How the coming smart contract coup over the online travel industry will boost hotel property values
Smart contracts include a variety of contingent claims that must occur before the next sequence in the contract is executed, thus reducing monitoring costs and automating the next step with much greater speed.
Hotel properties are an example of an industry that has become increasingly subservient to third-part Online Travel Agents (OTAs) that serve as intermediaries between their business and customers seeking accommodation at good rates. In return for this economic lifeline, hotels fork over significant, sometimes exorbitant, booking fees. Some hotels cede control over rates they can provide directly to customers in order to curry favor with the online booking powerhouses that promise the lowest available rates to their own followers. These expenses and operating limitations cut significantly into net operating income. Smart contracts might change all this, and boost hotel valuations while better informing investors of future hotel potential values.
The Rise of the Online Travel Agents or OTAs
The OTAs were originally a welcome disruption to the hotel business when they first hit the scene in the early 2000s, just as the internet was becoming ever more accessible in peoples’ homes and drastically changing the way they lived and shopped. The pioneering OTAs would purchase bulk amounts of rooms or help hotels with excess inventory fill rooms that would otherwise likely remain vacant. The OTA, like any traditional travel agent, kept a modest cut for facilitating the connection (commissions amounted to 5-10% in those early days). Hotels also welcomed the added advertising they could achieve by harnessing the then-new internet platforms by appearing in customers’ search results. Customers, meanwhile, benefitted from being able to compare hotel rates in real-time without having to pay a traditional travel agent, and letting hotels compete for their business on these online travel forums. Win-Win-Win, right?
Fast forward to today, though, and several of those once-fledgling pioneer OTAs have grown into near-monopolistic industry powerhouses. Their commissions charged to hotels now average from 15-30%, sometimes up to 45%, of the booked rate. A 2017 report by CBRE Hotels’ Americas Research found, on average, commission payments are the second highest expense in a hotel’s rooms department, behind only labor costs. Hotels are also often compelled to pay additional fees on top of commissions for enhanced advertising and to be placed higher on consumer search results on OTA websites. And in many cases, the OTAs construct contractual restrictions on hotels being able to offer lower rates to customers that attempt to directly book with their preferred hotel, keeping room prices artificially high despite cutting OTAs out of the transaction. All of these inflated expenses, of course, get passed along to the consumer who may naively believe that he is getting the ‘lowest guaranteed rate’ without having to pay anything for the service.
Have the OTAs Overplayed Their Hand?
Hoteliers are the first to observe that the ‘win’ column is increasing disproportionately for the OTAs with the OTAs’ growing customer base and exceedingly low overhead (relative to operating hotels). In attempt to wrest control of their business back from the OTA titans, some of the largest hotel brands, such as Marriott and Hilton, have begun major expansions to their customer loyalty programs in an attempt to increase direct bookings. By 2019, Marriott seeks to renegotiate contracts with Expedia and Booking Holdings Inc – parent company of Priceline and Booking.com – to include lower commissions (currently upwards of 10%). However, the largest hotel companies make up less than 1% of all inventory listed on the leading OTA sites. The smaller brands and independently-owned hotels do not have the same bargaining power to free themselves from the OTAs and typically have to pay the highest commissions. (See Everything You Wanted to Know About the Hotel Industry’s Gripes Against OTAs for a more in-depth read on this topic)
There are indications that consumers, too, are less enamored with the service provided by OTAs. The booking options presented by OTAs are almost too limitless, often resulting in exhaustive sessions of searching for the best deal, then questioning yourself whether to ‘buy now’, or wait to see if prices will go down any further. With the growing awareness of big data and privacy concerns, the process can also feel a bit manipulative. For these reasons, some consumers are returning to (or perhaps approaching for the first time) old-school travel agents to do their bidding for accommodation to save some time and frustration. Millennial consumers, in particular, show a growing preference for experience-based travel that makes them more likely to pay an agent to tailor a trip to their liking. Hotel operators are not only picking up on that preference to attract more direct bookings themselves, but in many cases offering the same direct booking rates to partnered travel agents in order to reduce the commissions paid to OTAs. In another twist, the Netherlands-based start-up Bidroom is an online platform that boasts a ‘0% commission’, and instead makes profit from charging annual subscription and membership fees to customers in exchange for special travel deals. Elite credit card services are also tapping into members willing to pay higher annual fees for access to deals and personalized travel concierge services.
