This New Technology Might Pose Serious Threats To The Oligopoly Created By The Bigger OTAs

by Trefis Team
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OTA giants such as Priceline and Expedia are becoming more and more powerful much to the dismay of the travel related service suppliers in the market. Hotel owners claim that the OTAs charge a steep commission mainly because of the oligopoly they’ve created in the market. Recently, we also witnessed how regulatory bodies in the U.S. are also clamoring against the rising power of the OTAs. However, this might soon be a thing of the past as a new technology called blockchain is here to create a fairer market place thereby lowering the barriers of entry for the smaller players and hence increasing competition among the online travel middlemen.

Blockchain is the technology that drives the cryptocurrency, Bitcoin, the first decentralized digital currency in the world. Blockchain is a distributed database where data can only be added implying that the historic data cannot be lost or corrupted in the long run. In an interview with Skift, Fritz Joussen, CEO of TUI Group, one of the largest leisure, travel, and tourism companies in the world, argues how blockchain might help in collapsing the stronghold that big OTAs such as Priceline and Expedia currently have in the online travel market.

According to Joussen, the OTAs build their customer base by aggressive marketing campaigns and then charge high commissions to the hotel suppliers in return for the reach they provide the latter. Though they do help travelers with a vast array of choices and a range of prices to suit their needs, the rising commissions that they keep imposing on the hotels and airlines is something that they can continue with solely due to their oligopolistic powers in the industry. For example, not only do Priceline and Expedia own 95% of the U.S. online travel market, in more fragmented markets like Europe and Asia, these big OTAs are growing even further, thus demonstrating the sheer bargaining power that they both command. However, according to Joussen, blockchain can break this oligopoly.

How Will The Blockchain Technology Help Improve Competition?

Currently, TUI has shifted all its contracts to its private blockchain and in the next step, the company will move all its inventories to blockchain in the future with a large database that will be updated live with the availability statuses. TUI has also been in discussion with the Winding Tree to build a decentralized distribution platform for travel products. Winding Tree is currently in the process of building a public blockchain for the travel market. The company, in turn, will not make any profit by the distribution or transaction on the platform as it is decentralized. Hence, it is currently raising money for the project through Initial Coin Offering (ICO), a fund raising technique used by decentralized companies to raise capital.

The idea behind this platform is to cut off the middleman and give the distributing power back into the hands of hotels and airlines. The public blockchain offers security and at the same time doesn’t let one single player control the market. Also, the high barriers to entry created by the bigger OTAs will be dissolved if this becomes a reality. Bigger OTAs pose a significant threat of extinction or bankruptcy to the smaller ones simply because of their influence over the hotel and airline suppliers. Sometimes, even when a small OTA does well despite the hindrances, those are acquired by the bigger OTAs so that the latter can further consolidate their position in the industry.

It is not like the OTAs will not be required anymore, but instead their role will change where they might help travelers find the exact property they are looking for from a curated list. However, competition will increase in the travel industry, as anyone can source rooms from blockchain and hence the bigger OTAs solely deciding the inventory distribution and their commission rates might be dismantled. Instead, the hotels and airlines can also have a say in deciding how much commission they want to pay to the OTA middlemen. The harder hit might be the metasearch engines, however, because they currently take advantage of the flaws in the distribution system which might be nullified by blockchain.

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Notes:

1) The purpose of these analyses is to help readers focus on a few important things. We hope such communication sparks thinking, and encourages readers to comment and ask questions on the comment section, or email content@trefis.com
2) Figures mentioned are approximate values to help our readers remember the key concepts more intuitively. For precise figures, please refer to our complete analysis for Priceline

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