The 3rd Dimension of the Hotel Business — Content

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June 12, 2015
Distribution
Cindy Estis Green

Could the way that hotels deploy and manage content affect the sustainable health of the hotel industry?

“Content is king” is a commonly used aphorism, but what does that really mean? They say the currency of the digital economy is content but how does this affect a hotel? Content for the hotel industry means everything from hotel descriptions, photos and video, along with rates, availability and guestroom and meeting space inventory. Creating, curating and controlling content has been core to the strategy for the large tech companies. For example, Google is amassing the power to control the content for every aspect of the digital economy in many sectors, e.g., travel, retail, music, et al. Amazon has made similar headway in the retail merchandise markets.

Content enables the merchandising of products and services that ultimately results in sales. The better the content is, and the easier access one has to it, the more valuable it is. Whoever controls the content controls access to the consumer and in so doing, the ka-ching of the virtual cash registers.

Because access to high-quality content will continue to gain momentum and power the sale of hotel products (rooms, meetings, ancillary services), examining its role today in the current market would be a valuable exercise. Could the way that hotels deploy and manage content affect the sustainable health of the hotel industry? In the early 2000s, when third-party digital sales were emerging, hotel companies provided descriptive hotel information, rates and inventory to third-party sellers (OTAs, retail and wholesale travel agencies, metasearch players, et al.) and the third-party sellers used that content to sell hotel rooms for which they were paid a commission or transaction fee. Third-party sellers continue to use hotel-supplied content combined with merchandising material they create themselves. For instance, in the name of improving sales, Expedia has taken thousands of photos of hotels to enhance the imagery provided by individual hotels or brands. Google is currently offering hotels attractive packages to create “hotelview” (think Google Streetview) images of the interior of hotels and giving the hotel license to use these images. Of course, Google owns this content and retains full access to it as well. This high-quality material provides great benefit to the hotel but it also triggers some risk by empowering a third party to have the best merchandising content available.

What exactly is for sale today?
As the digital arena becomes the primary marketplace for buying and selling products such as travel, retail goods and music, content will be the differentiator that drives consumer traffic and engagement to grease the skids of commerce. This phenomenon makes the content that best enables highly sought after merchandising, and its value rises in proportion to its contribution to the sale of products. If aggregators pool this content to use for selling and are the gatekeepers to its access, the more the aggregator can charge for it as a highly prized resource tapped by marketers to generate sales. It is not just the individual hotel’s content that is prized, it is the ease of access to an aggregated rich pool of compelling content that is very attractive to marketers. The more appealing to consumers, the more it will drive revenue and the more the aggregator can charge for its use. In turn, the hotel will pay the marketer who uses this rich content to sell their hotel rooms.

Whoever controls the content, controls access to the consumer, and in so doing, the ka-ching of the virtual cash registers.

Content’s Role in the Hotel Business
The hotel business has existed for many years with two primary dimensions: first, there is the fundamental sale of rooms and ancillary services to consumers, and second, there is the business of hotels, which is about the buying and selling of hotels as real estate assets. Where does this new valuable content fit into the traditional view of the hotel business? To date, hotel companies have not only given away their own content to enable third-party sales, but they have also invited large third-party sellers to come into the properties to create content (which is then owned by the third party) and actually paid these third parties to create even more, such as photos and video, which is used to build up aggregated merchandising pools. When the third party creates content and shares it with the hotel that, of course, may be helpful to each individual hotel. But the third party enjoys a “network effect” as it plays a gatekeeper role by controlling this centralized pool of content.

In effect, the hotel is enabling the third party to create a powerful merchandising resource; the hotel then pays a premium (usually in the form of commissions) to those who want to access this content in order to sell their rooms. And the gatekeepers, with immense power in controlling consumer attention and traffic, will ultimately specify to hotels what content they need to make available, where and when. The hotels will have to fully submit to the demands of the content gatekeeper(s) if they want their hotel sold in the digital marketplace. What sounded like a great idea to get low-cost images of the property may have deeper and more troubling long-term implications for every participating hotel. And, what hotel can decline participation if the gatekeepers control the consumer demand? This is much more concerning than the previous era of OTA dominance where hotel companies negotiated specific selling agreements. The level of control over the marketplace in the new digital era will dwarf by several orders of magnitude any control that was imposed by the online travel agencies in the decades of the 2000s and 2010s.

