Till early this year, Durga International was just another budget hotel in Paharganj, a haven of sorts for backpackers and low-budget tourists in central Delhi. For its owner Vijay Sharma, filling up the 45 rooms was a constant struggle as he competed with some 1,500 hotels and lodges in the neighbourhood, which is right across New Delhi Railway Station. Then, in February, Sharma’s fortunes miraculously changed, almost overnight. Rooms began to fill up, often with the same customers making a repeat appearance, and business is now up 200 per cent since the bleak days. What’s different? Well, for starters, Durga International has a huge logo of Zo Rooms, an online budget room aggregator, hanging along with the name of his hotel for the past 10 months. “Zo has given a new lease of life to my business. It’s a God-sent opportunity,” beams the 45-year-old hotelier. Just a few metres from Durga is Rama Inn, another budget hotel, and another budget hotel with a tie up — not with an online startup but with MakeMyTrip, the online travel agency (OTA) that launched its budget brand Value+ in October. Unlike the Durga-Zo alliance, though, Rama Inn’s owner Sonal Gupta didn’t need to opt for a cobranding alliance. But she gets a chance to be a part of the OTA’s network which, at last count, had tied up with 1,000 hotels across 35 cities for its budget brand. “MakeMyTrip is a recognised brand and am sure of reaping rewards with this tieup,” says Gupta. Paharganj is just one of the thousands of neighbourhoods in the country witnessing a slugfest between the funds-flushed online budget room aggregators like Zo and OYO and the OTAs such as MakeMyTrip and Yatra. They’re all battling it out for slices of the humungous $20 billion (`1.32 lakh crore) budget hotel pie. The Spark that Ignited the Power Keg The spark that ignited the powder keg was the move by the leading OTAs to block the budget room aggregators from their platform last month. Rajesh Magow, cofounder of MakeMyTrip, contends that poor feedback from consumers about the quality of rooms and services offered by these startups and anxiety among the hoteliers over dilution of their brand identity gave birth to Value+ brand in October. Unlike OYO and Zo, MakeMyTrip began by offering flight tickets, and later got into package tours and hotel bookings. It’s also a relatively old company, founded in 2000 and debuting on the Nasdaq a decade later. OYO was founded in 2013 and Zo a year later. Besides age, they also have moneybags on their side; whilst OYO recently raised some $100 million, Zo has attracted a little under half that amount. That kind of money isn’t giving Magow of Make-MyTrip — whose market capitalisation is a little under $700 million — the heebie-jeebies. “These are just startups who have got their first round of funding,” he says, claiming that Make-MyTrip has enough cash on its balance sheet to match the financial muscle of the startups. But the game might change if there is a consolidation among the online budget aggregators. And the possibilities are quite strong as the talks of a possible buyout of Zo Rooms by rival OYO start doing the rounds. Paavan Nanda, cofounder of Zo Rooms, reckons that OTAs may not have “the capabilities to take away any share from us. We have been aggressive and will remain so”. He adds that whilst earlier OTAs were a major contributor to the business, these days a majority of Zo’s bookings come directly through its mobile app and website. “It requires a different sort of a DNA to create a business like this,” asserts Nanda, declining to comment on the talks of buyout by OYO Rooms. One of the catalysts behind the intensifying dogfight is a sharp fall in hotel bookings through walk-ins. As more and more consumers, including budget travellers, shift towards internet bookings, the scramble to get hold of them will intensify among the OTAs and online budget aggregators. Amit Anand, cofounder and managing partner of Singapore-based venture capital firm Jungle Ventures (backed by Ratan Tata), says the market for standardised budget accommodation is booming across south-east Asia. In Indonesia, for instance, Jungle Ventures has invested in RedDoorz, which has the tagline: “If you don’t get what you see, it’s free”. “The opportunity is massive and I think there is place for startups as well as OTAs to offer similar services here in India,” adds Anand. Internet and mobile adoption is fuelling demand for budget rooms. According to a report by the Internet and Mobile Association of India (IAMAI) and IMRB International released early this month, the number of internet users in India is expected to reach 402 million by December 2015, a growth of 49% over last year. And the mobile internet base is exploding: in urban India, it has grown by 65% over a year ago to reach 197 million in October 2015. The numbers for rural India are expected to reach 87 million by December 2015 and 109 million by June 2016. And of all the internet non-users surveyed across 35 cities, 11.4 million were willing to access the net over the following year; two-thirds of those users intend to do so through their phones. In the hotel industry, 12% of bookings are estimated to happen via the internet; in five years, half of all bookings are expected to be online. While air and rail bookings have already witnessed high online penetration of 40-50%, the hotel segment is still underpenetrated. For the OTAs, slow overall revenue growth and lower margins in the air ticketing segment are pushing them into the online budget aggregator space. Which also means that they have to match the startups on the freebies front. So if OYO and Zo are offering free WiFi, free breakfast and full cashback if a consumer is not satisfied with the quality of service, MakeMyTrip has put its skin in the game by offering double the money back. As in any new and emerging sector, players need to invest in attracting hotels as well as consumers with the objective that both will eventually discover the associated value and benefits and become loyal to them in the long run, says Pragya Singh, vice-president (retail, ecommerce & consumer products) at Technopak Advisors, a retail consultancy firm. Beyond Top-line Metrics While many investors today do seek more financial discipline in startups and are increasingly looking beyond top-line metrics, they also understand that in a new and emerging sector, investment is required in creating both supply and demand at a scale. Hence they may need to keep backing the players, she explains. “Ecommerce needs patient capital wherein profitability follows scale,” says Singh, adding that most investors in this space are not new to ecommerce and have