The Internet?s impact on hotel operations remains one of the key issues lodging analysts face when making investment decisions. Investors have been concerned that the Internet will increase room discounting over time. However, Goldman Sachs Research suggests that Internet-induced room discounting has been relatively modest so far and that the percentage of rooms booked on-line has been lower than expected. Our research also suggests that, going forward, the on-line reservation process will impact different hotel operators in dramatically different ways. This article, the first in a series on the Internet?s impact on investing in the lodging sector, explores shareholder concerns about Internet-related room discounting. In future articles in this series, we?ll analyze for HOTEL BUSINESS? readers the potential savings from cutting the middleman out of the reservation process; hotel company web development programs, business to business (B2B) opportunities; and lodging advantages relative to other e-commerce opportunities. In addition to having conducted our own primary research on the impact of e-commerce on the hotel industry, Goldman Sachs Lodging Research has met with Internet/technology leaders at major hotel companies over the past few months. Our analysis suggests that, thus far, the Internet?s impact has been surprisingly modest, with fewer than 2% of all reservations booked over the Net. Despite this fact, hotel chains are accelerating energy and capital to build Internet potential. The Internet will affect nearly every facet of a hotel?s operations and every transaction in between, from the way customers make reservations, to the way a franchisee orders pillowcases. It is our sense that all the concerns of Net-induced discounting have completely overshadowed the many benefits the Internet has to offer operators. In fact, we expect the Internet to eventually help boost profits for some of the strongest hotel operators. Furthermore, once investors realize that the Internet will not sound the ?death knell? for the sector, but, instead, holds much ?imbedded? value, we could see an improvement in valuation for a number of leading lodging brands. Some of the key momentum-turning events that investors anticipate include the formation of a consortium by leading hotels to build their own combined hotel reservation system that will aggressively compete with on-line travel agents. Another ?event? is the transformation of hotel websites? function from being used primarily for room reservations to becoming travel portals. Over the next several months we expect the major branded hotels to leverage their brand recognition to get on-line consumers to visit their sites and book rooms. These highly recognized, branded full-service travel portals include hotel-, air-, and auto-reservation capabilities. We suspect that these improvements will increase investors? appreciation for the potential the Internet holds for lodging companies, eventually leading to stock price appreciation. As optimistic as we are about the countless revenue and cost-cutting opportunities the Internet has to offer, we also recognize it harbors a ?dark side? for the industry. By providing customers with instantaneous pricing information for a large pool of comparable hotels, the Internet enables customers to find the lowest prices available. This will undoubtedly result in some price pressure. Rather than having to dial four or five 800 numbers, contact a travel agent, or telephone hotels for the lowest room rates, consumers can check one site to find the lowest-priced room and book it in a matter of minutes. As a result, costs may spiral downward as hotels seek to safeguard market share. The lack of consistent and transparent pricing within the various distribution systems might prevent the Internet from becoming consumers? preferred booking engine, thus tempering near-term discounting. Consumers have learned to use various booking methods to get the l