The Shift in Value Away from Hotels and Brands
The shift in value that has occurred in the hotel economy at a global level over the last 10 years, as evidenced by market caps of some third parties at three times to 10 times the hotel company market caps, indicates that content and merchandising power is valued much more highly than the services that hotel brands are offering. One may argue that it is capitalism at work and the best merchandiser deserves to win. However, to some extent, it is a zero sum game. Customer acquisition costs (added to increasing labor and utility costs, and inevitably, interest rates) are rising to a point that hotels have to reduce staffing and limit reinvestment in the product in order to maintain flagging profit levels. While this may seem hard to imagine as we enjoy the highest demand period the hotel industry has seen in the U.S. market (and many others around the world), the up cycles are always followed by down cycles. Also, as these costs rise, the free cash flow of a hotel property declines causing a disproportionate hit to the asset valuations (upwards of 10 to 15 times the added costs) when applying real estate capitalization rates. During a period when an industry should expect economies of scale from high demand, the inverse is happening – customer acquisition costs are rising at twice the rate of revenue growth. At what point do these costs rise so high that hotels can no longer sustain them? One could argue they already are too high at 15 percent to 25 percent of room revenue, but this reality is obscured by the record demand levels. And how will this look when the inevitable downturn comes and costs continue to rise in the face of declining demand. (Not to mention the increase in supply in major markets by Airbnb and similar models fueled by consumers looking to earn a little more money when the job market shrinks). Is this a healthy or sustainable situation for the hotel industry? The traditional brand value proposition is to deliver direct business to a hotel. However, it is clear that this is increasingly not the case. If the value of brands and hotel real estate is declining due to the rising volume of third-party business and its associated costs, is there a new business model that might ultimately be better for the health of the industry?

Can Content Change the Brand Value Proposition?
The practice of giving content at no charge to third parties will continue to erode the brand value proposition by accelerating the growth of high cost third-party sales at the expense of more efficient direct brand sales. It is possible that the emerging market for content could effectively be a push on the “reset button.” The digital economy places great value on access to the best quality content, and rather than being a scenario of doom and gloom, it may result in a new and vibrant market for hotels. The sale of content to marketers of hotel rooms may prove to be the third dimension for the hotel business, creating a new marketplace and new revenue streams for hotels. This revenue from content may mitigate some of the commission costs associated with each transaction.

The marginally lower commission rates negotiated by the brands with third-party sellers cannot compensate for the rising brand costs required to operate in a competitive market where OTAs and search engines spend billions per year in marketing. And with the decline in direct business, the brands are at risk of becoming another expensive third party to owners. The soft brand alternative for owners (such as Marriott’s Autograph and Hilton’s Curio) has emerged as an attractive option as it gives incremental benefit to hotel owners without the high fees and CapEx requirements of the traditional brand model. But, when faced with a deep economic downturn, it may trigger enough at-risk hotels in existing long-term agreements to demand a wholesale change to the model (in spite of the many years remaining before expiration of the agreement). It was the reality of bankruptcy in the airline industry in the early 2000s that drove it to make dramatic changes to commission and transaction fee models.

Where We Go from Here
Hotels have given their content to OTAs, search engines and other third parties to facilitate the sale of hotel rooms on their behalf. In the past, hotel brands could directly influence a large percentage of the sales levers, but now with 60 percent to 70 percent of bookings touching some third party along the sales path, this pure direct volume is dropping fast.

Winners in the digital economy will leverage their content to control consumer traffic and then monetize that traffic. Because content enables merchandising, it is the new currency of the marketplace.

Hotels compete head to head for access to consumers, with companies that have funds 10 times greater for marketing and for technology investment. This contest will be hard to win without matching third-party funds. Either hotels can pay high commissions to the third parties or they can increase funds to brands, but they can’t afford to do both for much longer. Further, as long as a third-party controls the merchandising levers, no matter the cost, hotels will always be subject to the control of that third party. Hotels may have to consider getting into the content game or become passive recipients of some downstream benefit for which they will be compelled to pay a premium. (Didn’t that pattern already start with OTAs and very quickly was followed by the search engines?) The winners control the consumers’ shopping path. If there are only one or two large technology giants that take on the gatekeeper role, then hotels will have to cede primary control of merchandising and sales efforts, making them subject to any conditions and fees that the gatekeepers choose to impose. (Google is already making moves that feel like it is exerting excessive control, well documented in the antitrust action in the European Union.) Although no one company may exclusively control the consumers’ path, hotels can make their content available to enable more merchandising options (not just a few gatekeepers) and thoughtfully match up the content most appropriate for the consumers in each channel. This can encourage competition, preventing the few from controlling the many, and in so doing, improve the consumer experience. Further, charging for valuable content appears to be an emerging practice in the digital economy.

Google’s power may not be diminished anytime soon, but there may be a way to restore some balance to the system that may be needed for the sustainable health of the hotel industry. To the extent that hotels still control availability, rates and inventory, the imperative to manage access to it will be crucial to any hotel’s future economic position. Controlling access to content and monetizing it in accordance with its value in the marketplace may become the third dimension of the hotel business for the next decade.

Cindy Estis Green is the CEO and co-founder of Kalibri Labs. She is also the chief consultant to the AH&LA Consumer Innovation Forum, a research group examining distribution issues at an industry level representing hotel brands, owners and operators.

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