"The recent contract negotiations between large lodging companies and giant intermediaries have been interesting.
"Both Hilton and Marriott have announced that they have new contracts with Expedia. Those contracts include certain concessions that were made by Expedia. For instance, Expedia is no longer guaranteed last-room availability. There is also a reduction in margins being paid to Expedia for those two hotel companies.
"Most important, in some ways, the new contracts finally made explicit what was implicit before, which is it is no longer deemed to be a violation of the rate-parity clause of their contract with Expedia to offer better pricing to the members of a hotel chain's loyalty program.
"That means 2016 could be a big year for large lodging companies to begin to tailor rates and offers for their most loyal customers.
"I have been working with online travel agencies for many years. I have negotiated deals with them in the past when working with hotel companies, and it was always the case that if you had a fenced offer ... a fenced group of hotel customers, you could offer them a better price than you were offering Expedia.
"The major chains never did that. They never had the technological capability to do it and frankly they never had the insight that that was where the world was going. They always could have done so, they had the market power and the money, but what you see in the last round of negotiations is that they made this wish explicit.
"And they discovered that Expedia wouldn't punish them! That Expedia would not file a lawsuit against them for violating that parity agreement by offering members of their loyalty program a better deal.... This happened even though Expedia has been executing its business plans exceptionally well and, of course, made a number of key acquisitions last year.
"Now, what I found to be fascinating about what has happened in the aftermath of that is those negotiations happened in Q4. They were announced on a staggered basis. I think Hilton came out first and then Marriott announced a similar deal to Hilton's.
"But in the ensuing 2-3 months since then, you see chief executives at Priceline Group and Expedia Inc commenting that they think it is a big mistake for hotels to be getting into this.... I think shows how much power this hotel effort really has."
"Now what if you're a hotel that is not affiliated with a flag, you're not a Marriott or Hilton or Accor franchisee? What to do?
"The thing to watch out for is that Priceline Group will, and it looks like Expedia Inc will soon too, will be wanting to offer you services that are not unlike what brands such as Marriott provide owners.
"The BookingSuite division, launched a year ago by Priceline Group, is a fascinating move. We also have evidence that Expedia is following suit because Trivago somewhat quietly announced recently that it had acquired a property management system (PMS) in Europe, Base7Booking. It's interesting because Expedia Inc is now in this awkward business of offering hotels B2B services as well.
"If you just look at BookingSuite, BookingSuite is, I would say, the single biggest threat today to the major hotel brands today.
"If you look at what Priceline Group and Booking.com are actually offering through BookingSuite, it is the ability to replace the vast majority of services that a traditional hotel brand provides. They are now able to provide a white-label booking engine, they are now able to make pricing recommendations.
"We haven't seen the PMS side of it roll out, but presumably BookingSuite's acquisition of HotelNinjas means that at some point they will offer a full PMS, too. They will be offering more distribution services. According to their own plan, sometime in the near future they will have more than 100,000 hotels using their B2B services.
"When you start to think contextually about Marriott even getting bigger and acquiring Starwood, you have to keep in mind that the Marriott/Starwood combination is dwarfed in comparison to the potential of Booking.com having what amounts to a soft brand of their own with tens of thousands of hotels.
"What is interesting is BookingSuite is kind of democratizing access to hotel brand. The types of hotels who are signing up for BookingSuite are hotels that would never really be a good fit as a Courtyard or as a JW Marriott or a Western or in a traditional brand.
"These tend to be smaller hotels, they tend to have small owners. They do not have the major real estate investment trust or other institutional-type buyers and developers of assets as owners. These are families or very small companies that have a small presence in a secondary or tertiary market, let's say in Southern France.
"They are not really a good candidate to be in a traditional brand but they may have a very nice asset that is well located and where they recognize the benefits of being part of something larger.
"So it creates a two-tier system within Booking.com, where there are the people that have opted in for the full suite of services that Booking can offer and everybody else. The leverage that system potentially gives Booking.com if they continue to execute effectively is tremendous. And presumably Expedia Inc will follow with its own offering, too.
"I suspect that BookingSuite's RateManager is having significant growing pains. From what I understand the churn rate is very high on hotels rotating in and then abandoning. [Editor's note: See Tnooz's interview with BookingSuite's chief for an alternate perspective.]
