A business model that is neither goose nor gander

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Currently, OYO’s business model runs in two streams. A 100% inventory model and a fully-owned hotel model.

Contrary to what Son would like you to believe, OYO doesn’t actually operate the hotels in which it has taken up 100% inventory.

This is more of a commitment around occupancy than a complete take-over of operations. While this allows OYO to operate in a relatively asset-light model, the flipside is that the company has little to no control over day-to-day operations.

Refusing to honor though

Social media is riddled with cases where hotel owners refuse to honor OYO bookings or the hotel conditions and amenities are not in line with expectations.

The fully-owned Townhouse model affords the company full control over the hotel experience, but given that these are largely greenfield projects, involve major upfront investments to set up the hotel and an asset-heavy model to run operations.

It also means that scaling up from tens to hundreds of hotels is a daunting challenge. Even today, OYO only has 38 townhouses in total.

What this means is that contrary to Son’s attestation that like Google and Facebook, OYO will reach profitability with scale, the fact of the matter is that these models are hardly comparable.

Unlike pure digital plays like Google or Facebook which can achieve significant economies of scale, for the likes of OYO, each additional room added comes with a cost – both for setting up as well as for managing and maintaining. Apart from the thin sliver of costs attributable to consumables (which is just a few percentage points of the overall costs), there are no significant economies of scale awaiting OYO.

Already giving competition

But like Son claims, an AI (artificial intelligence) delivers a competitive edge to OYO? Can “43 million micro-optimizations per day” help OYO price its offerings better? It might have helped if OYO was the market-maker but in industries like hotels and especially in the low-end segment that OYO operates in, pricing is determined by two things.

Firstly, there is a natural bound in terms of the highest rates that can be charged (going up higher would bring these hotels in direct competition with the premium brands who offer far higher levels of quality and service for that price point) and secondly, pricing fluctuates by a simple dynamic involving unused/available inventory and customer demand at any point in time – the more the supply of available rooms, the lower the price and the more the demand, the higher the price.

This can be solved with simple algorithms that pretty much every hotel chain already uses and doesn’t require AI, much fewer millions of micro-optimizations a day.

It appears that given the current hype around AI, the temptation to force-fit AI into your narrative afflicts the owners of billion-dollar hedge funds just as much as it does seed startups presenting pitch decks.

Brand – The double-edged sword

All said and done, even its harshest critics will agree that OYO has one thing going well—the brand. The tens of millions of dollars invested in advertising the OYO brand and emblazoning all the partner hotels with its signage have made OYO’s name all but ubiquitous in India. Now that the company has over 7,000 partner hotels across more than 200 cities in India, every neighborhood in these cities is likely to have an OYO brand hotel prominently visible.

You would think that having a recognizable brand carries reputational heft and is, therefore, valuable. But as in the case of Kingfisher Airlines, a brand is valuable only if the execution on the ground matches the brand identity and provides the brand owner with some kind of pricing power.

In the case of OYO, neither of these are guaranteed. It has little to no control over ground-level operations and the fact that OYO discounts hotel room prices on its own platform relative to these same rooms on aggregators such as MakeMyTrip and Booking.com might point to a lack of pricing power.