Online travel agencies developed in the early to mid-1990s, gradually becoming one of the first great internet success stories of the tech era.
As we all know, before OTAs, if you wanted to fly somewhere, you had to call a travel agent and see what options they could propose.
But over the last quarter century, how consumers buy travel has obviously changed.
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Thanks to the power and transparency of the web, it’s now possible to find potentially appropriate solutions for oneself quickly and conveniently.
As a result, we spend more on travel than ever before and, since there’s less friction in the research, planning and buying process, we can go on breaks more often.
OTAs value for consumers is evident. But what about on the supply side of the equation?
Turns out OTAs are just as powerful for hotels as they are for travelers.
But, unfortunately, OTAs suffer from some image problems amongst many hoteliers, often due to misconceptions or misinformation about how they work.
Let’s explore four popular myths about OTAs that our industry keeps falling for over and over again:
1. OTAs are duopolies
FALSE.
There are dozens of independent OTAs (both generalist and niche), as well as metasearch sites, across the globe, providing choice for hotels that don’t want to work with the big players.
In addition to these, search giant Google is already the largest player in travel. And it’s been long-rumored that both Airbnb and Amazon are both aiming to expand their reach deeper into travel distribution (the former having attempted to so already over the last 18 months).
And although more travel bookings are steadily moving online, the offline market continues to be staggeringly large.
If the two major OTAs are a duopoly, they’ve done an astonishingly bad job leveraging that market power.
Over the past decade, OTA commissions have significantly fallen, OTA contracts have become far more flexible and hotels control both their own inventory and pricing.
The reality is the lines between hotel distribution players are blurring, and while OTAs remain an important part of the distribution equation, they by no means represent the entire distribution ecosystem.
In fact, as their business model evolves, the larger hotel chains even appear to be morphing into OTA-like marketplaces by adding vacation rentals and flight packaged travel deals, cross-selling complementary travel services and even acquiring new brands to offer a more compelling multi-brand shopping experience to their website users.
2. OTAs are restrictive
FALSE.
OTAs are pay-for-performance channels, meaning hotels only pay when they have a paying, staying customer.
With rate parity a thing of the past, hotels are now in full control of their revenue potential.
OTAs have also become more sophisticated by offering levers that hotels can use to get more revenue and occupancy when they want it.
Although brands supposedly work in the interest of their member properties, it often appears that brands are instead focusing on their own best interests by restricting which channels hotels can use to optimize their business.
While an over focus on "controlled" distribution (driving all sales through the chain’s CRS) might be good for the brand, it often comes at a revenue or expense hit for franchisees.
And it’s ironic that OTAs suffer from this reputation of being restrictive, when in fact they work on flexible contractual terms, while in contrast hotel brands lock members into 10- to 20-year contracts with expensive get-out clauses.
3. OTAs drive low-quality revenue
MOSTLY FALSE.
As revenue management becomes more sophisticated, the hotel industry is starting to look at revenue contribution after expenses when optimizing its various distribution channels.
With brands pushing costly direct booking efforts, bankrolled by hotels themselves, it should come as no surprise that OTA bookings usually contribute more bottom-line revenue than supposedly cheap direct bookings.
In addition, OTAs help by creating new, incremental and frequently high spending demand.
Yes, they can be used to dispose of distressed inventory, but this should not be, and isn’t, their prime purpose.
And yes there are other, more premium revenue channels out there, but if those channels could deliver all the volume ever needed by a hotel, we wouldn’t need to use multiple distribution channels, each with their own comparative advantages and limitations, to try to fill our hotel.
4. OTAs are expensive and don’t deliver value
TOTALLY FALSE.
Brands charge just as much for distribution as OTAs: an average of 16% but anywhere from 15 to 30% depending on the brand and additional marketing and loyalty fees.
The amount itself isn’t the key issue because irrespective of how it is generated, distribution requires both investment and effort - staying guests don’t just materialize out of thin air.
A bigger concern is that brands charge their full take-rate of fees and commissions on every booking, regardless of the distribution channel that actually generated that business.
This double taxation practice extracts billions of dollars from our industry, lowering net operating income and asset values for owners.
In fact, it’s a real puzzle as to why hotels continue to tolerate this gross rooms revenue approach to rewarding brands when in reality third-party channels are doing much of the sales and marketing work.
While brands maintain that they drive an ADR premium to their franchisees, the reality is that very few brands are worth the resulting cost.
In contrast, for a commission charged only on realized bookings, OTAs offer merchandising, marketing, revenue management, a payment platform, as well as customer service and loyalty programs.
Try costing all that out separately and see where that lands in total.
Platforms hold the key to freedom
Our industry often chastises itself over the transfer of power that occurred from hotels to OTAs.
If the two major OTAs are a duopoly, they’ve done an astonishingly bad job leveraging that market power.
Peter O’Connor - Essec Business School
Even today, we hear from so-called pundits who keep claiming that we should learn our lessons from the growth of OTAs and fear the platforms.
It’s the platforms, including new entrants like Google, Amazon and Airbnb, that will unshackle the industry from hotel brands who control how hotels run their business and charge them more and more for delivering less and less contribution and value.
So why does our industry keep paying the brand-tax to legacy brands that are more concerned with growing their self-perpetuating check-cashing franchise machines?
A well-balanced, competitive platform future means that hotels can finally focus on building their own brand.
It’s time we put some equity back into our own assets.