The fierce debate about blockchain rages on. The evangelists insist that it will be as transformative as the Internet. The skeptics ask why there hasn’t been any impact after ten years. The fight has reached hospitality, with a panel at every conference and salvos in the industry press. Distribution looks like the area most ripe […]
The fierce debate about blockchain rages on. The evangelists insist that it will be as transformative as the Internet. The skeptics ask why there hasn’t been any impact after ten years. The fight has reached hospitality, with a panel at every conference and salvos in the industry press.
Distribution looks like the area most ripe for disruption. This complex web of wholesalers, resellers, rules (pricing/commission/cancelation/loyalty), customer segments, systems, and interfaces is extremely difficult for hotels to manage and confusing to consumers. Simplification is sorely needed.
In addition, the uneasy relationship between suppliers and resellers – a mix of competition and mutual dependence – is in a state of flux. Companies are testing new distribution models and encroaching in each other’s space. This is an opening for a new technology.
But while blockchain is an amazing technology, our analysis finds that it is not likely to have an impact on hotel distribution for many years. In addition, the most exciting use case being promoted for distribution blockchain is unlikely to ever deliver on its promises.
In this article, we will assess the four most prominent use cases for blockchain in distribution, and review the impediments that keep distribution blockchain years away from fruition.
A booking often involves multiple systems across multiple companies. For example, it could involve the OTA database, the hotel PMS, and the brand CRS.
These systems essentially store the same data: room type, rate, date, etc. Yet discrepancies are common. According to Webjet, an Australian OTA piloting a distribution blockchain, up to 5% of travel invoices require reconciliation. These disputes over commissions and payments take a huge amount of time and effort to resolve.
Of course, this challenge isn’t unique to hospitality. Two databases never match perfectly – even if the databases live within the same company, and even if one database directly feeds the other. (This is also why accountants have to reconcile the books at the end of each period.)
The solution is to have all parties share a single master database. But in the past, this solution was very hard to put into practice. Someone had to own and run a central database, but no company wanted to hand control over its data and transactions to anyone else. In addition, companies still needed internal databases to power their own systems and reporting, but it was extremely difficult to synchronize high-volume/high-frequency data from the central master database to these internal databases.
Blockchain overcomes these two impediments. Because the “distributed ledger” is decentralized, it is accessible to many but owned by no one. And because the data is automatically replicated across multiple nodes, it is easy for companies to copy the data from a node into its own internal databases.
If the industry set up a blockchain to transact bookings, then counterparties would agree to the terms and record them into the blockchain. This would then become the authoritative source for commissions and payments, essentially eliminating the need for reconciliation.
Imagine selling a room for $200 on your hotel website and $200 on Expedia – and then finding that a lesser-known OTA is selling it for $175. You’ve lost profit on inventory being sold too cheaply. In addition, it has undermined “book direct” messaging, teaching customers that they should scour the Internet to find lower rates than the hotel offers.
As described by TripTease, this kind of scenario is distressingly common. Hotels often sell a portion of their rooms to wholesalers. The wholesalers receive a significantly discounted rate, on condition that the rooms be used in tours or travel packages and the rate not be revealed to the traveler. (For example, the traveler can see the cost of the entire package but not the cost of individual components.)
Selling to wholesalers has three advantages for hoteliers. First, it locks in occupancy in advance, reducing risk and guaranteeing revenue. Second, it gets bookings from travelers who wouldn’t book the room individually. Third, it creates price segmentation so that rooms are sold at the highest rate each customer will pay. Tour participants are charged the most they’ll pay, while other customers are charged a higher rate – because they can’t see what tour participants are being charged for the room.
But a wholesaler may break the terms and resell rooms individually (outside of a package). Or it may be that a travel agent or tour operator buys the rooms from the wholesaler but then sells the rooms individually. Whether it happens immediately or after multiple steps, the rooms are eventually sold onto an OTA at a rate below retail.
The problem is that there is no tracking mechanism for wholesale inventory. The hotel can’t see who broke its terms.
But blockchain could address this. Blockchain is both traceable and transparent. If the industry created an inventory distribution blockchain, a hotel would be able to see exactly who moved its inventory where. An offending party’s supply could be cut off in the future. In fact, if the industry took advantage of blockchain smart contracts, then rules could be implemented to automatically reimburse the hotel company the difference between its wholesale and retail rates if a room was resold outside of a tour.
The travel industry carries a huge amount of inventory. There are more than 20 million hotel rooms and 100,000 airplane flights available every day – to say nothing of car rentals, accommodation sharing, tours, activities, event space, and ground transportation.
There are entrepreneurs ready to bring new models to the distribution space. But they must acquire all of this inventory; most customers won’t bother with an upstart company that can offer 5% of the hotels when they could go to Booking.com and see all of them.
This is a high barrier to entry. The travel industry is extremely fragmented, and new players can’t acquire inventory from hundreds of thousands of companies and systems. Instead, they must access the database of an existing industry player, like a GDS. But that access does not come cheap. And of course, the existing industry players don’t always look kindly on new disruptors.
