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HSMAI Section: OTAs, Google and the Future of the Internet

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July 01, 2016
Jeroen Oskam - j.oskam@hotelschool.nl

Strategic foresight Strategic foresight is an important instrument for companies and organizations to build response capacity when facing uncertainties. The best documented example is Shell’s preparedness to anticipate rising oil prices in the 1970s. In the last 15 years, the hospitality industry has been surprised by the emergence of new business models driven by new communication and distribution channels. Scenario planning techniques will not allow us to predict the future, but they can help us to “think the unthinkable” and to strategically anticipate different outcomes of current developments.

An important debate in our profession is how to prevent revenue leakage to intermediaries by increasing the share of direct sales. But current interpretations may be built on thin ice if our understanding of the internet and its future evolution are inevitably limited; simply put, for scholars and analysts the internet is “too big to ignore, too recent to assess.” In the latest issue of the Journal of Vacation Marketing, we envisioned potential future scenarios for electronic distribution based on changes in internet use and access itself.

The Baseline Future: Current Predictions While the current market share of online travel agents (OTAs) is already a concern for the hotel industry, the fact that in 2014, 57 percent of bookings was still nondigital  and a fourth was “direct to hotel”  shows an impressive further growth potential. OTAs claim a growing share of hotel room revenue, varying from 8.8 percent for upscale hotels to 15.8 percent for economy hotels in 2014.  The increased OTA claim to distribution costs has been predicted to mainly be caused by a growing share of bookings, due to increased online access and a spike in mobile bookings, even if commission percentages themselves would be lower. Assuming an increase of third-party intermediary bookings from 25 percent in 2010 to 50 percent in 2015, hotel profits would be under added pressure: “For anyone concerned about the almost $4 billion paid to third parties in 2010, the prospect of paying double that amount within 3 to 5 years may be shocking, but not unrealistic.”

Metasearch engines equally show an impressive growth – KAYAK’s 1.6 billion bookings (2013) are expected to triple by 2019, which will benefit OTAs more than hotels because of their marketing power and expertise. In nontraditional markets, market share and growth potential are even bigger. In China, 54 percent of travellers use metasearch engines; the predicted compound growth rate of online travel revenue is 21 percent from 2013 to 2017.

The most extreme consequence of a full dominance of hotel distribution by internet intermediaries would be a scenario in which hotels lose their direct market access, along with an important share of their revenues. Market control by one or two platforms will reduce local competition and drive commoditization. Hotel brands will become irrelevant, and we may see hotels marketed exclusively at the destination level.

An OTA – Google war? The baseline forecasts underlying a similar scenario assume that a number of circumstances will remain as they are now. One of these circumstances is the current symbiosis between travel intermediaries and search engines such as Google; a peaceful coexistence between internet companies and their main advertisers serves their mutual interest. What could cause this balance to shift? What if Google would abandon its cautious experiments and decides it can afford to enter in direct competition with travel intermediaries?

The development of the internet and internet-based business models in the last two decades is based upon an understanding of the internet as a free platform, without censorship and with no marginal costs per communicative transaction. A reduction of this freedom would drastically alter the competitive forces in electronic commerce and distribution. Such an alteration can become plausible if we analyze the role of three phenomena: net neutrality, search algorithms and two-sided markets.

The net neutrality discussion revolves, in the West, around commercial control of certain data streams. In countries such as China, Turkey and Iran, political control is at stake. As a next step we can think of internet providers adding a surcharge to Amazon purchases. It is easy to imagine how external parties may seek a competitive advantage by blocking or interfering with data streams.

In a similar fashion, we ingenuously believe that internet searches lead to the best matching information. The Facebook timeline however shows how these selections can become biased, not only because algorithms have detected our preferences, but also because of content.

Finally, traditional analytical models obfuscate the competitive dynamics in internet companies. That is why most experts initially predicted disintermediation in hotel distribution, to be surprised later by the OTA reintermediation. The two-sided market theory, however, shows how companies such as OTAs, Google and Facebook cater to two different customer sides, enlarging their customer base on one side by charging higher fees to the other side; the service to hotel bookers is subsidized by commissions paid by hotels. These markets inevitably see a winner takes all competition: travelers go to the site that offers most hotels; hotels choose the channel with most potential clients.

Power concentration in E-commerce  We may see a further oligopolistic escalation because of software bundling. While in the ancient PC days we had become used to “unowned” technology – we installed the software that we chose on our devices – Apple has popularized restrictive “owned technology” that bundles hardware with commercial channels. This development has benefitted from mobile internet access, which favors apps over internet browsing.

In our “Scary Five” scenario, we see internet media houses such as Google, Facebook, Apple, Amazon or eBay commercializing their own branded devices with exclusive access to their commercial channels – for hotels, travel, groceries and everything else. Neither OTAs nor hotel companies may be able to get their proprietary apps on the shelf space of mobile phones. Big data control will strip hotel companies of their marketing power. Even if OTA commissions will disappear, these controlled markets may continue to minimize margins.

Early Warning Signals These scenarios – OTA dominance or Scary Five oligopoly – are not meant to accurately predict the future, but to identify plausible developments. Their purpose is to enable professionals and businesses to detect the early warning signals of those developments and to prepare alternative scenarios for the different outcomes. For hotel distribution, these warning signals should not only be sought in our own industry, but especially in how our internet use and access evolve.
Full study and scenarios in Jeroen Oskam & Tjeerd Zandberg, "Who will sell your rooms? Hotel distribution scenarios," Journal of Vacation Marketing (2016), ahead of print. A follow-up study, "The Shelf Space of a Phone Screen: Assessing the Media Value of OTAs" (CHME, May 2016) applied the findings to the "Billboard effect" debate.

1Oskam, Jeroen& Zandberg, Tjeerd (2016), “Who will sell your rooms? Hotel distribution scenarios”.
Journal of Vacation Marketing, ahead of print, doi: 10.1177/1356766715626965.
2Juman, D. & Sileo, L., 2014. Global Online Travel Overview, s.l.: PhocusWright.
3Schaal, D., 2014. Online Travel Agency Hotel Bookings Grew Faster Than Hotels’ Own Websites in Q1.
4Mayock, P., 2015. Study: OTAs continue to steal market share. www.hotelnewsnow.com/article/Pdf/16383/.
5Green, C. E. & Lomano, M. V., 2012. Distribution Channel Analysis: a Guide for Hotels. McLean, VA: HSMAI Foundation, p. 2.
6Turner, S. A., 2014. Metasearch must be used smartly.

 Jeroen Oskam is with the Hotelschool The Hague. He can be contacted at j.oskam@hotelschool.nl.
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