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Global Hotel Exchange (GHX) Fights For What's Right in Online Hotel Booking

Posted: 04/16/2012 12:12 pm

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Whenever a group of giant corporations control or collude on pricing in a sector, business or industry such as railroads, airlines, steel, computers, telecommunications, silver or the Internet, bad things will undoubtedly ensue. This is the reason for Anti-Trust laws in America.

Inside the international, global scope of the Internet, regulating these cabals becomes much trickier. And on the web, there are few more tightly-knit online businesses than travel; early start-up businesses tended to cluster around this online transaction because the travel industry was an obvious early online landing zone to reduce costs and increase convenience to busy travelers through online shopping, pricing and booking.

Of course, we now have dominant online travel incumbents--relatively mature businesses called Online Travel Agents (OTAs)--like Expedia (NASDAQ: EXPE; started by Microsoft but sold off), Travelocity (owned by Sabre Holdings, the American Airlines' creation and former market dominant distribution system), Orbitz (NYSE: OWW), Opodo (founded by European airlines including British Air, Air France and many others), Hotwire (an "operating company" of Expedia), Priceline (NASDAQ: PCLN) and others who effectively dominate the emerging industry much more than Carnegie or Rockefeller ever did theirs.

Note anything interesting about these incumbent OTAs? That's right; most were started by one behemoth corporation or another trying to establish a toll-booth on the online travel booking highway.

Though there's an incestuous thread running through the founding of most OTAs, Expedia is an attention-grabbing example of the grotesque and nefarious evolution of these dominant digital organisms that seem to operate with impunity and a blatant disregard for anti-trust laws. Started by Microsoft (anti-trust investigation, anybody?), Expedia was then suspiciously sold-off. What the Wikipedia entry on Expedia neglects to mention is that Expedia also owns Hotels.com, ClassicVacations.com and TripAdvisor.com. Is this worrisomely anti-competitive? I'd vote yes.

Just like Rockefeller was doing to small gas stations, these gigantic, well-entrenched online creatures can put smaller, independent travel businesses right out of business if they don't want to pay 35% of their revenues to these avaricious OTAs.

In yet another analogy to old 'John D,' OTAs also wield an inordinate amount of power over the entire industry food-chain, where their operations clearly fit into the definition of "anti-competitive practices," particularly when it comes to the "price fixing," "exclusive dealing" and "limit pricing" areas of our laws.

Take hotels for instance. Almost overnight in the mid to late 1990s, hotels were literally forced to list their rooms on the OTAs and let them virtually have their way with them in terms of onerous commissions, fees and other cuts the OTAs take for listing the rooms on their sites.

It was after 9/11, that the OTAs really muscled-in on the travel industry by seizing control in the three most crucial areas of any enterprise: inventory, distribution and pricing.

Through their 'land-grab' domination of the Internet, these OTAs exert total domination over the entire traditional travel sector including the airlines, hotels, cruises and rental cars all of whom used to have some influence over their own destiny but now cannot even set their prices where they want without getting a menacing 'nasty-gram' from an OTA.

Now, the OTAs would undoubtedly respond with some claptrap about providing an 'important distribution service' or their suppliers 'having a choice' about working with them but it's simply not true.

Even the big hotel chains felt threatened enough to have to participate because they knew that soon enough, few online customers would be going to their Hilton, Hyatt or Sheraton websites directly anymore but would be channeled through many of these big, monopolistic OTAs' websites instead. A comprehensive turnaround of billions of dollars of revenue this was; and the customer (and their personal data) wasn't even owned by the hotels anymore but owned in every way possible by the OTA--who don't hesitate to hold the customer hostage.

But don't just take my word for this ghastly situation; listen in on some of the industry conversations.

I stumbled upon an online academic survey which intrigued me. Entitled "The Impact of OTAs on Hotels," I corresponded with the progenitor, Farhan Malik, an MBA student in Thailand. While his results are not all in, they will probably not favor OTAs. Malik, also owns his own hotel has a vested interest in gauging the level of hotel-owner animus to their OTA controllers.

Not to miss out on the conversation, the "Hotel Professionals Worldwide" group on LinkedIn has a thread called "Hotels vs. OTAs: Whose side are you on?" This further confirms the bombastic positioning of the OTAs in the larger Online Travel industry.

This situation is just plain wrong.

Sometimes, one way fairness can be installed in a 'gold-rush' environment is to create an exchange or stock market type trading center which tends to level the playing field for smaller players and protects the consumer too.

