NEW YORK (TheStreet) -- Call it innovator’s poignancy. Sometimes a startup identifies an ignored niche, validates that there's money to be made, then gets trampled by bigger companies that suddenly smell cash.
Is that about to happen to San Francisco-based hotel booking service startup HotelTonight? The company's premise has been simple in its elegance. Surrounded by empty rooms that are worthless without guests, a smart hotel operator will bend on price to put a head on the bed. And mobile, with its built-in ubiquity and immediacy, ties it all together.
HotelTonight debuted four years ago and by now its apps are on over an estimated 10 million iPhones and Androids. The company isn't worried about the onslaught of competition from the larger industry players, citing its singular focus on just hotel rooms and its lower-commission rate for hotels business model.
Now that HotelTonight is becoming a household name, suddenly, Priceline (PCLN) (market cap: $60 billion), Expedia (EXPE) (market cap: $11.1 billion), Orbitz (OWW) (market cap: $845 million), and the big chains such as Marriott (MAR) , Hilton (HLT) and Starwood (HOT) are piling into the same-day hotel booking niche. The reason is their sense that this is a fast-growing market.
“I was suspicious of the size of the opportunity,” said Douglas Quinby, vice president of research at Phocuswright, a travel market research company. “Subsequent to the research we did, I am less suspicious. We see quite a bit of demand for close in [to the travel date] hotel shopping.” He added that “the OTAs [online travel agencies such as Expedia and Priceline's Booking.com] are in this very aggressively. It's a very crowded, competitive market.” One reason, Quinby suggested, is that across the sector, operators report rising bookings via mobile devices and those bookings, as a rule, tend to be short notice.
The big online travel agencies admit they are interested. “Same-day booking is a real market,” said Keith Nowak, director of communications at Travelocity, which claims annual gross bookings of $10 billion.
Then there also are many smaller competitors such as Hong Kong-based HotelQuickly and LMT -- aka Last Minute Travel. Groupon (GRPN) , travel site Hipmunk and a parade of others also have had eyes on the same-day market.
Bad as all that might seem for HotelTonight, if you ask Sam Shank, the CEO and co-founder of HotelTonight, whether he's about to be crushed by other operators, he literally laughs. “We continue to grow the business nicely. We are completely focused on mobile and last-minute. We don't have flights, we don't have cruises, we don't rent cars. We focus on getting the best hotel deals.”
Part of Shank's confidence is rooted in his belief that he has “reinvented the relationship with the hotels.”
Most hotel operators hate the online travel agencies. That is because they charge commissions typically ranging from 15% to as much as 30% and, especially for independent hotels and smaller groups, the rates are take them or leave them.
“We charge the lowest commissions in the industry,” said Shank. “No higher than 15% and often much lower. That’s why we get exclusive inventory and we have hotels competing to get into HotelTonight.”
Shank added, “Hotels give us an exclusive discount. Our prices are better than you will find at the large OTAs.”
HotelTonight also is itself no pauper. In September 2013, it closed a $45 million funding round. That lifted its total capital raised to $80.35 million. Investors include Coatue Management, GGV Capital, Battery Ventures, Accel Partners, US Venture Partners, and First Round Capital.
One criticism of HotelTonight is that it shows a user a tightly-edited list of hotel options. In Manhattan, for instance, in a quick search, HotelTonight showed 11 hotels, from the $229 Paramount Hotel in the theater district to the $549 New York Palace in Midtown East. Other services may produce literally hundreds of options. Said Shank: the edited list is a plus for a time-crunched traveler hunting for a room, now. “We built the app for speed and convenience,” he said.
There's been at least one sign business may be slowing amid rising competition, forcing it to expand beyond same-day bookings. The company's move in late September to end its policy of only selling rooms for the same night and opening the door to booking seven days in advance has put it on a direct collision course with the many online travel agencies.
Asked how that initiative was faring, Shank said, “It’s only been around for a month, it’s too early to say. The people who are booking in advance are much more likely to be first time customers. We are reaching a new audience.”
What's the verdict on HotelTonight? Phocuswright's Quinby, who follows this space as closely as anyone, said: “I definitely don’t think they are toast. They’ve built a great mobile app. HotelTonight is not about a cheap hotel room. It's about spontaneity.”
“The real question is, just how big is the last-minute market?” said Quinby. Is it big enough to feed all the hungry mouths? Sam Shank and his investors will definitely be finding out and, right now, few count him out. He validated the market, he proved he understands that traveler, and now it's up to the many competitors to prove likewise.
At the time of publication, the author held no positions in any of the stocks mentioned.
This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.