Hotels Revisit Their Internet Strategy

When Expedia or Hotels.com runs out of rooms at a particular hotel, it instructs travelers that the sites were unable to find rooms for the dates specified, Dennis said. "Customers understand that means the rooms are not necessarily sold out at the hotel," he said. "When you walk into Target and see that there's no Tide detergent left on the shelf, you don't say there's no Tide left anywhere in the world."

Despite the dispute, Expedia and Hotels.com would welcome InterContinental back as a partner, Dennis said.

Hilton has also terminated relationships with third-party sites over the way they were treating customers, but Subramanian declined to specify which ones.

Another factor behind the big chains' revolt was that they realized they could lower their costs of distribution. Bookings at their own sites didn't have incremental costs, while the margins on the merchant business with online agencies could be significant.

"Third parties cost more," Hilton's Subramanian said. "We don't necessarily have anything against them. There are times when we really need the business, like two years ago, and even today in some markets that are still recovering."

As the economy has strengthened, so has Hilton's bargaining power with the online agencies. Subramanian said Hilton has been able to whittle down the margins on merchant business through online agencies, though he wouldn't offer specific numbers. He also said Hilton had become efficient at using agencies when it needed to. "You never turn anything off," he said. "You just calibrate carefully what you need to drink from each fountain."

The big chains are reporting significant shifts in the mix of their business between their own sites and third parties.

Dan Gibson, senior vice president of corporate affairs at Starwood, said 75% to 80% of the company's Internet bookings are now made on its own branded sites, up from about 60% during the downturn that followed the 9/11 terrorist attacks. About 10% of the company's total bookings are now made via the Internet.

"We've won the battle of capturing them on our proprietary Web sites," Gibson said.

Hilton is seeing a similar shift. For all of last year, bookings at its own site jumped by 35% from 2003, while bookings from online third parties fell about 5%, Subramanian said.

Still, even chains like Starwood view the online agencies as partners that can help them gain customers they might not get any other way.

And the efforts by the big chains are far from putting the online travel agencies out of business. Expedia's Dennis noted that about 80% of the rooms Expedia and Hotels.com sells are from small to medium chains and independent hotels, which don't have the brand recognition or necessarily the marketing resources of the big chains.