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Marriott vs. Diller: It's a Brawl

By Alex Salkever On Nov. 17 at a posh Marriott hotel in Orlando, the titans of the

online travel industry are gathering for the PhoCusWright Executive Conference. The annual confab is a must-attend for serious followers of this exploding sector, in large part due to the speakers' list, which reads like a Who's Who of the business. Aside from senior executives at Orbitz and Expedia and top industry analysts, the roster includes John W. Marriott III and Barry Diller, and that's where it really gets interesting.

Marriott is the scion of the family-controlled hotel giant and represents the old way of running the travel industry. Barry Diller is the CEO and majority owner of Interactive Corp. (IACI), the most powerful company in the upstart world of online travel. Interactive owns the largest travel portal, Expedia, as well as hotel discounter and online discount ticket seller Hotwire.

Though they may claim to have friendly relations, the conflict between Diller and Marriott is growing more bitter by the month. Witness two curiously timed announcements. The first, on Nov. 11, said that effective January 1, 2004, Marriott (MAR) would guarantee the lowest room rate to any customer who books a Marriott room directly from the chain on the phone or on its Web site. Should the customer provide Marriott with evidence of any other lower published rate, Marriott will undercut the lower rate by 25%.

TAKE THIS! The second announcement came on Nov. 17, the day the Orlando conference opened, and trumpted a deal between Marriott and Diller's chief competitor, Travelocity, which is owned by Sabre Holdings (TSG). The agreement makes the online travel agency Marriott's first online "merchant hotel partner," and it extends the low-price guarantee to all Travelocity customers. Taken together, these moves are the equivalent of a party's host insulting his honored guest right before he's due to arrive. After all, Diller is a regular highlight of the conference and its most sought-after speaker -- even if the confab is taking place in a Marriott this year.

Granted, the Marriott room-rate guarantee won't apply to so-called opaque bookings offered by Priceline (PCLN) and Hotwire. Those involve either booking the room without knowing the brand (Priceline) or booking it from a dedicated discounter (Hotwire). And how Marriott defines "published rates" remains to be seen.

What's more, other chains have offered lowest-price guarantees. Starwood (HOT), which operates the Sheraton, W, and Westin chains, and Six Continents, which runs the Holiday Inn, Inter-Continental, and Crowne Plaza chains, made a 10% price-improvement offer for rooms booked on their Web sites. But taken broadly, the two Marriott initiatives seem aimed at accomplishing one thing: keeping Barry Diller from exerting too much control over Marriott. "If anyone can pull this off, Marriott can," says Lorraine Sileo, vice-president of PhoCusWright.

ALL EYES WATCHING. Industry analysts say the 25% discount is eye-popping not just because of its size but also because of Marriott's willingness to put its own call centers head-to-head with third-party Web sites in competition for best prices. That means Marriott execs believes it's more important pay a live operator -- a costly expense in a low-margin business -- than to let Diller get those customers online.

Other chains have largely focused on driving customers to their own branded Web sites, which remain the chains' lowest-cost distribution channel. "Marriott has definitely raised the bar. And they are really pushing hard to provide enough incentive so that people will book on their Web site," says Sileo. No doubt, the move shows how aggressively Marriott is pursing a direct relationship with its customers or herding them toward partners, such as Travelocity, with which it shares a beneficial relationship.

The entire hotel industry is watching keenly because in Interactive, it's facing a challenge it has never seen before: a strong, adversarial distributor of its product. Diller's chieftains at the three travel units are squeezing the hotels like never before for low, low room rates to pass on to bargain-hunting consumers at Expedia,, and Hotwire. While the online travel industry as a whole is growing quickly, Diller's minions are growing faster.

"WAYS TO CUT BACK." "They represent a very large chunk of the hotel rooms sold by online travel agencies, over 50%," says Sileo. "They can say to a hotel: 'We need a 25% margin, and for that you're in the default display on our site.'" By comparison, offline travel agents get a 10% commission from hotels. For now, the big hotel chains get far more online bookings from their own Web sites, but with Diller spending hundreds of millions of marketing dollars on his brands, he may catch up.

At the same time, business travel remains mired in a deep slump with no signs of revival. Business travelers pay premium prices and provide outsize profits to the hotels. But Edward Hasbrouck, online travel expert and author of The Practical Nomad series of travel books says this part of the hotel business may never get back up to speed.

"Businesses have discovered there are ways to cut back on travel and still get business done," says Hasbrouck. "You can pay for an awful lot of video-conference calls for the price of face-to-face meetings. That realization is going to mean permanent changes to a lot of hotels."

GOOD FOR CONSUMERS. One change is a new emphasis on getting every leisure-travel dollar possible and sending as little as possible to any distributors, but most of all to high-cost distributors, such as Diller, that demand deep discounts. "A high-fare airline like American could fill all its seats at discount rates and still lose money. There are also hotels that could sell every room through Hotwire and still lose money," says Hasbrouck.

According to the author, this is all part of a healthy process that ultimately helps consumers. "In most industries, manufacturers don't set their selling prices. Wholesalers sell to retailers who, in turn, decide what their markup is," Hasbrouck explains. "In travel, the suppliers have traditionally been able to control the selling prices, the markup, and the profit of the their distributors. The travel industry is moving in the direction of acting more like a normal industry."

A normal industry, however, is not what John Marriott and others hoteliers have in mind for their future. Which is why 2004 will be the year they mount more maneuvers like Marriott's 25% gambit and other moves to drive travelers to their hotel-branded Web sites and away from the likes of Expedia. No matter what, don't expect Marriott to give Diller a big bear hug at the big confab this week. Salkever is Technology editor for BusinessWeek Online. Follow his Nothing But Net column every week on BusinessWeek Online

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