Inside Thayer’s Investment Success

But innovation like this takes a different form from one company to the next, doesn’t it?

This kind of innovation can be a great competitive weapon for the middle-sized chains because it’s very hard for the big chains to move quickly. Small and mid-sized chains can take things to market at a lower risk, because they’re operating on a smaller scale. And it’s easier to innovate if you’re doing it in 20 locations as opposed to 2,000. Given their scale, big companies have difficulty executing small-scale projects internally due to the competition for resources. A much better approach for them is to identify partners with similar big scale, and collaborate with them. I think it’s a huge mistake for a company like Marriott to try and do everything in house, particularly in the areas of technology.

But when hotel companies build technology platforms, can’t they then boast of having a better value proposition to potential franchisees?

Well, the system per se doesn’t add any value. It’s what you do with it. A property management system and a simple reservation system don’t create any significant competitive advantage. They all do essentially the same thing, and the value that they provide to the owner is not materially different one to the other. So, it’s better to hand off projects like that to tech giants like IBM and SAP. They know how to build huge software systems that run global businesses. Why go out and hire a bunch of software engineers to do what they already do? As long as the data is available in a HANA or other memory-based system, you can do anything you want with it later.

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When I was at Marriott we created Marriott Honored Guest Awards, which was the first successful, wide-scale frequent traveler program. And it got started after we read about United Airlines bringing their MileagePlus program in-house. Up until then, United had been using a company out in San Francisco to run it. So we got the president of the company on the phone and said, “How’s your day’s going?” He said, “Not very well. Our only customer just left.” So we flew out there and bought his business because it had all the technology and the systems in place to run our guest awards program. Overnight, we had a sophisticated platform to linked together Marriott, Courtyard, and our other brands. From there, we were able to use it to make our time-share business profitable.

How did that work?

One of the difficulties with timeshares was figuring out what to do with it when you didn’t want to go there. There were other exchange networks like RCI, but the products that you were changing into were really unknown. The quality, the maintenance, and the service were really unpredictable. We said, what if you could exchange your week at Hilton Head for airplane tickets and a week at the Marriott Hotel in Maui? How cool would that be?

By 2007, time-sharing was generating something like 40 percent of Marriott’s EBITDA. We bought that business for $3.8 million. It generated more money than Fairfield Inns ever will in terms of profit for Marriott. One of the lessons out of that, though, is that you can never really tell which one of these is going to be the big one. When we bought time-sharing, there wasn’t anybody, myself included, that could have ever envisioned that time-sharing would get to be such a cash machine for Marriott. It’s a phenomenal business. Marriott has since spun it off. It’s now Marriott Vacation Club International, headquartered in Orlando.

In the face of so many information channels and tech startups, how much value have brands like IHG, Marriott, Hilton, and Hyatt lost?

Brand equity has gone down over the last 15 years. It used to be that when you said Hilton, you conveyed a ton of information about what you were going to get. What the hotels likely look like, what the rooms are going to be like, and what the level of service was going to be. One word communicated all that. Now, you don’t need that word because between TripAdvisor and all of the online information, I can find out far more than what the word “Hilton” can communicate to me and I can get it with a much higher degree of accuracy.

The value of the Hilton brand is less than it used to be because now, there are other information channels. And this explains why so many other players in the value chain are taking pieces, taking economic bites, of that chain. I think frankly the brands have been slow to understand that and they’ve been satisfied to let them have it. It comes out of the owner’s economics, but at the end of the day, if the owner’s economics aren’t strong enough, the brand is going to fail.

In addition to driving brand equity down, how are major disruptors affecting the industry?

Google and Facebook are the single two biggest threats to the existing status quo in the hotel industry today. If you think about it, Marriott has a million hotel rooms and knows more about those million rooms than anybody else, but they know very little about the customers who stay in those rooms. Now Marriott knows something about the travel patterns of the guests in its rewards program, but that’s about it. Google knows a whole lot more about Marriott’s customers than that. ADARA, one of the companies Thayer Ventures is invested in, can aggregate the kind of information that Google has so hotel owners and operators know enough about their guests to compete with the knowledge that Google and Facebook are going to have about them.

How does this impact the hotel value chain?

This is an important concept for people in our industry to understand. Look at Expedia and all the online travel agencies—they’re handling what percent of the business? Less than 15? A chain like Marriott gets less than 10 percent of its business from them and the entire pipe is so big. Five-and-a-half million hotel rooms running 70 percent-plus occupancy at 100 bucks a night. If you run the numbers, the scale here is enormous. If you can get just a little ladle out of that cash stream going by, it’s a hell of a lot of money. And that’s why companies like Google and Facebook are looking for an opportunity to get a piece of this value chain.

One of the things I want to see our industry do is collaborate better. We’re great competitors, but lousy collaborators. We should be working together on a single data format, for instance, and how data is dealt with. The big brands can still have their secret sauce, but that sauce is not in the format.

We’re collaborating on things like legislative priorities, but we also need to be collaborating in education. Our industry is one of the largest employers in the country. We don’t have a glass ceiling. We have a large percentage of immigrants, and we represent minorities in our workforce. As we become more global, our customers are global and our finances are global, and our workforce is increasingly global. So we need to do more to educate and develop the workforce for the 21st century.

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