A LOOK UNDER THE SHEETS AT THE EVER-EVOLVING RELATIONSHIP BETWEEN HOTELS AND OTAs.

Of the two great innovations that technology has enabled in the hotel business in the past 15 years, only one has been truly disruptive: the rise of Online Travel Agents.

Clayton Christensen’s theory of disruptive innovation identifies an innovation that helps create a new market and value network, and eventually disrupts an existing market, displacing an earlier technology. The term is used in business and technology to describe innovations that improve a product or service in ways that the market does not expect, typically first by designing for a different set of consumers in a new market and later by lowering prices in the existing market. The Harvard business professor went on, in his seminal work The Innovator’s Dilemma, to explore the landscape of winners and losers created by innovations.

While the other great technological innovation in the hospitality industry, WiFi, has had a transformative effect, it doesn’t really count as a disruption; it’s more of a new revenue opportunity. OTAs, on the other hand, fit Christensen’s theory perfectly. And few things in the modern hospitality business have created as many winners and losers, or are as controversial as OTAs. To some, they have provided a huge source of new customers; to others, they are bullies, parasites who exploit the marketplace.

OTAs have evolved from the early days of traditional travel agents setting up shop on the Internet. What started as a grudging way to get rid of excess room inventory has grown into a distinct business, helmed by new giants of the industry that have no physical presence. They are Darwinian: created from a mutation that better fit an evolving environment, more fit to survive than businesses based on personal relationships (like the high street travel agents they have surpassed) or legacy distribution networks (like those belonging to the hotel chains). Hotel chains were slow to take full advantage of the Internet; the online world still came under the remit of the IT department, and those guys were better skilled at managing critical infrastructure and removing risk than jumping into the uncharted waters of making money on the Web. Meanwhile, independent hotels generally didn’t have the money to invest in the Internet.

The early OTAs realised that there was an opportunity to put competitive rates online (initially by taking distressed inventory from offline travel agents), building visits to their sites through aggressive use of Pay-Per-Click (PPC) ads, and then making it simple for regular people to book. But the earliest attempts were slow and unintuitive, and hotels were loath to put truly competitive rates online (they didn’t want to see an erosion of their margins, or to upset the wholesale trade).

Fast forward to today, and the OTAs dominate online travel. The new breed of OTAs – such as Expedia, Hotels.com and Booking.com – have grown to become enormously powerful forces, with multi-billion-dollar turnovers. The success of OTAs has been based in large part on location-based searches on Google, which is where most of the action is, as the majority of people start their hotel search looking at a destination rather than going to a particular hotel brand.

And now, the OTAs are to some extent being disrupted by the rise of another giant: TripAdvisor. The ubiquitous review site has now found a way to effectively monetise itself by showing rates from hotels and OTAs in the context of the hotel reviews. For now this is good money for all concerned, but it will be interesting to see how the relationship shifts. For their part, the OTAs have been building up review systems of their own, which it could be argued are superior to TripAdvisor. Having sold the hotel room, they can be sure the review is from a real customer, something that TripAdvisor can never be sure of.

Looking at the bigger picture, what does this mean for hotel brands and the future? To a large degree, the OTAs have managed to shift the focuses of online travel buying to the locations (customers always begin here), price (people always want the lowest) and reviews. The danger for properties is that with OTAs abundance of choices, ease of use and low prices, consumers will become more loyal to them than the hotel brand.

Of course, as a brand person, I don’t believe this will come true. Instead it’s an incentive for hotels to build stronger brands and learn some lessons from OTAs – particularly in terms of how they sell rooms online, and the ease-of-use of their websites.

Elsewhere:

Making the most of your relationship with OTAs

This first appeared in Status QUO Issue 3, July 2014

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