Introducing the Next Disruption to Online Travel Booking
The developments above signal a coming tide-shift in the way consumers conduct their travel transactions, but they all still feature a transaction middle-man between client and host – only differing in their business model for receiving compensation. Enter smart contract technologies – which stands to be the next big wave that could bowl over these commerce middle-men altogether.
European start-up LockTrip.com is one of the first to wager that the industry is ripe for distributed ledger technology (i.e. the blockchain technology that enables smart contracts). It launched in late 2017 and now boasts 100,000+ hotel and short-term rental properties (attempting to steal market share from the likes of Airbnb.com, as well) on its online platform that is functionally comparable to those of its competitors. On this peer-to-peer transaction platform, property owners can directly list, manage and advertise their property profile to consumers at their most competitive rates free from commissions; consumers are able to comparatively shop for accommodations in similar fashion to any of the major OTA websites. When a consumer makes a booking, an automated smart contract is initiated between the guest and host for the listed accommodation. Like any blockchain, the service is integrated with and powered by its own digital currency (LOC in the case of LockTrip). The site currently allows consumers to choose payment methods: by credit card, or in LOC tokens to save a further 2-3% in credit card transaction fees. In either case, the service automates the transfer of funds between parties according to the rules established in the contract (nightly rates, cancelation fees, deposit refunds, etc). In place of commissions, the company profits from the adoption and sale of its LOC tokens, as well as some add-on advertising features that property owners can opt to pay for in LOC. (A cursory search by this author – short of completing an actual booking – revealed that rates advertised on LockTrip were indeed notably lower than the same search on a major OTA website. View LockTrip’s whitepaper here.)
What Could This Mean for Property Valuations?
The potential real estate implications of all this are pretty straightforward. While hotel properties have some performance metrics unique to the property type, fundamental to the valuation of any income-producing property is the amount of net income the property can generate. Vastly reducing or eliminating the commission expenses currently paid by hospitality property owners, while keeping other revenues and expenses constant would result in a disproportionate increase in the property’s net operating income. Alternatively, owners could reduce rates and increase occupancy or invest in other revenue-generating strategies that would also result in an increased bottom line.
This discussion highlights (1) an emerging technology (blockchains) still seeking mainstream public acceptance and understanding (particularly in applications beyond cryptocurrency exchanges), (2) how its acceptance could be a hospitality industry game-changer on-par with the disruption by OTAs in the early 2000s, and (3) the cross-industry affects that could impact hospitality real estate values in the future. Smart contract technology are not on the radar of hotel developers/owners and investors – particularly at the smaller-scale where the benefits stand to have the greatest impact – but they certainly should be.
 Feinstein, Eran. (2018, February 23rd) OTA’s vs. Direct Hotel Bookings: Which is the Leading Trend for 2018? Retrieved from www.traveldailynews.com
 Mandelbaum, Robert. (2017, May 19th) Paying the Intermediary: An Analysis of Hotel Commissions. Retrieved from www.hotelmanagement.net
 Montevago, Jessica. (2018, April 5th) Marriott CEO Looks to Lower OTA Commissions. Retrieved from www.travelmarketreport.com
 Clampett, Jason. (2016, April 25th) Everything You Wanted to Know About the Hotel Industry’s Gripes Against OTAs. Retrieved from www.skift.com
 Sydenham, Stephen (2018, July 18th) Bidroom.com Set to Change the OTA Industry, With a Little Help From You. Retrieved from www.hotelspeak.com
 Ali, Soha. (2019, January 26th) This Blockchain Wants You to Lock(your)Trip and Go! Retrieved from https://blockpublisher.com