Comment: Key To The Online Future? Not Likely

Logo - RoomKeyYou know something is up when six of the world’s biggest hotel groups join forces to create their own booking website to directly compete with online travel agents.

Choice Hotels International, Hilton Worldwide, Hyatt Hotels Corporation, InterContinental Hotels Group, Marriott International and Wyndham Hotel Group all own a piece of the new site – Roomkey.com.

It’s caused something of a stir in the tight-knit world of travel distribution though not the controversy it might generate in some other industries where suppliers would never set up shop to compete directly with retailers.

But the travel industry has seen it all before.

A recent example includes the oddly named Opodo, a European Online Travel Agent now owned by private equity, which was originally formed in 2000 as a joint venture between Aer Lingus, Air France, Alitalia, Austrian Airlines, British Airways, Finnair, Iberia, KLM and Lufthansa.

Their motivation, same as the Roomkey.com founders, was to cut travel agency distribution costs, which can be as high as 30 per cent.

The partner airlines figured they could sell their airfares at a reduced commission through their very own online co-operative, just like Roomkey.com

But it wasn’t that simple.

For a start, big commercial websites cost a lot of money to run and market – they eat cash, especially in the early formative years.

Then there’s the issue of ultimately funding what is essentially a competitor to your own branded site, which is not only a straight out conflict of interest but also undermines the cheapest distribution channel for any business.

So over time the original partners sold out to Amadeus, a global travel distribution system, which eventually divested it as a non-core asset to AXA Private Equity and Permira Funds for €500 million.

That works out at 11.7 earnings, which is pretty good money, though you’d have to think a lot had been spent along the way so it was probably a zero sum game.

It’s worth noting that when Opodo was started 12 years ago, the internet was all about potential – no-one was really making any money online.

But that quickly changed as global travel slumped in the aftermath of 911 and hoteliers turned to online travel agents to help sell heavily discounted rooms.

These days everyone buys travel on the web and online travel agents have matured into highly profitable businesses.

How profitable?

Let’s use Priceline.com, one of the fastest growing on international online travel agents, as an example.

In the third quarter alone, Priceline.com had a turnover of US$6.3 billion (up 56.2 per cent year on year), revenue of US$1.5 billion (up 45 per cent) and net income of US$469.5 million compared with US$223 million for the same period a year ago.

That’s a lot of money, and the growth rates remain astonishing, especially at a time when the hotel industry in many parts of the world is going through hard times.

Hence the hoteliers feel they are doing all the work but the online travel agents are making all the money for little effort.

An obvious question at this point is: why don’t the hotels just stop selling through online travel agents?

The answer is they can’t afford to. Online travel agents dominate the market and are still growing at a ferocious rate, as we can see from the Priceline.com example above.

This brings us back to where we started – Roomkey.com.

It’s a nice site – softer, prettier and simpler than its commercial rivals – but in my opinion Roomkey.com will have no meaningful impact on the online accommodation market.

The major reason is that hundreds of millions of dollars are required each year to gain the kind of profile and scale a site like this needs to be profitable.

And there is no way the partner companies have that kind of money to invest in a website that is 1) a potential competitor and 2) a non-core business.

Ultimately, Roomkey.com is expensive rhetoric.

Ends

Share and Enjoy:

8 thoughts on “Comment: Key To The Online Future? Not Likely”

  1. I couldn’t agree less. Innfinite has over 70 branded hotels representing various brands in its portfolio. This is a game changer, watch this space, its high time this happened. OTA’s have had it too good on their own for too long and add zero value to the hotel [product.

  2. The sector of the industry that TAUGHT online buyers why they needed to shop around – by scattering rates all over the place instead of protecting best for its own brand, tries it one more time. There’s a reason it didn’t work with Travelweb. The OTAs got out of the gate with success early on because they were built in the age of modern technology and could, and weren’t hampered by the older GDS/DOS systems. The hotel companies – and the airlines for that matter -needed them to lead the way. But then when the opportunity evolved to keep all those best rates for themselves within their own technology, they couldn’t or wouldn’t do. You taught people to shop around for the best rate, because you put it in a different place every day. You’ll teach them to stick with the brand, when you consistently put your best offers there – including for groups.

  3. the time has come! hoteliers may change a lot with their own place, they know how to do it and have the sensibility to move quick and precise where they want to, that is, to price their rooms exactly in the level required and making discounts in the right amount to make THEIR prices the best option

  4. I find it interesting that when you go to the brand sites, Room Key pops up and offers the consumer the opportunity to shop both the brand that they were searching and their direct competitors in the market that are members of Room Key. This gives the consumer an easy way to find a competitor hotel at either a more attractive rate or a hotel that better fits their requirements. This will get interesting!

  5. It is prohibitively expensive to establish a new travel consumer brand. The last two major travel brands to be successfully established in the U.S. were Orbitz (2003) and Kayak.com (2004). In addition to the initial investments for technology, website design and architecture, hosting and analytics, there is a serious need for ongoing operational and promotional expenses.
    Obviously these kind of investments are unavailable in this economic environment. Most hotel brands are public companies and under the scrutiny of Wall Street i.e. every penny is being monitored and scrutinized.

    So what would it take for the new “anti-OTA” players like RoomKey.com to become viable industry players? In my view there are three main challenges new travel consumer sites like RoomKey.com have to overcome in order to secure sustainability and become real players in the industry:
    * Establishing a Unique Value Proposition in the Marketplace: RoomKey.com does not offer one as far as the the travel consumer is concerned.
    * Securing Serious Ongoing Revenues Needed to Establish a New Travel Consumer Brand
    * Overcoming the Reaction and Legal Challenges by the OTAs (remember Orbitz.com?)

Comments are closed.