cnbcs104

Hotel Reservations IPO Opens Strongly


by Hal Plotkin
Silicon Valley Correspondent

Hotel Reservations Network Inc.’s {ROOM} winning business model is already boosting its initial public offering, with 5.4 million shares priced at 16 per share, above its filing price range of 11 to 13.

The stock opened around 24 Friday morning and has hovered around the mid-20s since then.


Hotel Reservations Network Post-IPO Stock-Performance Chart

“They’re in a good place at a good time,” says Henry Harteveldt, senior analyst at Forrester Research, based in Cambridge, Mass. “The Internet is really ideal for operations like HRN. They have some very good opportunities.”

Dallas-based Hotel Reservations Network is a wholly owned subsidiary of New York-based USA Networks Inc. {USAI}, which also owns a controlling interest in Ticketmaster Online-CitySearch Inc. {TMCS}. The company buys hotel reservations in bulk and resells them at discounted rates through its own Web site, hoteldiscount.com, and through affiliate-marketing agreements with more than 2,000 other Web sites, including market leaders such as PreviewTravel and CheapTickets.com.

“HRN is one of the two leading players,” says Fiona Swerdlow, senior analyst at Jupiter Communications, based in New York. The other major contender in the hotel-reservation-consolidation market is Las Vegas-based TravelScape.com Inc., which was recently acquired by Bellevue, Wash.-based Expedia Inc. {EXPE}, another popular online travel site.

“There’s going to be lots of growth in the travel sector as people become more comfortable being online,” Swerdlow says. “And hotels are certainly going to be an integral part of that.”

Online hotel bookings are expected to increase from $630 million in 1999 to $4.2 billion in 2003, representing a compound annual growth rate of 60 percent, according to Jupiter Communications.

Hotel Reservations Network appears to be doing a good job keeping up with, or even surpassing, that growth. The company’s revenue increased from $23.3 million in 1996 to $66.5 million in 1998, representing a compound annual growth rate of 69 percent.

The company notched it up even further more recently, with revenue swelling to $108.3 million for the nine months ended Sept. 30, a 166 percent compound annual growth rate, compared with the same period a year earlier. Internet-generated bookings accounted for 44 percent of revenue in 1998 and 78 percent of revenue for the nine months ended Sept. 30.

The company also boasts something that is relatively rare for an Internet IPO: net income. $1.3 million for the nine months ended Sept. 30, compared with $4.4 million for the same period a year earlier.

Hotel Reservations Network also operates a toll-free discount-hotel-reservation phone service that predates its Internet operations. Analysts say that experience gives the company a leg up on many of its competitors, particularly those that entered the market more recently.

“The fact they were there before the Internet can only be beneficial, compared to a new start-up,” says Robert Labatt, senior analyst with the Gartner Group, based in San Jose, Calif.

Labatt has used the company’s services. “They got me out of a jam, and it worked out fine,” he says. “Their business model definitely has legs.”

One reason is because there are ample opportunities on both the supply and demand sides of the equation.

“The consolidators are doing a brisk business,” Harteveldt says. “They’re helping the industry get rid of its unsold inventory in a controlled way.”

Hotels are eager to sell excess inventory, Harteveldt notes, since only 60 percent of their revenue, on average, comes from room fees. The rest of their revenue comes from ancillary services, such as telephone calls, room service and in-room movies.

“First they have to get them in the rooms,” Harteveldt says “After that, hotel guests are like little cash registers that need to be rung at every chance.”

Another key to Hotel Reservations Network’s success involves its early and effective use of online affiliate marketing deals. Under the company’s affiliate program, other Web sites agree to include links to the company’s Web site or resell its inventory in exchange for commissions on actual sales. The average commission works out to about $17.50 a booking, according to the company.

Swerdlow says, “$17.50 is very good.” Airlines, on average, are now paying just $5 to $10 commissions for airline tickets, she notes.

“The affiliate model works well because it gets the company on thousands of Web sites,” without forcing the company to pony up huge upfront advertising fees that might not pay off,” Swerdlow adds. “We think it’s a great low-cost way of marketing online.”

One question looming over the hotel-reservation-consolidation industry, however, is whether the name-your-own-price business model popularized by competitor priceline.com Inc. {PCLN} might eat into the more-traditional discount model, where reservations are usually offered at a low but fixed price.

“I think there’s going to be room for both models,” says Josh Friedman, senior analyst at International Data Corp., based in Mountain View, Calif. While some consumers are willing to select hotels based solely on price, Friedman says many others want to know exactly what they’re getting. “It appeals to different groups. To be honest, name-your-own price never seemed like a good idea to me. I like to know where I’m going to stay. But other people want to just hop on a plane and go.”

All the analysts agree, however, that the growth of the Internet, and broadband access in particular, will be an important business driver for HRN. In the future, ever more-robust Internet travel Web sites are expected, for example, to offer more pictures of actual room accommodations and may also give consumers other options and conveniences, such as a chance to avoid less-desirable rooms, including, for example, those near ice machines or swimming pools.

“The Internet and the hotel-reservation-consolidation industry are an absolutely ideal fit,” Harteveldt says. “It’s like a hand in glove.”

CC BY 4.0
This work is licensed under a Creative Commons Attribution 4.0 International License.