The blockchain, as many industries have come to realize by now (some of them reluctantly), is a technology that can and will change people’s lives and business models wherever there is a marketplace with a multitude of participants; some (or all) of which have diverging interests and no reason to trust each other.
Take the hotel booking industry as an example. Here, many suppliers with a very inhomogeneous range of offerings (from a bunk bed to a luxury suite) have to be connected with several potential buyers who all have diverse and ever-changing desires. This has created a market that is abundant with middlemen and cutting out the middleman is a prime use case for the blockchain.
The Online Booking Market
If the blockchain is the second wave of disintermediation – cutting out middlemen – in the global markets, the Internet boom of the late 1990s was the first one.
Of course, with the increasing availability of Internet access for consumers, hotels started creating their own websites to attract guests and turn them into repeat business. However, this approach is hit-and-miss – it is hard for a small business to allocate adequate resources to the creation of a professional, up-to-date website. While website kits can be bought for around $20 a month, the real value of a website is in its individual content and seasonal specials and updates. It requires:
- High-quality photography
- High-quality copywriting
- Effective online marketing and search engine optimization
In summary, the amount of work involved is at least equal to half a full-time position, to be filled by a qualified person, which is a significant expense especially for family-run places that can’t afford a large payroll.
Thus, with the exception of large hotel chains, hotels could not, and still cannot, rely on business that comes through their own websites.
So travel agencies were still needed in the market. Entrepreneurs soon noticed that travel booking could be made much more comfortable for the customer, as well as more efficient for both sides of the deal; if conducted online instead of brick-and-mortar travel agencies. This resulted in the creation of online travel agencies (OTA).
[bctt tweet=”If conducted online, travel booking can be made much more comfortable”]
OTA’s business focus is both B2C and (for the section of business travel) B2B: They offer a user-friendly web-based interface with a vast array of options for booking hotels, flights, rental cars, and other related services such as travel insurance. The most popular examples – and largest in their field – are Expedia.com and Priceline.com, each with their own respective subsites.
However, OTAs are not the only middlemen between traveller and hotel or airline in the online travel industry. Another key component of the global travel ecosystem are global distribution systems (GDS), which is actually a relic of bygone times when offline travel agencies needed to check the real-time availability of hotel rooms and flights. The first GDS was introduced as early as the 1950s. The largest and most influential GDS companies today are Amadeus, Sabre, and Galileo Travelport.
Fees and commissions
These systems are not targeted towards consumers; instead, they are primarily used by large hotel chains to offer large quantities of rooms to travel agencies or the business travel departments of global corporations for a fixed fee per booking (around $10 to $15). Hotels usually offer their rooms at around 30% below consumer price on the GDS, and in addition to that, a hefty setup fee of several tens of thousands of dollars – or more – serves as a significant barrier to entry for smaller hotels.
OTAs, on the other hand, do not work with a fixed-fee structure; like their offline counterparts, their fees are commission-based. Hotels, for example, pay around 10 to 30% in commission. Large hotel chains are usually able to negotiate commissions between 10 to 20% for their members, while independent hotels typically have to pay between 15 to 25% in commissions.
Going back to the two largest online travel agencies, Expedia owns the websites Expedia.com, Orbitz.com, Trivago.com, and Hotels.com, and Priceline owns Priceline.com, CheapOAir.com, and OneTravel.com. In recent years, Priceline has always enjoyed a significantly better profit margin than Expedia (around 20% vs. around 3%). Analysts attribute this to the fact that Priceline operates globally and relies on a commission-based business model almost exclusively, while Expedia is a US-centric company and often operates with the merchant model that is characteristic for US-based travel agencies: They buy capacities and sell them to their customers.
Which distribution channel for what hotel?
A study (shown below) among hotels affiliated with major brands revealed that a high proportion of revenue still comes from direct conventional marketing channels, such as walk-in customers. However, these hotels are more likely to be situated in attractive metropolitan regions with a steady supply of passerby foot traffic. Similarly, figures for direct web bookings are likely to be biased, since major hotel chains can attract web traffic to the multi-property websites more easily than a small hotel. Other sources estimate that OTAs account for ca. 40% of small hotel bookings.