Generally speaking, suppliers would prefer for more companies to resell their inventory. It would be in their interest to have a common database of inventory information that any reseller could access. But a shared repository is extremely expensive to coordinate, implement, and maintain, especially when there are hundreds of thousands of (constantly changing) companies that need to write data to it.
Blockchain could make this travel industry inventory database a reality. As with previous use cases, its decentralized nature avoids concerns about handing control over to a single organization, and data can be replicated back into internal systems from the blockchain’s many nodes.
But also critical to this use case is the ability to embed the maintenance fee into the blockchain itself. As with any database, there is still a cost to storing the data, processing the transactions, and validating all new data (to prevent fraudulent data entry). Without going into the technical details, a blockchain can require that a payment (using its own token system) be made when a transaction is executed and validated, thereby paying the nodes that have volunteered to maintain the system.
These three use cases certainly could provide value. But they’re not what has the industry excited. The big promise is that blockchain will liberate hotels from OTA commissions.
The story goes like this: Leisure travelers like OTAs because they’re the only place where customers can select from every single hotel room, flight, rental car, etc. This gives OTAs control over a large portion of the leisure segment, and they use this market power to charge hotels high commissions.
If barriers to entry were reduced, as described above, then thousands of new entrants could challenge the OTAs. You can’t play hardball with Expedia over commissions if it is responsible for 15% of your bookings, but it would be easy to negotiate if it was just one of a thousand OTAs sending you bookings.
Unfortunately, this misunderstands the source of the OTAs’ power. Room Key has access to a huge amount of hotel inventory and still isn’t relevant. Vacations by Marriott has access to Expedia’s flight and rental car inventory and still can’t make a dent in the market. And of course, there used to be many more OTAs in the past, all of whom had access to large inventories. The market consolidated to the current triopoly (Expedia, Booking Group, and Ctrip) regardless.
The real source of the OTAs power isn’t their access to inventory, its their access to customers. The triopoly spends more than $10B/year in marketing and advertising to make sure that customers use them first. You can’t expect thousands of new OTAs to bloom if customers never hear of them.
There is an opening for a small number of companies to challenge the OTAs:
But why would the new entrant charge less than the OTAs? In monarchies, when the old king was overthrown, the new king didn’t give up his right to tax the peasants. If the OTA triopoly is replaced, don’t expect the new players to charge lower commissions. As long as there is a gatekeeper between hotels and their customers, commissions will remain stubbornly high.
While the most-hyped use case may not be realistic, there are still some useful applications for blockchain in distribution. Unfortunately, they aren’t significant enough to spur the investment needed to deploy blockchain across the industry.
There are three major impediments holding up distribution blockchain:
Complex Coordination – To launch a universal blockchain, the industry will need to agree to use cases, data standards, participation rules, compensation models, and much more. But the hotel industry is notoriously fragmented, ranging from large brand franchisors to mid-size management companies to independent owners of a single property. Then there are all the other stakeholders: the GDSes, OTAs, AirBnb, travel agents, wholesalers, technology providers, etc. And everyone has different interests.
Blockchain becomes more useful as it adds participants; a blockchain that is used by only a few companies isn’t very helpful. But that gives each party a perverse incentive to drag their feet on adoption until they get what they want. In the airline industry, an organization like IATA or ARC could set standards and cut the gordian knot. But there is no equivalent organization in hospitality. The negotiations will be challenging and extremely time-consuming.
No First-Mover Advantage – Often, a new technology will provide outsize benefits to the company that brings it to market first. But that isn’t the case with distribution blockchain. Not only isn’t it useful until most of the industry adopts it, but everyone benefits equally. There’s no advantage to being first.
Essentially, blockchain is a public good, and the problem with public goods is underinvestment. At every company, there will always be many projects competing for funds. If blockchain has no return until the rest of the industry invests and there is no pressure to be first, then everyone will prioritize projects with a shorter repayment horizon. Blockchain will always be on the agenda, but no one will actually invest.
Significant Investment Required – To make things worse, distribution blockchain will not be a small investment. There are a huge number of interfacing systems across the industry, and each will need to be upgraded to either integrate directly with the blockchain or to copy data from the blockchain into its proprietary database format. While this isn’t an insurmountable technical challenge by any means, we shouldn’t forget that there are still parts of the industry using mainframe CRSes. The hospitality industry moves slowly, and every company will need to invest in upgrading many different systems.
Given these impediments, it is not surprising that every company that Excella has spoken to in the hospitality industry is watching blockchain – but no one is actually investing in it. There simply isn’t the payoff needed to overcome the impediments.
Blockchain advocates will point to Winding Tree, an organization that has started creating the standards, platform, and payment tokens to enable travel distribution. But even Winding Tree has admitted that it “has a long road ahead to build the decentralized open-source autonomous platform.” The first test for Winding Tree in hospitality is still months away – and will be limited to a single hotel in Stockholm. Of course, every technology has to start somewhere, but it is a very long journey from a single property to a useful, industry blockchain.
Blockchain isn’t new anymore. If there still aren’t any substantial investments in distribution blockchain after ten years, when will it start, and how long will it take before thousands of industry players adopt it?
Blockchain may yet change distribution. But the change is still many years away, and the industry has far more pressing issues to focus on.