe that the OTAs’ billboard effect is as inconsequential as this latest analysis suggests, despite the colossal leverage that these firms wield in marketing?

It seems that once again we’re viewing this problem from the perspective of hotel inventory, rather than hotel customers.  Isn’t it possible that the OTAs are successful because they’re good at what they do – ie attracting customers and connecting them to supply?  The discussion of the billboard effect is instructive.  There is certainly no shortage of strong opinions on the matter in the hotel marketing community, but here we see two academic interpretations of exactly the same data that draw completely different conclusions.  Perhaps what this latest study really tells us is the limitations of theory in explaining this phenomenon. 

If the industry is really committed to understanding the billboard effect – and it ought to be if it is persuaded by the estimated $2.5bn this study thinks that it’s wasting each year – it should move beyond the theory.  Perhaps a budget like the $200,000 devoted to this study could finance a test where 1,000 potential bookers are given budgets of varying sizes to find hotel rooms online.  Several locations and date ranges could be selected, allowing the study to observe capacity-constrained and soft demand markets/periods. The study could then observe exactly which websites were used for which purposes as the test participants shopped around and ultimately booked rooms.  The results would provide a much-needed touch point in reality that would lessen the industry’s dependency on individual opinions.

In the meantime, though, prepare for a tsunami of OTA-bashing as the $2.5bn sound bite permeates the blogosphere like the humidity of August in Nashville.

Refreshing Insight

Hopefully among the post-event commentary, people will find time to praise what was probably the most insightful presentation of the two days, the closing presentation from Scott Berman, the US lead of PWC’s Hospitality and Leisure practice.  It came in a closing session where industry analysts discussed outlooks for the economy and the lodging sector.  The session had been re-hashing the usual talking-points, which can be summarized as follows:

• Room sales and occupancy have increased impressively during the recovery
• ADR growth is lagging occupancy growth
• Room supply has slowed to the point where it is well-aligned to demand
• ADR growth should therefore be faster because that’s what happened after the last couple of recessions
• The fact that it isn’t is an economic anomaly that can only be explained by hotels’ reticence to charge more for their rooms, and – of course – the nefarious activities of OTAs

For those of us who see no anomaly in a combination of higher sales volumes and lower prices – one suspects Adam Smith wouldn’t have either – this is a depressing intellectual cul-de-sac.  Is the industry entitled the same rate growth, despite the fact that this recession was way longer, with unprecedented default on debt and hotels being starved of capital for the last three years?    

Up stepped Scott Berman with the revolutionary idea that the industry’s problems may have something to do with the quality of the product.  Using an imaginative analysis of his own travel patterns for the year to date, he described hotel experiences and compared them to the rate profile of the hotels that he has used.  He concluded that a climate of travel industry apathy following years of operational cuts has degraded the quality of customer experience to a far greater extent than after previous recessions.  And that in this environment, travelers resent price increases and actively resist them. 

This should provide food for thought for the economic revisionists who can’t or won’t understand why hotels aren’t grasping pricing power.  Readers of this blog will be familiar with our views on quality and its absence from industry analysis, so it was nice to hear such an articulate account from a kindred spirit.  It was also a great way to bring to a close what had been an excellent conference.  We look forward to next year’s event, which – mercifully – is to be moved to September!