These numbers, together with the high setup cost for GDS access, show that distribution by OTAs is a very important channel for small hotels. However, collaboration with an OTA is often unnecessarily laborious. For example, rates cannot be changed in real-time by hotel managers themselves, but need to be processed by the responsible manager at the OTA. These inefficiencies further contribute to the significant cost of OTAs to small hotels that are caused by high commissions.
For example, for an independent small hotel with only 12 rooms, which cost $80 per night (for the sake of simplicity), commission will be around $16 per room and night – in the hypothetical case of constant full occupancy, $5,760 per month. Assuming a reasonable room occupancy rate of 60% as a yearly average (Paris and London don’t even reach 80%), commissions will be around $3,500 per month.
But being listed on an OTA site is not enough. To gain a small advantage on the platform, hotels are advised to additionally buy pay-per-click advertising and invest a minimum of $2,000 per month.
This budget is spent even if a lot of visitors click on the ads but not book a room.
So, an independent hotel can easily spend $5,500 per month only on commissions and the pay-per-click fees on OTA sites.
OTAs: Not always honest
OTAs are not always advantageous for consumers to use either. In the past, OTAs have been criticized for a number of unfair or intransparent marketing tactics, according to The Hotel Distribution Report 2016 by hotelanalyst.co.uk:
- Some OTAs, such as On The Beach, have admitted to raising prices after a customer booked, requiring the customer to pay more than expected or cancel the trip.
- Many offer discounts based on fake regular prices; the supposedly regular prices displayed to the customer are the highest prices that have occurred within a certain period of time.
- Urgency messages such as “Only 1 room left on our site” have also been shown to bend the truth regularly; often, more rooms than what are announced are available directly from the hotel.
The Advantages of Hotel Booking on the Blockchain
A blockchain-based approach brings the following advantages when compared to conventional GDS and OTAs:
- Barriers to entry, especially setup costs, are significantly smaller. Any Internet-enabled computer can be connected right away. Therefore, the network becomes accessible even to smallest players in the market.
- Fees for legal paperwork and manual assistance (like OTA managers mentioned above) can be reduced drastically through automation and smart contract logic.
- The overall marketplace will become more secure – no more cheating OTAs with fake prices and urgency messages if every blockchain participant can check the truth behind their claims.
[bctt tweet=”Blockchain can eliminate the online travel agencies with fake prices and urgency messages”]
And because the hotel booking industry deals in “perishable goods” – nights in hotel rooms, whose profits are forever lost if they are not booked in time – having more than one or two sources of business is a great advantage for hotels. Therefore, a blockchain solution may as well coexist with traditional solutions at first.
Smaller barriers to entry
One of the main advantages of blockchains are their low barriers to entry. While the mining of Bitcoin and other energy-hungry endeavors still rely on cheap power not found everywhere in the world, the mere participation in blockchains can be realized with a cheap desktop computer or even a mobile device. To connect to a blockchain-based service means in most cases to set up a so-called wallet – a user account on the blockchain. If the wallet is online (there are offline wallets too), all that is required to create it are some personal details, not unlike a social media account.
In contrast, getting connected to a GDS is notoriously difficult, especially for small-time travel agents. The setup is not only expensive – in the $100,000 neighbourhood, depending on the specific system – but the systems are known for their lack of user-friendliness (so much so that businesses exist for the sole purpose to help small travel agents set up these GDS connections).
Reduced fees through automation
Automation in businesses has been one of the main drivers of digitalization since the 20th century. However, the travel industry, with regard to automated processes, suffers from two main problems:
- Even with some degree of automation (like automatic updates of room availability on a hotel’s website and web-integrated booking system), a lot of steps in the whole operation are still being done manually, therefore inefficiently – particularly in small hotels, who often rely on phone instead of web bookings.
- Both with automated and manual processes, many decisions are not legally binding – for example, customers may ask to temporarily hold a room instead of booking it definitely, and then fail to cancel, leaving the hotel with a profit loss. And the collection of unsettled debts is often too expensive and labor-intensive for small businesses such as independent hotels.
With smart contracts, the blockchain is adding another source of more efficient and legally binding processes to the market. There are movements in various countries to make smart contracts legally binding, so that they can replace actual legal contracts on paper. And even in countries where they are not legally binding, a travel platform can include in their terms and conditions that its smart contracts are binding for all users.
