Saturday, August 19, 2000

For these folks, there's no such thing as no room at the inn

Buyer of rooms in bulk sets a system on its ear

By David Koenig
The Associated Press

        DALLAS — While negotiating with upscale hotels for blocks of rooms that he would later resell, David Litman gained intimate knowledge about an industry whose pricing models can be an inscrutable maze of tiered rates and secret discounts.

        Elite hotels seemed eager to keep it that way, and they certainly didn't want their rooms peddled by discounters like Mr. Litman. Nevertheless, by offering bargains to consumers, Mr. Litman helped build Hotel Reservations Network into a Wall Street darling and the leading online seller of hotel rooms.

        “A lot of the luxury hotels wouldn't talk to us because they were afraid we would hurt their cachet,” Mr. Litman said. “But we drive occupancy. We put people in rooms. We're the alternative to the $10,000 ad they have to put in the newspaper.”

        Despite some resistance, Mr. Litman ultimately found no shortage of willing hoteliers eager to fill rooms that would otherwise sit empty.

        Mr. Litman and his partner, Robert Diener, built the Hotel Reservations Network from the ground up, assembling a steady supply of rooms in more than 60 U.S. and European cities, including hard-to-get venues such as Super Bowl cities.

        To draw leisure travelers, Hotel Reservations has lined up 2,500 affiliates, mostly other Web sites, by paying them commissions of about 5 percent of sales.

        The company had a strong initial public offering and performed well even during last spring's slaughter of technology stocks, including online travel companies. Hotel Reservations was trading at $30.06 Friday on the Nasdaq Stock Market, nearly 30 percent below its high but still above its IPO price, and it had a market capitalization of nearly $500 million.

        Unlike many Internet companies, Hotel Reservations is profitable. In its first quarter as a publicly traded company, it reported profit of $1.2 million on $55 million in revenue through March 31 — 150 percent more revenue than a year earlier. It will report second-quarter earnings next week.

        Mr. Litman, 42, and Mr. Diener, 41, started the company with a toll-free telephone number in 1991. They took it on the Internet in 1995, seeing the Web as just another way to sell rooms. Today, most of the company's sales are made on the Internet, including its two Web sites, and

        Research firm Jupiter Communications projects online travel sales will rise from $6.5 billion last year to $28 billion by 2005, accounting for one-seventh of leisure bookings.

        Airline ticket sales dominate the online travel business now, accounting for nearly 80 percent of revenues. Jupiter said hotels suffer because the variables that go into choosing a place to stay — location, amenities, ambiance — are difficult to convey on a Web site. But it predicted that hotels will gain ground on the Internet.

        Hotel Reservations, or HRN, and other wholesalers and consolidators of hotel rooms, such as Quickbook of New York, buy blocks of rooms from hotels well in advance, then resell them. Reserving rooms in advance — the consolidators sometimes turn back unsold rooms — the companies gain prized rooms during big events or peak seasons, which can be sold at huge markups.

        “There are so many nights, especially in New York, Boston and Chicago, that are sold out,” said Ilan Falkovich, a New York travel consultant who said he can almost always find a room through Hotel Reservations. “That's more important to us than the discount, especially for business travelers.”

        Jerry Roscoe, a mediator for ADR Associates in Washington, recalled that when his travel agent tried to book him a room at The Lucerne in New York City in May, she was told the hotel was booked. Mr. Roscoe called the desk and got the same answer.

        “But HRN had not only a book ing, but superlow rates,” Mr. Roscoe said.

        Mr. Litman and his negotiators prefer to deal with individual hotels, not the chains' corporate offices, and they have struck deals with Hiltons, Sheratons, Holiday Inns and Best Westerns. Most of Hotel Reservations' 1,500-strong list are midprice hotels, yielding deals such as $69 for a room in New York City, $39 in Orlando, Fla., and $35 in Las Vegas.

        Last year, the founders sold the company for about $360 million to cable channel USA Networks, which took the company public Feb. 25 at $16 a share. USA Networks retains nearly 70 percent of Hotel Reservations' shares.

        Analysts say Hotel Reservations' greatest strength is its extensive roster of affiliates who send customers its way — exclusively. Many of the affiliates sell air tickets or car rentals.

        “You couldn't go out and build a hotel-room network and duplicate their affiliate network,” said Jake Fuller, an analyst with Donaldson Lufkin & Jenrette. “They have a reputation for being able to sell rooms, and they've done it for a long period of time.”


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