Online hotel bookings increase

By Brad Foss
Associated Press

NEW YORK — Ever since she coordinated her Italian honeymoon using a computer and a credit card, Karen McDermott has been hooked on planning trips over the Internet. She's hardly alone, since millions of Americans regularly buy plane tickets online.

Karen McDermott checks out the Web site of an Italian hotel from her apartment in the Brooklyn borough of New York. McDermott regularly books hotel rooms online, where only 4 percent of reservations are made, and has found increasingly better deals as the marketplace online begins to grow. Associated Press

"I'm looking for a good deal and the convenience," said McDermott, a research librarian who has used Travelocity.com to reserve rooms in Cincinnati, San Francisco and Washington in the past year.

While online spending for hotels remains small compared to airline tickets, the marketplace is growing fast — annual sales are expected to reach $7.7 billion by 2006, or double the forecast for 2002. Yet many of the nation's leading hotel chains have little to celebrate because consolidators and Internet travel companies control as much as 95 percent of these sales.

The largest consolidator, the Hotel Reservations Network, buys up rooms in bulk from hotel franchisees at extremely low prices and resells them through thousands of affiliated Web sites and on its own retail site, hotels.com. It's a great deal for bargain-hunting travelers as well as for Dallas-based HRN, which is able to mark up nightly rates by 28 percent on average, according to analysts. HRN's stock price has more than tripled since its first day of trading in February 2000.

After HRN, which had $536 million in revenues and a net profit of $13 million last year, the next biggest discount seller of hotel rooms is Expedia Inc. of Bellevue, Wash. Both companies are majority-owned by USA Networks of New York.

The result is that hotel companies are losing on several fronts: their ability to set prices is weakening, franchisees' profit margins are under pressure and well-known brands could become watered down over time. Put another way, the industry is in a long-term battle to prevent the commoditization of its product, said Jake Fuller, an analyst at Thomas Weisel Partners LLC in New York.

"You want consumers to view Marriott differently than, say, Hyatt," Fuller said. "These companies have spent billions to build their brands."

Ready to defend themselves and to try to recapture lost revenues, five major hotel firms will begin a joint online-distribution venture in late spring or early summer called the Hotel Distribution Network, or HDS. Based in Dallas, its main goal is to undo the primacy of crosstown rival HRN, which is responsible for roughly 9 out of 10 hotel rooms sold over the Internet, according to analysts.

HDS' founders are Hilton Hotels Corp., Hyatt Corp., Marriott International Inc., Six Continents Hotels Inc., Starwood Hotels and Resorts Worldwide Inc. and Pegasus Solutions Inc., an electronic reservation company.

HDS interim chief executive Joe Humphry said the company will offer a "better value proposition" to its owners' franchisees and other individual hotel owners that currently sell excess inventory on the cheap to consolidators and travel Web sites.

"It has become a very profitable business," said Humphry, whose company has spent two years planning a strategy while consolidators and Internet travel sites reaped profits from this nascent sector. However, Humphry said, "a lot of the owners of the hotels feel it has been at their expense. In the future, they need to sell at rates that are more economical for them."

Practically speaking, that means HDS will try to woo franchisees away from consolidators by offering them a better price per room and promising to reduce the time and expense it takes to process online reservations.

The venture might sound like the hotel industry's version of Orbitz, the online distributor started last year by five major airlines, but it is fundamentally different, explained Henry Harteveldt, Forrester Research's Internet travel analyst.

For starters, HDS was not established as an alternative to the computerized booking systems used by travel agents and their online counterparts; by using Pegasus' technology, HDS ensures that its rates are available through every distribution channel. And HDS will focus solely on hotel rooms, whereas Orbitz offers much more than airline tickets; in fact, Orbitz will be the first major retailer to sell HDS' inventory.

By next year, HDS will sell directly to consumers over its own Internet site, travelweb.com.

"It will challenge dominant online hotel sellers and can carve out a meaty role for itself in the long run," Harteveldt said, "but it won't win the top prize because the industry is too fragmented."

HRN president Bob Diener agreed there's plenty of business to go around. So while the company he co-founded is under attack, Diener does not feel threatened.

"We don't see any impact on our growth potential," Diener said. Yet Diener is obviously looking over his shoulder. One month after HDS said it would not charge cancellation fees to consumers, HRN said its fee would drop to $10 from $50.

That is exactly the kind of impact hotel executives hoped the new joint venture would have.

"We think there's room for new competition in this area," said Bruce Wolff, Marriott's senior vice president of distribution and sales and a member of the HDS board.

Marriott is ahead of the industry in that 6 percent of its sales occur online and three-quarters of those transactions take place on its Web site. Yet even as the world's biggest lodging company embraces this low-cost distribution channel, Marriott and its competitors are locking arms for another reason — HDS will boost its participants' revenues by marketing their full-range of nightly rates, not just the lowest-priced inventory, which is HRN's focus.

The problem with HRN's model, Wolff said, is that it sends the message that the best hotel deals are only available online