For example, in the conventional model, a hotelier may host a guest who gives a fake ID upon check-in, and they may then check out without paying the bill, leaving the hotelier not only with a loss in revenue but the costs for consumed food or damages to the room. In contrast, if a smart contract is in place, it can check as early as booking if
- the guest has supplied an ID
- the guest has sufficient funds in the wallet to pay for the room.
A blockchain can even take the funds in escrow and transfer them to the hotel owner after the guest’s stay, regardless of whether the guest has tried to avoid payment.
Increased honesty and transparency
If there is one single thing that blockchain technology was made for, it’s this: To prevent market participants from cheating each other. It is hard to imagine a marketplace in which the players are more incentivized to cheat than in Bitcoin trading. Each of them is anonymous, and the profits of cheating can be realized instantly by transferring cryptocurrency into one’s own pocket.
If we compare this to the ecosystem of hotel booking, there are some features that make the latter look harmless. Players in the hotel-booking economy are not technical specialists and have neither the time nor inclination to go looking for technical vulnerabilities; they largely depend on their good standing with local authorities. Even if they do cheat the system, profits cannot be reaped instantly. Even the cheating committed by OTAs as described above may be widespread and annoying, but is relatively unsophisticated. These cheats depend on information asymmetry: the customer does not know the average prices in the last 30 days or the real number of remaining vacancies in a certain hotel. On the blockchain, these information asymmetries are removed by transparency, as every participant can view any transaction.
Nocturus: Transparent and Efficient Hotel Booking
There are interesting solutions being developed who use the advantages of blockchain technology discussed above – smaller barriers to entry, efficiency, and fee reduction, as well as increased honesty and transparency. We will look at the real-world example of Nocturus, a blockchain-based hotel booking middleware.
The Nocturus team states in their white paper that previous hotel-focused startups have stressed the technical aspects rather too much, and they have not focused enough on the user-relevant value creation in the business, which they aim to do now. They are developing a blockchain-based infrastructure by using Ethereum and Hyperledger (see below), which will replace existing distribution systems – GDS initially – by more efficiently matching hotels with customers. OTAs, on the other hand, will not be replaced, but will be offered the option to be connected to Nocturus’ blockchain – just like they are connected to GDS now.
The savings through increased efficiency are projected to be high enough to not only generate significant cost reduction for the owners of hotels and other properties, but to permit Nocturus to operate a low-cost business model as well. Concretely, they are planning to cut commissions for hotels from around 20% to 10% plus a transaction fee of 2%, significantly increasing the profit margin that is 17% for a US hotel room on average by 50%.
Nocturus is constructing a distributed open ledger in which all actors in the ecosystem can act as nodes. Thus, anyone is allowed to list, view, or book rooms. This marketplace is implemented based on the open-source Hyperledger project, a framework for permissioned blockchains that has been developed in cooperation with IBM, The Linux Foundation, and other notable entities. This has even been piloted in several industry applications.
[bctt tweet=”Nocturus is constructing a distributed open ledger for hotel booking industry”]
While many of today’s startups operate on an Ethereum basis, which offers the advantages of a native currency and its wide adoption in many industries, using public blockchains such as this has significant disadvantages:
- As public blockchains are used for a multitude of purposes (cryptocurrency trading and payments, diverse industry applications, fun and games, etc.), the network load is high.
- Slow execution of transactions and smart contracts.
- High transaction costs
A permissioned blockchain, which can be built on top of Hyperledger protocols, does not have these disadvantages. In short, scaling a startup on a Hyperledger basis is easier since it does not have to contend with these two important obstacles.
Hyperledger blockchains do not come with their own native currency, unlike Ethereum for example. But the safe and fast execution of payments is an integral part of the hotel booking business. Therefore, Nocturus’ system contains two tokens:
- NoctCash – used to sell the hotel rooms, whose transfer is done on Hyperledger
- NoctToken – intended for use in the ICO and as a medium for proof-of-stake on the Ethereum network
If NoctCash was on Ethereum, the transactions were slower and expensive (a gas fee is needed for each action.) So NoctCash is intended for internal use only, to settle booking payments on the blockchain, and not for sale on external exchanges – unlike NoctToken, whose value is given by the room listings directly: for every $100 worth of room listings, the hotel needs to prove its ownership of 1 NoctToken. At the same time, actors with a high balance in NoctTokens are more likely to get the permission to create new blocks on the chain. Thus, the opportunities for malicious actors who don’t have stakes in Nocturus to create fraudulent transactions or fake listings are minimized.