shown faith and willingness to back the players. “But as the market grows and matures, players will need to focus at sustainable monetisation models,” she attests. A sustainable monetisation model is what Ashish Kashyap of Goibibo feels would differentiate his travel portal and budget brand offering from the online startup newbies. The founder and chief executive of the six-yearold OTA, which is backed by South African internet and media conglomerate Nasper, claims that of the 30 online budget hotel startups that have been launched over the past year, 29 are not flush with funds. At the current unit economics that they operate at, it will be hard for them to justify a long-term business plan, he says, adding that surviving in the segment is not just a funding game. There is huge amount of technology differentiation required, be it in terms of providing applications for hotel owners, yield management systems and at the same time powerful booking, ratings and reviews systems for the traveller, says Kashyap. “We have created a platform based on network effects between real hotels and real travellers. This is very hard for any player to break into,” he explains. Goibibo rolled out its budget accommodation brand, GoStays, in September this year. In less than two months, it’s taken the label to 99 cities, tied up with 1,384 hotels and made available 11,000 rooms, claims Kashyap. While the entry-level rooms are priced as low as `599, the top one comes for just under `2,000. Goibibo earns a 30% commission on every room sold. “We are building this business for the long term, and not to exit,” adds Kashyap, perhaps alluding that a selloff may be the end game for many of the budget room aggregators. For the moment, though, an exit is the last thing on the minds of the top team at OYO Rooms. In fact, they’re busy “enjoying the first-mover advantage,” says Kavikrut, whose designation of chief growth officer at OYO leaves little to the imagination about the two-year-young startup’s priority. Backed by the likes of SoftBank and Sequoia, OYO has bulldozed its way into 140 cities, partnering with roughly 4,000 hotels and boasting availability of over 40,000 rooms. To OYO Rooms, claims Kavikrut, should go the credit of conceptualising and creating a new business model in the Indian hospitality industry. “While everyone was busy attributing the stifled growth in the budget category to the lack of infrastructure and quality accommodation, we tried to solve the problem by enabling predictability and ensuring a delightful experience driven by technology,” reckons Kavikrut. OYO says it takes on an average 48-72 hours to convert a room into an OYO room and `12,000 to rebrand it. Kavikrut contends that OYO’s success would be hard to replicate as it is determined by pace and ability to innovate, ship new product enhancements and ensure consistency of experience. Claims and Counterclaims The OTAs may be unnerved by such speed and nimbleness but for its part, WudStay, another budget aggregator that started operations in June this year, feels that the OTAs may have already missed the bus. “It is extremely surprising that OTAs are trying to roll out their offering so late in the day,” says Prafulla Mathur, founder and chief executive of WudStay. The very fact that OTAs didn’t ensure quality and didn’t guarantee user experience resulted in the birth of the standardised accommodation category, he says. It is very difficult for OTAs to succeed at this point considering the online players have gone so far ahead from an operational perspective. “The budget aggregation space is more about quality and standardisation than discounting,” he avers, adding that a consumer is willing to stretch his/her budget for quality assurance. For any OTA to succeed, it would need to first understand the gap between customer expectations and market offerings and then figure out ways to bridge that gap. WudStay is present in 40 cities, has a roster of 400 hotels and 4,000 rooms and is planning to scale up at a much faster clip in the coming months. Being a startup, contends Mathur, is also one of the biggest advantages over OTAs. “While we are very focussed to deliver real value to the user, we have the option to be more flexible in our approach compared to OTAs,” he avers. Sharat Dhall of Yatra, one of the leading OTAs in the country which started operations in 2006, would scoff at any such suggestion. “We might not be a startup in terms of our age, but at heart we are very much like a startup — young, nimble, aggressive and extremely quick at adapting,” says Dhall, president of Yatra, which rolled out its budget brand TG Rooms and TG Stays in September this year. Dhall contends that the online startups are burning cash by offering rooms at ridiculously discounted tariffs. In a scenario when the market is moving away from ‘show me the numbers’ to ‘show me the revenue’, it would be interesting to see how the startups manage to raise more funds unless they convince investors about the sustainability of their business model, he says. Burn and Earn Yatra has quickly scaled up presence of TG Rooms and TG Stays — 12,000 rooms and 400 homestays, respectively — to take on the challenge from the online rivals. “You just can’t blow away established brands that have been in market for over a decade. That’s just wishful thinking,” maintains Dhall, adding that the brand is not in a mad rush like the online aggregator startups to put every hotel on its list just to show numbers. “Picture abhi baaki hai (the movie is yet not over),” he says. Yogendra Vasupal of Stayzilla is well aware of the flip side of relying heavily on the ‘burn and earn’ model. That’s why the 34-year-old founder of the budget room aggregator has been maintaining a low profile and making calculated moves to gain market share. In a war of attrition, it’s not the one who has the largest arsenal or army who wins, says Vasupal who started Stayzilla back in 2010, established a presence in over 4,500 towns and works with 40,000 budget hotels. The one who succeeds in gradually wearing down the rival with small, tactical victories has a better chance of winning than those burning money and aggressively making strides. “For every $50 somebody burns, we spend only $1 in this war,” he contends. “It’s not about how much money is being raised but what’s the runway,” he says. For a company bleeding $8-10 million on a monthly basis, explains Vasupal, $100 million raises would mean a runway of just 10-12 months. And for a company burning $1-2 million per month, funding of $40 million would mean a runway of 20-40 months. “Show-me-the-money is old school. Showme-the-runway is new school,” he adds.