Blockchain’s potential — and potential consequences: Q&A

Blockchain technology allows digital information to be distributed to a network – but not copied – via a secure ledger. Records are public and verifiable, making that information harder to compromise. A good idea, right? At this point, that’s all it is so far in the hotel sector. Other industries, such as financial technology, are first movers for blockchain, which supports burgeoning crypto currencies like Bitcoin.

However, it’s more than the buzzword du jour for people like Flo Lugli, founder and principal of Navesink Advisory Group, a technology and hospitality consulting firm in New Jersey and Arizona. Lugli, also executive chairman of the Global Hotel Alliance and a former EVP of marketing at Wyndham Hotel Group, among other roles, advises companies at the intersection of hospitality and technology. She talked to HOTELS about where blockchain could be headed (hint: It’s not happening anytime soon).

HOTELS: I’m observing some skepticism about how quickly hotel companies are going to jump on blockchain’s potential, given the industry’s lack of history as a first mover in technology. What do you think?

Flo Lugli: The challenge you have in the hotel industry is the complexity and the structure of the industry that precludes a lot of investment. In the U.S., you have these huge hotel brands, and their core competency is not technology. Their core competence in many cases is not even hotel operations. It’s basically hotel franchising. And so, especially as they’ve moved into more asset-light models you could say that they’re in the hotel industry but they could just as easily be compared to any other franchise industry.

From an economic perspective, they are receiving a very small percentage of the revenues that they have to then expend on reservation platforms and marketing and loyalty programs, and so forth. And then, obviously, the fragmentation of ownership and management makes it even more difficult.

Outside of those big hotel companies, you have a handful of mid-sized chains and a lot of independent hotel companies who are management companies, but again, their forte isn’t technology, so they depend upon a whole host of other providers… So you’ve got very complex, high fragmented operating models supported by complex highly fragmented technology platforms, many of them legacy in nature.

Even to take advantage of anything new could require significant platform changes and investment which would have to be justified within the context of capital as a percentage of total revenue and total spend… I don’t think we’re going to see any big fundamental investments or changes in how things are done within the next three years.

H: Is there a good way for hotels to engage with blockchain? Where could they start?

FL: I think what you might see is some experimentation with private blockchains from a distribution perspective, for example. But the challenge with private blockchains is that it requires an invite or permission to join and actually restricts certain transactions… So from a distribution perspective, if you’re trying to distribute inventory and you’re going through a private blockchain, you might have to participate in multiple private blockchains in order to reach all the people you want to reach. Is that just replacing one problem with another?

I think today, everyone looks at blockchain and says, this is a great new tool, but is it a solution looking for a problem? I think you might get some early adopters… some smaller hotel companies who perhaps could be a little bit more nimble and want to have a reputation for being on the cutting edge, but I don’t think you’re going to see a mass movement within the next three to five years because of these legacy platforms that underpin the entire industry.

H: Where might blockchain be used first?

FL: I do think there are certain opportunities and use cases that could be built… like digital identity or loyalty management, profile management, payment settlement, things like that, but again, I think there’s going to be some thought that has to go into this. For instance, with loyalty implications, everybody talks about, wouldn’t this be great if you were a member of, say, Marriott’s loyalty program, but through blockchain you could use your points anywhere you want? And the blockchain would handle the conversion and the settlement and things like that, which sounds great from a consumer perspective.

But from a hotelier perspective, I need to start thinking about, am I losing that relationship with that customer? What does that do to my actual ability to manage my liability? Because the liability I have to post to my balance sheet is predicated on redemption levels, and how many members we have, and propensity for those members to redeem based on past experience, am I going to have to take a huge P&L hit because I have an unfettered way for these members to redeem? … Any of these loyalty programs, I think, want to understand the what-ifs or the different scenarios – the unintended consequences of what would happen if this was out there and people could just decide, I’m going to use 500 points and go out to dinner tonight at this restaurant because they’re part of this whole loyalty blockchain.

H: The points become a commodity.

FL: Right. What if I decide I want to use my Marriott points and stay at a Hilton? … From a consumer perspective, that sounds really great, but at the end of the day, the reason you actually spend tens and tens of millions of dollars on a program and charge your franchisees is because you’re trying to keep them within your family. When I was at Wyndham, I wanted them to actually cash it in for a free night, not for a Target gift card, right, because the Target gift card provided no residual value to my franchisees.

H: And then it’s not a loyalty program, it’s just a points program.

FL: Right. It becomes more of an affiliate type of program versus your own program. The other thing with blockchain is that the technology is relatively in its infancy, and so because it has to check a lot of different things and the blocks have to move through the permissions, it takes a while. I mean, I think they can say that they can do, like, seven transactions a second, which is infinitely slower than I think consumers would be willing to do when they are searching for hotels, for example. The computing power needs to be improved, and I’m sure it will be, and as a result the costs need to come down and efficiency needs to go up before it’s widespread within the industry.

H: In your advisory capacity, are you getting a lot of questions about blockchain?

FL: I’m getting no questions about blockchain.

H: Why is that?

FL: I don’t think it’s on anybody’s horizon, quite frankly. I mean, there’s a lot of talk about it and in conferences, people may be talking about it. I’m not aware of anyone that has taken capital dollars and said, we’ve got a project here.

H: What’s top of mind instead?

FL: Things like personalization, CRM type of activities, the things that are really going to move the needle immediately … things that they know they can actually build an ROI on.