A New Balance is required in the Sharing Economy

Over the last quarter in India, we are seeing substantial friction in the sharing economy. Be it delivery partners versus food tech companies in Kochi, drivers versus ride sharing apps in Mumbai, or hotels versus OTAs at various cities.

It seems that the formulas of sharing in the sharing economy, their dependence on demand and supply conditions and then the expectation of guarantees in business have caused things to come to boil. Government has largely stayed away from regulation and allowed the parties to come to their own understanding.

Being from the hospitality Industry, let me dwell a bit deeper into this problem from a Hotel Vs OTA perspective and i'm sure the same logic applies across the board for other shared industries.

In the traditional world, hotels were owned and operated by single enterprises. With the advent of asset light, the ownership of assets and operations separated and even Brands that owned hotels began to sell them off and take them back on management or lease. It separated the skills required for hotel development from the skills required to operate hotels.

This has now further evolved into a separation of marketing and operations. Some companies Operate assets very well and are good with people, standards, and complex 20+ touch points at a hotel level and some companies specialized in distribution and marketing which is a specialized skill in itself requiring a lot of capital to get to size.

We now have the Trifecta:

Hotel owner

Hotel Operator

Hotel Marketing

Sometimes we have a hybrid...

Hotel Owner-Operator with a hotel marketing

Hotel Owner with Hotel operations & Marketing enterprise

With OTAs emerging around the turn of the century, hotel marketing became a large and serious business. OTAs are willing to go for years and years without profit to develop a market. In a country like India, even after 18 years of existence, the OTA penetration is less than 12% of the market size. In developed economies it is at 30-40%. The objectives of the OTAs in India is still not at Odds with the hotels. OTAs are only interested to move more and more of the offline business to the online space and find themselves engaging in everything from holidays, FIT rooms stays, Corporate stay solutions. The amount of money this involves is to say the least, mind boggling. I know for a fact that a prominent OTA spent almost 4 times on marketing than what it made in revenues. I am fairly certain that no Hotel Owner or Hotel Operator is ever willing to put their balance sheet on the line to such an extent. Even now, the most prominent OTA we work with spends more on marketing us than earnings received in commission from us. Are the hotels full yet? They are getting there.At IntelliStay, our city hotels are now consistently 80% plus occupied and our leisure is a tad lower.

This is a classic case of supply and demand. As the demand rises, the negotiating power is greater with the owner of inventory and as the demand fades, the negotiating powers are more with the Marketers.

We have seen with Airlines where there are few major players and high level of coordination, parties have come to the table and found a way to make the formula work and future proof.

It seems the problem with the lodging industry, at least in India, and most places in the world, there is a fragmentation of representation and as a result a coordinated settlement is hard to negotiate. There are at least 5 large associations in the TA and Hotel space in India and for too long these conversations around sustainability have not been had. Hotel owners, hotel chains, travel agents, regional associations. There is no ONE Voice. Attempts in the past to achive that voice has not resulted in consolidation.

I read now associations sending out notices that:

1) The commissions are too high

2) Discounts are disturbing parity

3) That contracts are being changed on a whim

There are two sides to every argument:

We have to remind the owners of Inventory that the final control on the same is with you. Hotel owners have a responsibility to have a marketing plan and a channel mix and negotiate their contracts accordingly. If you leave your inventory to OTAs ONLY when it pleases you and when there is heavy marketing spends, then your base is eroded and you are destroying your own entity's control on your outcomes. Then in upcycles, you will find yourself not in control of your inventory and commissions. I hear that commissions are too high and there are no profits but the answer to that is costs cant be allocated equally to every booking. If OTAs are only selling inventory that you could not sell on your own, then commissions are selling costs and as long as incremental revenue is achieved, there is no margin issue. Discounting is resulting in market expansion. It is forcing people to shop online and we have seen this from e-tail to food. Insurance to movie tickets. Large balance sheets of well funded companies find discounting the most direct method to attract new customers and grow occupancy. Marketing spends and offers rather than seasonal can sometimes continue for months on end.

Loyalty comes from user experience and if the hotel does a good job of taking care of their clients, offer direct benefits and inducement in property, then OTAs act like a customer acquisition strategy and not a revenue dilution strategy. Establishment cannot give away its whole sales and marketing to another entity without putting itself at risk.

Similarly, we have to remind the OTAs that inventory owners will want to see their price points match their own so that it leaves an even playing field. As market penetration slows down, a return to normalcy is welcome. Are we there yet? probably not. But as we approach it, we need to rationalize marketing via discounts to marketing via user experience and other ways of delivering value. Also commissions are a big cost for inventory owners and cannot be a single static blanket formula. They have to be bench marked to how critical the channel is to each hotel and work in ways where its high for a lot of work and lower for little work. Some dynamic formulas will have to emerge. At IntelliStay we have increased and decreased involvements with OTAs cyclically and now we find ourselves well integrated on formulas that take care of both of us with our individual specific requirements met. It is based on good faith and partnership. It was not always like that. We have worked on the problems and found a way to work and now moved from strength to strength.

OTAs can only normalize when there is consolidation in the online selling space and when the fight for market share slows down. The emergence of large players in the last three years who smudge the distinction between OTAs and Hotel Operators is further adding to the confusion and has not let OTAs slack off because in the end, the market segment being chased is identical. OTAs have had to respond and sustain their promotions to ward off the challenge. A lot of the problems we see today are technically not between OTAs and Inventory. It is actually between OTA and OTA/Soft brands where the inventory has suffered as a side effect. So a bit of scorched earth is causing a push back.

Hotels cannot survive without OTAs. OTAs cannot survive without hotels. It's a marriage and stuff happens. The sooner all parties realize that kids (Our customers) are involved and watching this and getting traumatized by it, the faster we will find a reasonable and workable solution. But continuing distress and brinkmanship will only prove that we dont care about our customers. Let us stop taking each other for granted and engage with each other in good faith. Anything else will be tragic for both. Lets remember that the India story is strong and underlying demand supply deficit is decade-al in nature and nothing must disturb that story.

Lets continue delivering world class service and let our partners play a role in bring it to the world.