The American Hotel & Lodging Association recently unveiled a new campaign designed to spread awareness about the “dangers” of booking a hotel through a third party. The campaign is a thinly veiled shot at online travel agencies (OTAs) and metasearch engines, which have evolved from hotel partners into bona fide competitors. Despite hoteliers’ efforts to wrest back control of the transaction, OTAs are favored by Millennial travelers who would rather have one easy booking option than countless loyalty memberships.
In just two decades, the travel booking landscape has been completely upended. Prior to 1996, travelers had two choices: book direct or speak to a travel agent. But that all changed with the emergence of Expedia and Priceline. These OTAs, formed to give consumers another channel through which to book a hotel, today can help travelers book a cruise, rent a car, or find a flight. The ensuing rise of “metasearch engines” like TripAdvisor, Kayak.com, and Orbitz gave travelers a one-stop shop where they could find the best deal, period-whether that deal was available via direct booking or through an OTA.
Today, two enormous players control the vast majority of the OTA and metasearch universe. The clear leader is Priceline, a global firm with a market cap of $98 billion that owns brands such as Booking.com, Kayak.com, and RentalCars.com. At over $2,000 per share, Priceline is the S&P 500’s single priciest company. U.S.-based heavyweight Expedia, worth $23 billion, boasts an equally impressive portfolio of brands-including Hotels.com, Travelocity, and Orbitz.
How do these firms make money? Expedia relies on the ” merchant model,” whereby an OTA purchases inventory (rooms, flights, etc.) and resells it to travelers. Though merchant OTAs face high upfront costs (the price of buying a block of hotel rooms) and high inventory risk (the prospect of not selling those rooms), they are free to repackage and resell the rooms however they want. Alternatively, Priceline relies on the “agency model,” whereby an OTA merely lists the inventory and makes a cut of each transaction. Though this model offers little control over inventory, it frees the company from inventory risk.
For years, OTAs and hotels coexisted harmoniously. OTAs raked in profits without having to spend anywhere near the overhead of hotels, while hotels could move unsold inventory and enjoy “free” marketing. In fact, a 2009 Cornell University study found that an Expedia listing can generate as much as a 26% boost in direct bookings. In the early days of OTAs, when commissions typically averaged just 5%, the partnership was a no-brainer for hotels.