How much will hotel companies pay OTAs (online travel agencies) and similar third-party distributors this year? That was the thought-provoking question raised on Thursday by Max Starkov in a LinkedIn post.

“In 2023, hoteliers will pay the top OTAs and bed banks $50 billion in commissions and markups,” Starkov wrote. “A staggering amount!”

The post went viral among distribution nerds. Putting a figure on third-party distribution underscored its importance.

We’ll highlight some points that many hoteliers misunderstand about distribution in a moment.

But first, is this $50 billion figure plausible?

Estimating Hotel Distribution Costs

Starkov — a consultant in New York who formerly ran a digital agency since merged with Cendyn — based his estimate on an “amalgamation of publicly available data for the publicly traded companies and investor presentations for the private ones.”

Our own estimate is that hotels — both branded and not affiliated with major hotel brands — will spend roughly $47 billion this year on online travel agency commissions.

Hotel companies will spend an additional $11 billion on bed banks — essentially wholesalers, such as Hotelbeds and WebBeds (which typically distribute rooms through tour operators and packagers).

We’re going further than Starkov did by also estimating hoteliers’ total indirect distribution costs. We put it at $75 billion — a figure that accounts for the costs of working with corporate travel agents and traditional travel agencies.

To be clear, we’re making an estimate based on educated guesses because we lack some authoritative data points.

To boost confidence, we’ll show our work. A side benefit: Our explanation will illuminate the contours of hotel distribution — including some nuances that often get overlooked.

Key Assumptions

First, we assume that 2023 will shape up to be pretty similar to 2019 in revenue for third-party distributors. We have good estimates for 2019 so we will use those and, after all, the hotel sector largely has rebounded to pre-pandemic levels of revenue, if not occupancy.

Our broad assumption about this year’s performance isn’t exact. Some regional markets are underperforming, while others are over-indexing. Plus, the year’s not over yet.

We’re also assuming that what third parties are “taking” from hoteliers as a cut in exchange for their distribution services is roughly the same now as in 2019. We will get more information on that next year after annual financial reports are released.

The calculations above also assume that 70% of hotels worldwide aren’t affiliated with large hotel groups. Thus, we assume they pay distributors slightly more because they don’t benefit from favorable volume discounts.

Surveys of Hoteliers

For its estimate, Skift Research draws on two of its recent market reports: the Global Accommodation Sector Market Estimates 2022, by Varsha Arora, and the Hotel Direct Booking Outlook in 2021 by Seth Borko.

In the 2021 direct bookings report, we surveyed hoteliers to find out their typical distribution channel mix and their typical average cost per channel, expressed as a percentage of bookings.

On the one hand, the survey size wasn’t large enough to scientifically represent all hoteliers worldwide. On the other, subscribers to Skift Research gave us feedback saying our numbers did dovetail with what they’ve observed.

Channel costs are, of course, different for chains and independents. Giant hotel groups can haggle volume discounts with online travel agencies and other distributors. We’ve simplified this issue by averaging the typical costs facing chains and the typical costs facing unbranded hotels that our survey revealed.

To estimate global hotel revenue, Arora gathered data from the financial statements of major hotel and distribution companies, private company presentations, governmental reports, and other credible third-party sources, such as CoStar’s STR.

That’s how we came to our estimates that hoteliers will spend roughly $47 billion this year on online travel agencies and about $75 billion on all indirect distribution.

What Hoteliers Underappreciate About Distribution

Let’s return to Starkov. We asked him what he thought about the response to his LinkedIn post.

“My LinkedIn post generated a ton of commentaries by hoteliers that I can classify into distinct groups,” Starkov said.

“First are the ones, predominantly independent hoteliers, who have been brainwashed by the OTA propaganda and have given up on their own direct channel efforts,” Starkov said. “They think: ‘The OTAs spend billions of dollars on marketing and technology, they know the online traveler, and we simply cannot match that.’”

“The second group is hotel companies that realize that only balanced distribution is in their best interests,” Starkov said.

But this group doesn’t agree on what “balanced online distribution” means. Marriott and Hilton seek to get an overwhelming majority of room nights booked online through direct channels. However the average independent or small regional hotel group is much less ambitious.

Starkov believes that independent hotel companies must be more ambitious about direct bookings.

Direct Isn’t Free

To be clear, hoteliers also face costs with direct bookings. Digital marketing, such as through paid Google ads or wooing social media influencers, costs money. Metasearch auctions must be bid on, even for leads that don’t turn into bookings. If you affiliate with a brand then some of these responsibilities can be offloaded but operators still must may pay into the corporate marketing budget

Even ‘free’ channels like organic searches and loyalty stays are are not truly free. To earn those organic clicks takes investment in copywriters and coders that drive search engine optimization while hoteliers must still pay into loyalty programs if they want benefit from getting guests who are hooked on reward redemptions.

Skift Research estimates that hotel companies may spend nearly $30 billion this year on activities related to driving direct bookings. That would rise if hoteliers shifted more of their mix to direct.

Still, direct has its virtues as these estimates show that the average cost of a direct booking is half that of an indirect one. Based on the assumptions above, a 10 percentage point channel shift away from middlemen and towards direct bookings would yield $6.5 billion in savings on hotel distribution costs globally.

Back to the Future

Some context: Hoteliers have been here before. They once enjoyed very high direct distribution.

“Back in 1995, 75% of room nights came from the direct channel, making hoteliers one of the best direct sellers in the economy!” Starkov said.

But online distribution came along, and tech-savvy, better-capitalized online travel agencies took share.

Today, the typical independent hotel gets a majority of its reservations through third-party distribution. This channel is costlier. It also makes it more difficult to establish relationships with guests to personalize service and offer upsells.

“Obviously, independents do not have the branding, technology, marketing, and talent muscle of the major hotel chains,” Starkov said. “But they can significantly lower their over-dependency on the OTAs [online travel agencies] by investing adequately in CRM [customer relationship management software], technology, and marketing.”