"A new internet for the travel industry": Why blockchain matters

Here are three reasons why we think blockchain should be something that hoteliers have on their radar:

• It has the potential to vastly reduce the market share of OTAs and intermediaries

• It could make it a lot easier (and cheaper) for hoteliers to introduce new technology to their operations

• It might just be one (possible!) solution to the problem of rogue wholesale rates.

And here are three reasons why we shouldn't get carried away with excitement:

• There's undeniably a lot of over-funded, over-hyped ideas floating around

• It's likely to be a long old while before most hoteliers come into contact with the technology

• We simply don't know yet whether it can live up to its supposed potential.

Read on to find out more.

What is blockchain, anyway?

If you've opened a newspaper or clicked on an article in the last 3 months, chances are you've heard of blockchain. Most commonly associated with Bitcoin (a 'cryptocurrency' which uses a blockchain as its ledger), blockchain technology has witnessed an explosion of interest and investment recently. For a great in-depth guide to how blockchain is shaking systems up around the world, check out this New York Times piece.

The blockchain buzz is just as inescapable within the travel industry as it is anywhere else. Over the past three months, we've heard that both Lufthansa and Nordic Choice hotels are experimenting with blockchain distribution - prompting a plethora of think-pieces on whether blockchain will be the saviour of online travel.

We know we're all supposed to care about blockchain - but it's hard to care about something you don't yet understand. There are a lot of heavy-duty blockchain 'explainers' out there - but most of them still manage to be pretty complex. Let's take it back to basics.

How blockchain works

A blockchain is an ever-growing list of records, called 'blocks'. What's being recorded are transactions. One 'block', for example, might contain the record of Person A transferring $500 to Person B. Importantly, blockchain technology is inherently resistant to modification of transaction records after the fact. In the words of Harvard Business Review, a blockchain is "an open, distributed ledger that can record transactions between two parties efficiently and in a verifiable and permanent way."

Following so far? Essentially, a blockchain works pretty well as a single source of truth. Once a transaction has occurred between two parties, it's there on the ledger forever. Every 'block' is linked by code to the blocks immediately preceding and following it - so you couldn't change one without having to change them all.

The other important thing to know about blockchains is that they are based on decentralised consensus. Transactions are recorded across multiple computers, so there is no way to alter records retroactively without the collusion of the entire network.

Blockchains are distributed across those multiple computers when the founders host a 'token generation event' (you might have also heard these referred to as 'initial coin offerings' or ICOs). Essentially, people invest in the blockchain and in return become 'owners' of the infrastructure. These 'token holders' can then participate in the governance and development of the platform.

How a blockchain works - infographic

Image: Financial Times

Blockchain's potential for the hotel industry

What has always frustrated growth and innovation within the hospitality industry is the problem of centralised and inaccessible inventory. The vast majority of relevant data is held by a couple of large companies, which arguably makes the barrier to entry for new companies (who may have great ideas) unfeasibly high.

This is where the blockchain advocates say they can really revolutionise the industry. Make the data accessible and you open up limitless options for hotel distribution, goes the theory.

Remember we said that both Lufthansa and Nordic Choice were experimenting with blockchain? Well, the blockchain platform they've chosen to experiment with is Winding Tree. Billed as a 'blockchain-based decentralized open-source travel distribution platform' on its website, Winding Tree has been at the forefront of discussion about blockchain in travel over the past year - and are preparing for their own 'token generation event' on February 1st. We asked co-founder Maksim Izmaylov to explain to us their offering.

Maksim and Winding Tree have astutely identified a major pain point among hoteliers and third-party providers alike. Data held by global distribution systems (GDSs) can be expensive and inaccessible, while blockchain technology is inherently easy to access and low-cost - making it an undeniably attractive alternative at first glance. If hotel booking transactions were to be removed from the control of siloed systems and placed in a decentralised blockchain then, theoretically, transactions would get easier and cheaper - with the savings (in an ideal world) passed on to the ultimate end user, the guest.

"We're a non-profit foundation with the goal of fostering innovation in the travel industry," Maksim tells us. "We're not a company. What we're building is not software that we're going to sell."

"Our aim is to open up the data in the travel industry. Currently, data (e.g. room inventory) is very siloed and is controlled by intermediaries (e.g. GDSs) who don't have any incentive to innovate. The travel industry is currently running on technology that is 10, 20 years out of date."

