Big Hotel Chains Strike Back Against Web Sites
By JULIA ANGWIN and MOTOKO RICH
Staff Reporters of THE WALL STREET JOURNAL
A few weeks before the beginning of spring break, Gary Lobo started worrying
about business at his Clarion Hotel Maingate, near Walt Disney World in
Orlando, Fla. With war jitters and the sputtering economy, advance bookings
for March were down 20% compared with last year.
So Mr. Lobo, the hotel's general manager, called the travel Web sites
Hotels.com and Expedia.com, and told them he needed to move rooms fast. He
authorized the sites to double the number of rooms they sold for him per
night and lowered his rates. Within hours, Mr. Lobo's fax machine was whirring
with reservations, and soon he had filled a third of his rooms for March.
But executives at Choice Hotels International, the owner of the Clarion
brand name, view such aggressive Internet sales tactics as a threat to the
industry. Starting at the end of this month, Choice will require hotel owners
to give their best rates to customers who book on the chain's own Web sites,
such as Clarionhotel.com or Choicehotels.com, instead of on third-party Web
sites.
Choice's moves are part of a bigger battle the major hotel chains are
waging against the growing power of the two dominant travel Web sites, Expedia.com
and Hotels.com. Besides Choice, three other major lodging companies have
vowed they will undercut Expedia.com and Hotels.com's prices on their own
Web sites. And five of the largest hotel chains, including Marriott International
Inc., Hilton Hotels Corp. and Hyatt Corp., have banded together to create
their own Web site, Travelweb.com, which is aimed directly at the online
travel brokers.
Only 9% of all hotel rooms are booked through the third-party Web sites.
But the sites are growing rapidly, both in market share and number, even
as reservations decline amid the worst slump to hit the hotel industry in
a decade. The chains saw the Internet compress ticket prices for airlines
and badly want to avoid that fate.
"If we are not careful, these wholesalers will become ... so big and
powerful that we will have to work with them," Eric Pearson, a vice president
at Six Continents PLC, told a conference of about 1,800 hotel owners last
fall. "And you will have to pay a premium to be on their shelves." Six Continents
owns the Holiday Inn, InterContinental and Crowne Plaza brands.
Executives at the Web sites say they are helping the hotel industry by
bringing them new customers. "Whenever you have disruptive technology,
some resist it," says Erik Blachford, incoming chief executive of Expedia
Inc.
Last year, when overall hotel bookings were flat, those on middleman
Web sites were up 53% from 2001, with $3.1 billion of rooms sold, according
to the travel-research firm PhoCusWright. Hotels.com and Expedia together
accounted for about 60% of last year's online hotel bookings. Both are majority-owned
by Barry Diller's USA Interactive, which is reaping some of the richest
rewards of any business in either the travel or the Internet industries.
With profit margins as high as 30%, "Expedia and Hotels.com are cash machines,"
says Paul Keung, an analyst at CIBC World Markets. Shares in Expedia nearly
doubled last year while shares in Hotels.com rose 20%. The lodging sector,
by contrast, saw its shares slide 8.5% last year, according to CIBC World
Markets. The emergence of powerful middlemen has been a shock to the hotel
industry, which traditionally sold most of its rooms directly to consumers.
Unlike the airline industry, which sold about 75% of its tickets through
travel agents before the Internet, hotels have historically made less than
30% of their bookings through intermediaries.
The pricing pressure couldn't come at a worse time for the $104 billion
hotel industry. Occupancy and room rates have been falling since mid-2001.
The Sept. 11 terrorist attacks made matters much worse. The industry profit
benchmark of revenue per available room fell 2.5% last year, according to
Smith Travel Research. Last month, Marriott's chief financial officer, Arne
M. Sorenson, called 2002 the "weakest lodging environment since the Great
Depression."
When the top airlines confronted this pricing squeeze two years ago,
they struck back by joining together to form their own Web site, Orbitz.
It has steadily won a larger and larger share of the Internet audience
away from the more-established online competitors such as Expedia and Travelocity,
the No. 3 online travel agent. Orbitz now commands a 13% market share of
online travel sales. Industry leader Expedia has 36%, followed by Travelocity,
with 24%, according to PhoCusWright. Many airlines also provide discounts
for travelers who buy tickets on their Web sites instead of on third-party
sites.
Last year, the hotels joined to create their own version of Orbitz. Marriott,
Hilton, Hyatt, Six Continents and Starwood Hotels & Resorts Worldwide
Inc. formed Travelweb LLC. Later this month, the group will go live with
its hotel-booking site, Travelweb.com.
Meanwhile, Six Continents, Hilton Group PLC, which operates Hilton hotels
outside of the U.S., and Accor have formed WorldRes Europe, a similar initiative
in Europe that they hope will gain ground before Hotels.com and Expedia
take over the market there.
In November, two large hotel operators in Las Vegas -- Mandalay Resort
Group and Park Place Entertainment Corp. -- joined up to create LasVegas.com,
a sort of mini-Travelweb that they hope will compete with Hotels.com and
Expedia. The Web site sells rooms from all Las Vegas properties, not just
those of Mandalay and Park Place.
"We're taking the third-party Web sites head on," says Frank Han, a senior
vice president at Park Place Entertainment, which owns Bally's, Caesars
Palace, Flamingo and Paris. Mandalay, whose properties include the Luxor,
Excalibur, and Circus Circus, says it has withdrawn about 50% of its inventory
from Hotels.com and Expedia since launching its own site. "We need to take
back our room product, and we need to sell it the way we want to sell it
and maximize our revenues," says John Marz, senior vice president of marketing
at Mandalay.
