In any form of combat, there are victors and losers. In the battle over hotel rate parity, however, there are a number of constituencies with stakes in the fight.
Because the hotel industry is highly fragmented, with hotel owners and brands each employing differing business models, each party may be impacted differently by changes in pricing strategy, distribution policy, or marketing efforts.
Compensation to online travel agencies (OTAs) is typically paid at the property level and is not reflected on brand profit-and-loss statements.
On the other hand, a brand advertising campaign may be borne entirely by the brand, with the hotels benefiting from any resulting bookings.
Morgan Stanley, the investment bank, recently analyzed the potential impact of the hotel/OTA battle. Given its interest in tracking securities, the investment bank evaluated three actors: hotel owners (Real Estate Investment Trusts, or REITs), hotel brands, and OTAs.
The assessment for hotel owners was that, against standard-hotel-brands-win versus OTAs-win scenarios, it was unlikely the hotel owners would be significantly impacted—only seeing a small (i.e., ± 3%) valuation swing.
Hotel brand valuations had more at stake, varying ± 16%, depending if they won or lost.
The group with the most to gain or lose were the OTAs. There was one interesting nuance, though. Their potential upside of 27% exceeded their forecast downside of 23%.
With more to gain, yet much to lose, from a shareholder value perspective, OTAs could expect considerable pressure to win the battle — perhaps with more intensity than that experienced by the hotel brands.
A third, more challenging scenario was also modeled, namely, a rate war. Hotel brands and especially hotel owners would want to avoid this becoming a reality, with each potentially losing approximately 30% of their share value, while OTAs would only lose 13%.
Gazing into the crystal ball
The reality is that nobody—Wall Street equity analysts, executive leadership of hotel brands, REITs and OTAs, or pundits—can accurately predict the outcome of the hotel rate parity wars.
There is no historic precedent to reference and too many soft variables to reliably predict an outcome with any certainty. Again: As of this writing, Morgan Stanley weights the outcomes of all three scenarios equally, indicating that the result could tip any way.
However, based on the researchers’s analysis, the stakes are clear. In a straight hotel brand-OTA win/loss comparison, the stakes are higher for the OTAs than for the hotel brands and owners.
However, where the positive/negative swing for brands and owners is equal, for the OTAs the upside gained from success exceeds the downside from a loss. This factor alone would indicate that OTAs would want to allocate more resources to the battle to ensure victory.
The ultimate litmus test may be the third, price war scenario, where hotel brands and owners are exposed to significant losses at a factor 2+ times greater than valuation losses sustained by the OTAs.
This combination of forecasts could hint that OTAs would not only be more highly motivated to earn a win, but would also be more willing to engage in a price war to achieve that ultimate outcome.
Regardless of the ultimate result, the process to gain a new form of equilibrium could get messy. It is also highly probable that under any outcome, the value chain economics for all the parties involved will be forever changed.
NB: This is an excerpt from a new Tnooz Report “Rate Parity and Beyond: Surveying the Hotel vs OTA Battlefield,” available for purchase now.
The report is by Robert Cole, who runs RockCheetah, a hotel marketing strategy and travel technology consulting practice. A former hotel and GDS exec, Cole advises major travel brands, travel-technology start-ups, and the investment community.
NB2: Image from WarGames