Because of its open design, the Nocturus blockchain can be implemented by any independent entity, thus allowing every small business to setup a blockchain node and essentially become an OTA instantly. The smart contracts on the blockchain ensure payment for hotels for every booking, which in turn enables hotels to accept bookings even from new and unfamiliar OTAs.
Security and integrity is realized by smart contracts which, for example, ensure that room fees are transferred in an irrevocable manner, and that fraudulent actions such as fake bookings (from the customer side) or the double-listing of rooms (from the hotel side) are prevented.
The booking of a room on the Nocturus blockchain happens in the following manner: The customer, or OTA, sends a request to book a certain room including:
- ID of the room
- Desired dates
- Customer information
- Payment wallet
- Proof of NoctToken ownership (for proof of stake)
A smart contract then automatically:
- Checks the availability of the room
- Checks if the wallet is holding sufficient funds
- Checks if OTA has sufficient NoctTokens for booking
If all of these conditions are satisfied, the smart contract will:
- Debit the OTA’s wallet
- Transfer funds from the OTA’s wallet to hotel’s wallet or escrow
- Post a booking transaction on the blockchain
- Update room inventory
- Return a booking code with which customer can check in to the room
Team and Partners
As Nocturus states on their website, “To build hotel industry software, you need hotel industry people.” Indeed, the company is headed by Eric Reynolds as CEO, who has more than 25 years of experience in the hospitality business. The CTO, Dr. Charles Flaming, is the Associate Professor of Computer Science in Suzhou and brings significant technical and startup expertise to the table.
Nocturus has already announced partnerships with notable entities in the hotel business such as DoubleTree by Hilton, Ritz-Carlton, and Renaissance Suzhou Hotel.
Nocturus’ pre-ICO is currently open for participation. Its donations will be used for legal and marketing expenses, and will not be refunded even if the soft cap is not reached. The following ERC-20 standard ICO will be conducted in several waves, the first wave consisting of 2,500 ETH, the hard cap. If the hard cap is not reached, all donations from this round (but not from the pre-ICO) will be refunded. If the soft cap is reached, further waves will follow up to a hard cap of 19,000 ETH.
NoctTokens will be locked during ICO, and it will be listed in exchanges 12 weeks after the ICO has ended, at the earliest.
Other travel blockchain projects
There are numerous blockchain projects aiming to make the travel industry more efficient; they focus on a variety of aspects of the travel process. Fewer of them are focused on the business problem of hotel booking. Two examples of these are Trippki and Lockchain.
Both Trippki and Lockchain, with their tokens TRIP and LOC respectively, are Ethereum-based solutions whose objective it is to make OTAs and GDS redundant. They are aiming to replace conventional means of interaction between hotels and travelers by replacing them with a single efficient blockchain solution. While Trippki (in addition to making hotel bookings more transparent) is building a reward system for loyal guests, Lockchain promises a radical 0% commission system and plans to earn its revenue by adding “freemium” services.
Therefore, they follow the classic business model for disruption in markets that has been successful in other industries by cutting out the middleman, even before blockchain; just as Amazon did for retail. Experience has shown that this is a proven business model whose potentials for cost savings are a good foundation for success in the market.
However, both of these systems are based on Ethereum (with the scalability problems that come with Ethereum) as described above.
Thus, both suffer from two disadvantages in comparison to Nocturus:
- They will have to find a way to scale and still be profitable, even when Ethereum suffers from high network loads, delays, and transaction fees.
- Their intention to disrupt the travel industry by replacing established actors is shared by many startups in many industries; however, the barrier to customer acquisition is significantly lower in a cooperative approach that can be both an alternative to and a service used by OTAs, like in Nocturus’ case.
Hotel booking is a fragmented market in which the problem of how to connect hotels and guests has been addressed by many middlemen and infrastructures in the past. GDS and OTAs are still incumbent players in the hotel booking landscape.
[bctt tweet=”Blockchain brings efficiency and significant cost savings for hotels while increasing honesty among all parties involved”]
Offering a transparent alternative to the conventional system will not only result in improved efficiency and significant cost savings for hotels but also in increased honesty among all parties involved.