"But there are also stories that there is huge revenue increases that are possible for the hotels that go on that RateManager platform and are successful. For hotels that are simple to run, it can add value from what GMs were doing with just using gut feel before.
"In any case, it's a savvy move by Priceline Group to go in that direction, and again it just highlights the need for hotel companies to have an alternative.
"There is still a real opportunity for hotel brands -- and for the software companies that serve the couple hundred hotels globally that are larger, more sophisticated and more professionally managed -- to have an alternative value proposition that really resonates with the consumer and is an effective answer to what Booking.com is doing.
"What hotels have failed to do adequately is to really create value for their customers in the discovery and booking process for hotel rooms.
"If the suppliers of hotel rooms are going to succeed at stemming the tide and being able to slow the continuous growth of these intermediaries, they must connect with those customers more deeply by leveraging the trusting relationship that they have with these people that sleep in their beds, and have meetings in their hotels, and host social events like weddings.
"A key component of that is the marketing and pricing strategy of the hotel. Up to this point, hotel companies, in my view, have been pretty inhospitable. They open their doors wide and are very gracious with their guests once they arrive on property, and so forth, but the pre-stay experience, and certainly the direct booking experience, has never been particularly good.
"What you've seen over the last several months is hotel companies starting to get away from a very impersonal points-based, tier-based type loyalty program, and begin to move in the direction of more personalization, and actually delivering tangible value to all of their loyalty customers.
"For the vast majority of consumers who aren't road warrior business travelers, there's never been an incentive to book direct. In fact, there have only been incentives not to, because sites like Expedia and Booking.com provide a better user experience, more choices, and the marketing message, true or not, of having lower prices. Hotels simply offering rate parity did not really address anything of value for the consumer.
"Hotels need to find a way to provide unique value propositions to those customers that they know and that trust them.
"In the absence of something special that they recognize, then the OTA promise of an efficient booking experience and low-prices with a wide array of choice, is going to win out in the vast majority of cases.
"Companies like Marriott and Hilton have done a good job of attracting frequent business travelers that can play the game and understand the system, but that ignores the vast majority of consumers in the market that travel all around the world for occasional business travel as well as for their leisure travel.
"What is missing in all of this - and this is where the future's going - is that, as you've seen the revenue management system market grow rapidly, it is because there's a growing realization among hotel companies that they are already have a very, very hard job.
"Their job is to provide a great guest experience with strong brands that resonate with large groups of customers and to have strong brand standards and then strong execution on property and then they also need to be excellent at the real estate side of the business. Getting the right real estate, the right locations, with the right investment to provide a great physical asset.
"Being world-class in both of those things is incredibly difficult. Most businesses can only be world-class in one thing, but the best hotel companies have to be great in both of those. So then to also add a third component, which is to be a world-leading technology company is, in every case I've seen anyway, one thing too many for them to be trying to execute on.
"What's been transforming the hotel industry globally is the movement away from custom, in-house IT systems, and a move to using modern software that's provided by a company that only does software.
"Micros did this with Opera. Digital service provider TravelClick did this with marketing and other business intelligence tools. They were the only two hotel technology companies that really broke out from being a regional niche player to being a large global player.
"Now you've seen other companies following in their footsteps as dedicated software-as-a-service providers, like hotel tech provider SiteMinder and my own company Duetto, which has a niche in revenue management and related services.
"There's a growing realization among hotel companies across the hotel technology stack, that building it themselves is actually now ... it has transitioned from being a competitive advantage through the '90s to being a competitive disadvantage.
"In-house tech development actually slows your ability to innovate and to, in this case, provide a loyalty program that's really cutting edge and optimized to add value for your guests.
"There is a segment of the hotel market -- Ace Hotels, Bakarat, One Hotels, Version, Public, etc.... some are lifestyle boutique hotels. They realize that where they have been wildly successful is that they have understood their customer far, far, far better than typical hotel companies do, the typical ones that have attempted to serve those same demographics and markets.
"These elite hotels exactly customize their physical product as well as the services that are offered and the culture and the whole vibe of the place and the types of employees they hire into a coherent whole.
"The hotel brands are all perfectly tailored to serve what is a very narrow niche but one where they can go very deep -- where they can really engender loyalty by connecting at an emotional level and at a practical level of all of the true needs of those customers.
"That's where loyalty as a direct booking tool ultimately has to go."