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Hotels to make room for online surge

The use of Web sites to book hotel stays is poised to explode, and it could force room prices lower, a Bear Stearns report says.

The use of Web sites to book hotel stays is poised to explode, and it could force hotels to pare the prices they charge for rooms, according to a new report from Bear Stearns.

"The online travel agencies, merchants and auctions, as well as slower business demand, put increasing pressure" on rates, analyst Jason Ader said in the research report.

Ader's research predicts that corporate room rates will be flat or show a slight decrease in 2003. "We believe that commoditization is taking place. Just how far it will go has yet to be seen," he said.

Travel is the largest segment of e-commerce and is still growing relatively fast. Jupiter Media Research recently predicted an annual growth rate of 23 percent in the online travel industry through 2006, with lodging growing at 26 percent annually during the same period to hit $15.5 billion.

Much of that growth is coming through travel sites such as Travelocity and Orbitz, as opposed to the sites of hotel companies such as Marriott International or Starwood Hotels & Resorts Worldwide. Expedia's Web site, for instance, saw more than four times the volume of visitors in June as Marriott's, which was the highest-ranked proprietary hotel site for the month, according to Nielsen/NetRatings.

Hotel chains have tried to fight back. Starwood and Six Continents, which owns the Holiday Inn and Crowne Plaza brands, recently launched campaigns guaranteeing that the room rates available on their sites would always be the least expensive available.

"With the advent of the Internet, hotel companies must manage their rates almost hourly to ensure that they are properly yield-managing their inventory," Ader said.

The changes in the hotel market are fairly closely mirroring the situation with airlines, Ader said. Once airfare rates began to be published online, consumers increasingly sought out deals and bargains, driving overall prices lower.

Airlines have struggled with how to handle discounted fares online. A few companies have fought back by launching Orbitz, a booking site owned by a consortium of airlines. Five hotel chains have tried to copy this model, opening Travelweb.com in February. Travelweb has been fairly successful, Ader said, grabbing 4 percent of the online lodging market. But it could face the same legal troubles related to antitrust issues that Orbitz has run into.

Hotel chains face other problems too: independent hotels and franchisees. Independent motels and hotels have found it easier to reach wider audiences through online travel sites. And franchisees, which account for a substantial number of rooms in the major chains, may be prompted to challenge rate and marketing decisions made by their corporate parents.

"Franchisees and independent hotel operators have embraced the Internet and have changed the balance of power away from the brands and into the hands of third-party Web sites," Ader said. "Combined with sometimes unwise pricing strategies employed by less sophisticated competitors, the hotels managed by the major hotel companies have been forced to lower their rates and offer up a larger percentage of their inventory to the non-proprietary distribution channels."