Last year, Six Continents, Starwood and Cendant Corp. -- which owns Ramada
Inn, Howard Johnson and seven other lodging brands -- launched a price
war with the online brokers. They promised to beat by 10% any price that
a customer found on a travel Web site. Choice joined the movement this
month. Starting in May, Six Continents will charge a $75 penalty to any
franchisee that receives a valid guest complaint about finding on third-party
sites a cheaper rate than the company's branded Web sites offer.
In their battle against the middlemen, many chains face an obstacle:
They often don't control the hotels. They own brand names, such as Comfort
Suites or Hampton Inn, and a local franchisee owns the hotels. The hotel
owners ultimately make decisions on how to sell their rooms and at what
rate.
That makes it difficult for the chains to stop hotel owners from using
online brokers. And many hotel owners believe they can sell rooms faster
on the travel sites than they can on the hotel chains' branded sites.
"If I need to move a lot of rooms quickly, I can't call Clarion's central
reservations" and get as speedy results, says Mr. Lobo in Orlando.
So hotel chains are scrambling to persuade hotel owners of the perils
of doing business with the online travel brokers. Six Continents recently
held a training session in Secaucus, N.J., to show hotel managers how prices
are driven down by online brokers.
During the session, Lily Lukyanovsky, a director of sales at a Holiday
Inn in Secaucus, said she recognized the importance of keeping most rooms
on the branded Web sites. But she also felt pressure to undercut her competitors
on sites like Hotels.com. "I see both sides of the coin," she said.
And consumers love the sites, believing the online brokers are going
to get them a better deal. On a recent trip to Las Vegas, Edgar auf dem
Graben, a 43-year-old pharmaceutical manager from a Chicago suburb, booked
four rooms at the Imperial Palace for $39 a night through Expedia. If he
had booked them on the hotel's own Web site, he would have paid $89 a night.
The two top online brokers both began as 800-numbers. Hotels.com got
its start in 1991 in a beach hut in Belize when law-school buddies David
Litman and Robert Diener were vacationing together. They had recently sold
a business they had built together offering discounted airline tickets,
and they were trying to cook up something new.
"We liked the hotel business because it's a fragmented business and the
information about hotels is very dispersed," recalls Mr. Litman.
At first, they advertised an 800-number for hotel reservations and made
money on the commissions hotels paid for each room sold. But they soon discovered
a problem: It was difficult to collect those commissions from the hotels
that didn't have an automatic process for paying. So they switched toward
a wholesale model, in which they asked hotels to reserve a block of rooms
for them, to resell at a higher rate.
Others were trying similar ventures. In 1990, a University of Southern
California undergraduate named Tim Poster started a small company called
Las Vegas Reservation System that advertised an 800-number to book rooms
in Las Vegas.
The arrival of the Internet changed everything. When Hotels.com's Web
site went live in 1995, the tiny Dallas firm was suddenly getting bookings
from all over the world. Within a year, 6% of its bookings were coming from
the Internet. When Las Vegas Reservations System's Web site, Travelscape,
went online in 1998, it sold 12 rooms the first day. Within a few days, it
was selling 50 rooms daily. "The business just took off," says Tom Breitling,
a co-founder of the site, which Expedia later bought. "From that day forward,
we were playing catch-up" technologically, trying to cope with the volume
of online business.
Expedia began in 1996 as an online travel-booking system created by Microsoft
Corp. In 1999, Microsoft capitalized on the dot-com boom and sold 18% of
its stake in Expedia in an initial public offering. By 2002, though, Microsoft
was shuttering many of its Internet initiatives, and the software giant
sold its approximately 65% stake in Expedia to Mr. Diller for $1.3 billion.
Expedia is a full-service travel agent selling air, hotel and cars, while
Hotels.com only offers hotel rooms. Mr. Diller says he encourages the sites
to compete with each other. But the two work different segments of the market:
Expedia tends to focus on more-upscale brands, while Hotels.com concentrates
mainly on lower-priced properties.
Hotels.com turned its first profit in 1998, earning $1.7 million on sales
of $66.5 million. Since then revenues have soared to $945.4 million last
year, while net income has increased to $72.1 million. Expedia's revenues
have risen to $590.6 million in 2002 from $13.9 million in 1998. It turned
its first profit in 2001, and posted net income of $66.3 million last year.
CIBC analyst Mr. Keung estimates that free cash flow -- a measure of
profits preferred on Wall Street -- at the two Web sites increased by more
than 75% last year, while the hotel companies saw their free cash flow fall
by 15% on average last year.
The profit potential of the online brokers has attracted rivals. In October,
Sabre Holdings Corp.'s Travelocity launched its own wholesale hotel offering,
promising to give hotel operators a bigger piece of the profits and to
pay them faster. Orbitz, the airline-owned Web site, is also starting its
own wholesale hotel sales program. Although it has been selling some discounted
rooms through an agreement with Travelweb's hotels, this month it launched
a much broader program to sell both chain and independent hotel rooms on
its site.
Some hotel chains are acknowledging that they need to work more closely
with the online brokers. Six Continents recently signed deals with Travelocity
and Expedia, under which both Web sites will get access to discounted rates
in the hotel company's central reservation system.
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