Industry Update
Opinion Article21 January 2015

Should Hoteliers Be Concerned with Amazon Becoming the Next Mega OTA?

By Max Starkov, Adjunct Professor NYU Tisch Center for Hospitality and Hospitality & Online Travel Tech Consultant

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Background:

The industry press is full of articles about Amazon entering the travel retail space, opening travel industry-focused offices, and contacting hoteliers to strike merchant-model wholesale deals. Industry "oracles" are predicting that Amazon will become the next Expedia or Booking.com.

In my view, by adding a "merchant model" extension to their flash sale-oriented site, Amazon Local, Amazon is achieving two objectives. On one hand, Amazon is simply "testing the waters" with all of their recent moves into the travel space. On the other hand, they are trying to expand the hotel offering of the fledgling Amazon Local. Like everyone else (Living Social, anyone?), Amazon is realizing that the flash sale model is extremely cyclical. In today's post-recession environment, hoteliers are no longer willing to provide steep discounts and outrageous deals when they can sell their inventory at higher rates direct or via cheaper distribution channels.

Can Amazon become a major OTA player?

With Amazon's current merchant model attempt, I think not, and here is why:

  • The OTA marketplace is already oversaturated. Travelocity is being "swallowed up" by Expedia. Orbitz is doomed as a stand-alone OTA. Establishing Amazon as a new OTA brand will be prohibitively expensive.
  • The merchant model Amazon has chosen is against the existing major shift from merchant to agency model that the industry is trending towards. Hoteliers do not like the merchant model: Amazon's 15% merchant commission is close to Booking.com's commission, yet Booking.com employs the agency model (i.e. guests pay at the front desk upon arrival) while Amazon has adopted the pre-paid merchant model.

Likewise, travel consumers do not like the merchant model: why pre-pay at Amazon when you can book on Expedia and pay at the hotel upon arrival?

  • Amazon is using 1990s technology: Hoteliers have to maintain inventory and pricing via the Amazon extranet? This was Hotels.com back in 2001!
  • The entrenched "travel consumer purchase intent" will work against Amazon: Nobody goes to Amazon to research, plan, or book travel, just as nobody goes to Expedia to purchase a travel guide book or a pair of swimming trunks. If you need a travel guide book you do think of Amazon as a place to purchase one, but if you think planning/booking travel you think of Expedia or Booking.com.

Should hoteliers be worried by Amazon's foray into the travel space?

Amazon is the largest online retailer on Earth with a market capitalization of over $134.6 billion. Amazon has mastered online retailing, inventory management, online order fulfillment and logistics.

From e-books to electronics and streaming video, Amazon excels in and "owns" every single retail category, except online travel retailing. Why? Despite all of its retailing prowess and innovation, Amazon has no idea how to manage ultra-perishable inventory, such as travel inventory.

Unlike books or socks, you cannot store travel inventory. You cannot store it in your highly efficient automated warehouses. Once the gate closes, those 15 empty airline seats are gone forever. At the stroke of midnight, these 50 empty hotel rooms are gone forever. You cannot put them in automated storage, or in a deep freezer.

In my view, hoteliers should NOT be concerned by the current merchant model entry of Amazon into the travel space, nor should they assist Amazon in their OTA efforts. Consider that even during the peak of the flash sales craze, Amazon Local could never become anything more than a small niche player, primarily for discounted retail items. With its current merchant model attempt, I don't expect Amazon to become anything more than a small niche OTA player not worth any hotelier's time.

However, if Amazon decides to buy an existing large OTA player and build a global travel retail empire on this new acquisition's platform, then hoteliers should be really, really concerned. For example, Expedia could be one such acquisition target. In today's world, with a mere $10.5 billion market capitalization, Expedia is too small of a company to become a true global player.

Amazon really knows how to drastically improve website user experience and conversions, how to upsell and cross-sell, and how to be super-efficient at low margins. By integrating its retail offerings into Expedia's fabric, Amazon can really change the online travel consumer marketplace.

Take, for example, a couple traveling on a quick weekend gateway to the Bahamas and purchasing their airline tickets from Expedia. Today, Expedia earns less than $3-$4 from this airline-only reservation. Amazon could easily convert these air-only customers into $250-$300 customers by upselling travel guides, streaming videos, sunscreen and sunburn lotions, vacation clothing, luggage, or anything else the world's largest online retailer already provides.

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22 April 2015 — No, Amazon is not creating a travel brand to compete with the Expedias of this world, a spokesperson has said. But today its sub-brand Amazon Local has added some modest improvements to how it markets, on any given day, around 300 hotels in the US and about 150 in the UK.
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