Global Hotel Exchange (GHX) is the start-up creation of Tom Magnuson, a Yank living in London. Magnuson is also the founder of Magnuson Hotels which he and his wife started in 2003.



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Talk about the 'little guy' succeeding: Magnuson says, "My wife, Melissa and I started up with two Macs in our kitchen; a 120-day vendor credit; and the accounting department was a computer in the basement."

Magnuson Hotels is now "the world's largest independent hotel group;" one of the Inc. 500; and represents over 2,000 hotels worldwide with aggregate assets of more than $4.5 billion. So Tom Magnuson knows the hotel business.

GHX exists for two classes of customer. First, GHX is for the hotel owners, to help them make more money in a crucifying environment and avoid paying the OTAs the huge fees they currently have to pay. Secondly and simultaneously, GHX is for the online hotel room consumers searching for the best possible price.

Instead of taking an OTA-like 'pound of flesh' ranging from 15 to 35%, GHX charges their hotels nothing. The only fee charged anybody is a $2.99 fee the hotel booker pays which should be more than offset by the lower room pricing GHX will offer.

The killer byproducts of this unique online business model is that GHX takes no money for the hotels; the hotels continues to 'own' their customer and their data; and finally, GHX is working to eliminate penalties for cancellation and that infuriating several hundred dollar credit/debit card set aside hotels can take that often leaves a traveler penniless on the road.

GHX clearly faces an arduous, uphill battle. But if GHX is successful, it could spell the end of the OTAs' reign of revenue terror against the hotel owners and the almost imperceptible yet damaging increase in room rates to the consumer.

In a recent hotel industry article written for Hospitality Net, Magnuson goes into some of the specifics of why GHX--or a company like GHX--is so timely and important to the hotel industry right now.

Tom Magnuson comes from a very interesting background. "I was born and raised in a small town under the freeway," Magnuson told me, "but Wallace, Idaho has more millionaires per capita than anywhere in the world." Sporting no less than seven NYSE-listed companies, the wealth of this tiny Idaho town has nothing to do with potatoes.

What Wallace, Idaho has to do with is silver and a lot of it. Known as the "Silver Valley," Wallace was at the epicenter of a silver-rush--who even knew there was one? "Wallace produced more silver," Magnuson stated, "than anywhere in the world."

Though the 2010 US census listed 784 residents in Wallace, way back in 1890 there were more than 2,000 residents in this, the most populated county in the state of Idaho due to a silver frenzy not unlike the one in gold that built California.

Back in the day, Wallace frequently saw "open warfare" and shootouts in the streets between mine workers and mine owners. And, interesting little place that Wallace is, silver is not the only beautiful product they gave the world: Lana Turner was born there in 1921.

So Tom Magnuson grew up in Wallace and his father was a widely-quoted silver industry expert. Magnuson told me that growing up he was schooled at the knee of his father in business and the silver industry.

One time, a young Magnuson came home from school to find two other gentlemen in his living room talking business with his father. The two were Lamar and Bunker Hunt, "The Billionaire Hunt Brothers" who I had always been told had "greedily" tried to corner the silver market in the late '70s.

When asked about my perception of the Hunts' motivations, Magnuson corrected me quickly. "The Hunt brothers were heroes," he said, "they put the silver market back on track."

This would seem to synchronize with what Magnuson is trying with his GHX solution: he's creating an 'exchange' which is online and strives to eliminate the 'middle man.' As in any business, the 'middle man' is anybody or thing, that participates in a transaction and brings little if anything to the table to deserve that participation.

"When we looked at this scenario we saw that the only way the hotel owners were going to get out of this is by a dramatic cost reduction of operating costs and creating a frictionless free market."

In order to level out the online hotel booking system and install some fairness for the consumer and very importantly, the 'inventory provider' ... the hotels themselves, who are hurting tremendously, there needs to be a hearty crackdown on the OTAs preposterous control and power-wielding over the hotel owners and ultimately, the hotel room consumers. Without this, there will continue to be a recession in the hotel industry.

Meanwhile the hotels seem to like the GHX value proposition. The iconic Waldorf Astoria in New York City recently signed on to GHX.

God knows what's going on between the airline sector and the OTAs. But it can't be good, given all the rampant consolidation and bankruptcies with the airlines. Could the OTAs be taking too big a share of the pie and harming the economy in the airline business too?

Any newcomers to an industry where they were previously not involved and who deliver little of value but take a disproportionate share of the revenue must be eradicated for they almost surely violate anti-trust laws. This is a prime example of 'doing what's right' in business and society in general.

 

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