"We want to create a protocol for the travel industry - similar to the HTTP protocol which forms the basis of the Internet. This industry should be able to share travel distribution data in a permissionless manner without crazy transaction fees."

"This could be like a new internet for the travel industry."

In short, the reason why hoteliers should care about blockchain is that, in theory, an open-access distributed ledger of hotel inventory would lead to far more options for distribution than hoteliers are currently faced with. Innovative start-ups currently frozen out of the industry due to high costs of entry would, according to Winding Tree, be able to go toe-to-toe with the biggest OTAs in competition for a hotel's business. Expedia and Priceline would lose their 95% duopoly (specifically called out by Winding Tree in their white paper-cum-manifesto) and, ultimately, the customer would win.

So how do the OTAs feel about all this?

At the end of 2016, Maksim posted an article to LinkedIn: Travel Industry's Invisible Battle. In it, he lays out the problems facing the travel industry and advocates blockchain as the necessary solution. According to the article's engagement stats, Maksim suggests, OTAs are well aware of the threat blockchain poses to their way of doing business.

"I can see who's reading that article!" he laughs. "GDSs and OTAs are very, very aware of how people feel.

"I think it was (Priceline CEO) Glenn Fogel who came out last year and said "blockchain's not a threat" to the OTA model - he just disregarded it completely. But what could he say? "Yes, we're a monopoly and we're the problem?"

"We (Winding Tree) think it is just crazy that hotels are locked into price parity agreements with these companies."

With such a strident anti-monopolistic mentality, Winding Tree are sure to win fans among hoteliers fed up with feeling constrained by their OTA partners. However, we pointed out, if Winding Tree's vision is for a thriving third-party landscape, where does that leave the Direct Booking Movement? Is blockchain something that will help the drive to increase bookings through a hotel's own website?

"We think that direct bookings are great!" Maksim tells us. "You should be able to go and book directly with the hotel and book for the best price. With our infrastructure, the customer is the king. The customer should be able to choose whatever they want to do.

"Here's our logic. There is still a lot of value in travel agencies. You can book everything directly with your favourite airline, hotel, etc, if you have the time. If you want the convenience of doing that through one interface then you should be able to do that too. What we're doing here is creating a marketplace for different ways of doing things to exist. All kinds of different applications should be competing with each other. At the moment there is no real competition."

And what about wholesalers?

There's another potential string to blockchain's bow - which, based on the reaction to our Spotlight on... Wholesalers, is likely to pique hoteliers' interest in a major way. Blockchain's selling point is that it works as an indelible ledger of transactions, unmediated and unaltered by third parties. If the transaction is processed and recorded in the blockchain, no-one can manipulate the price. That potentially means that it would be hard for a wholesaler to pass an 'unbundled' rate to a third party (OTA) to be sold for a price never agreed by the hotelier.

However, we're doing a lot of hypothesising here. The price shown to the end customer, for example, would still be open to manipulation. With blockchain in this industry still in such a nascent phase, there are no certainties yet as to outcomes. Blockchain isn't yet the silver bullet that some people think the hospitality industry needs.

So, what should hoteliers think about blockchain?

We believe that it's possible to hold two beliefs at once. Firstly, it is clear that blockchain is groundbreaking technology that is likely to transform how many people do business in one way or another. Secondly, it is also clear that blockchain is in a bubble right now, with many projects significantly over-funded and over-hyped. ICOs (inital coin offerings) are making millions for companies with little more than a white paper to explain their business plan. In a particularly striking example, the unprofitable and mostly unknown Long Island Ice Tea Corp saw their share prices rise 289% just by changing their name to Long Blockchain Corp. The current investment climate has been likened by many to the dotcom bubble of the late nineties.

In short, a convincing idea does not mean that a project will be a success. Blockchain-oriented companies are not necessarily any more likely to succeed than the next start-up.

Having said that, Winding Tree have zoned in on a problem that a lot of people care strongly about solving. Their vision for a new 'protocol' for the industry is an inspiring one and, if enough companies can be convinced to build upon it, could have a real impact on opening up the online travel space and on providing both hoteliers consumers with improved choice around how and where they spend their money. While there are no certainties as to how the blockchain craze will pan out, it feels like the industry would benefit if Winding Tree were able to deliver what they promise.

Want to keep up with Triptease content? Sign up for our newsletter and we'll send your our best direct booking tips fresh to your inbox every week.