Hilton vs Marriott | Bad Heir Day | 2

0:14On the manicured grounds of his mansion in Bel Air, Conrad Hilton stares into the distance. The lights of L.A. stretch out below him. The stars twinkle above. It's October 1966, and 47 years since Conrad bought his first hotel. Now, his name's known to travelers everywhere. But tonight, he passes the torch to his eldest sons. And to witness the moment, he's invited 100 relatives, friends, and business associates to his opulent home. Conrad isn't sure he wants to make way for his heirs He's not even convinced that they're ready to step up But he's 78 And he can't put it off any longer Conrad checks his white tuxedo for stains And then heads to the wooden podium on the nearby stage He steps onto stage knowing that he's about to surrender control Of Hilton's day-to-day operations For the first time in his life He leans toward the microphone.

1:20The music stops. Guests gather before the aging hotel mogul. Thank you for being here. Tonight, it gives me the greatest pleasure to announce two new appointments. First, please welcome the new chairman of Hilton International, my son, Nicky. Nicky heads towards the stage. He's a handsome 40-year-old who could pass for a member of the Rat Pack, but his playboy ways make them seem like Boy Scouts. Nicky's been hooked on heroin and arrested for drunkenness. His high-profile marriage to film star Elizabeth Taylor imploded after he kicked her in the stomach, causing a miscarriage, and he's still a loose cannon.

2:05Nicky stands at the podium and grins at the guests. For those of you who know me, this is probably the last thing you all expected. Me, the professional loafer turned big shot in my pop's company. The guests laugh, but not Conrad. He's tired of Nicky's antics. Suddenly, Nicky abandons the podium and hugs Conrad. Conrad pulls away and moves the show along. Next, let me introduce the new president and CEO of Hilton Hotel's domestic division. My son, Barron. Barron strides through the crowd, oozing confidence. At 38, he's two years younger than Nicky and prefers hunting to hijinks. When Conrad first offered him a job, Barron turned it down as too poorly paid.

2:58Instead, he started a fruit juice distribution business, made it a success, and only then joined the family firm. As Barron nears the stage, his wife Marilyn glides out of the crowd toward him. She's wearing a long pink silk dress embroidered with shimmering sequins. They join hands as if they're actors in a movie and step onto stage together. Conrad smiles at Barron and Marilyn's slick entrance, intentionally or not. Barron's once again positioned himself as the prince and left Nicky playing jester. It's plain to everyone that Barron will be Conrad's successor, not Nicky. And it won't be long before Conrad and Barron push Nicky out of the nest for good.

3:45But in doing so, they will make a strategic error that will wound Hilton for decades and give Marriott a fortuitous opening.

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6:15From Wondery, I'm David Brown, and this is Business Wars.

6:44In the last episode, Conrad Hilton bought a Texas flop house, which became the launchpad of the world's top hotel chain. Meanwhile, on the East Coast, J.W. Marriott parlayed his hot shop restaurants into a multi-million dollar food service business. Now, J.W.'s son, Bill, is leading Marriott's charge into the hotel business. and he's about to get an unexpected helping hand from Baron Hilton. This is Episode 2, Bad Air Days.

7:24Nikki Hilton sits at the end of the long mahogany table in the Hilton Hotel's boardroom in Beverly Hills. It's December 1966, and the company's annual end-of-year board meeting is underway. Nicky is feeling good as he lights up a cigarette and smiles as he exhales. This has been Hilton International's best year yet. Revenues of$122 million, 4.8 million guests stayed in our hotels. We expect 1967 will be even bigger. The board members clap. Nicky flashes a thumbs up at his brother Baron, who is at the opposite end of the table next to Conrad. Conrad claps, but he's not impressed. It's only been three months since Conrad put him in charge of the overseas operation.

8:14Nicky's taking credit for decisions Conrad made long ago that are now bearing fruit. Nicky also regularly goes AWOL from work without explanation. As far as Conrad's concerned, Nicky's a threat to Hilton International's future success. After the meeting, Conrad asks Baron to stay behind. Baron, I've had it with Nicky. I love him dearly, but he thinks this is playtime. Baron looks torn. Maybe he just needs more time. TWA wants to buy Hilton International. Barron is surprised, but the airline's offer for Hilton's international hotels makes sense. TWA's rival Pan Am has started a hotel arm so it can sell flights and hotels as a package.

9:05What's TWA offering? $250 million of TWA stock. That's a good offer, and it's stocks worth having. Conrad nods. I think we should say yes. I agree. Have you told Nicky? Conrad shakes his head. No, then I'm not going to. I don't want him derailing these talks. In January 1968, Nicky goes to Morocco to open a new Hilton. He thinks Barron and Conrad aren't there because they trust him. But while Nicky's away, Barron and Conrad agree to sell Hilton International to TWA. Nicky only learns the truth on his return, in the most embarrassing way.

10:01Inside Hilton Hotel's head office in Beverly Hills, Conrad, Barron, and Nicky are gathered around Conrad's desk. Nicky whacks his copy of Time magazine down on the desk. What the hell, Pop? Barron jumps in. Nikki, please understand this isn't a personal thing. Are you kidding me? You tell everyone I'm in charge and then four months later you decide Nick can't do it after all. I call that personal. Nikki, it's about what's best for the company. Well, I think selling our overseas hotels is madness when air travel's opening up the world. But even if you disagree, why hide it from me? Baron looks Nikki in the eyes.

10:41You were nowhere to be found, Nikki. Nikki blinks in shock at the lie. Baron and Conrad knew exactly where he was, in Morocco. Before he can reply, Conrad stands. We'll discuss this later once we've all cooled down, all right? For now, that's all. Nikki glowers at his father. That will be all? Forget it. And with that, Nikki storms out. In the weeks that follow, Nicky pleads with Conrad and Barron to cancel the sale. He even considers legal action. But it's too late for that. In May 1967, the sale goes through. The deal shatters Nicky. Within two years, at the age of 42, he'll be dead from a heart attack.

11:38But the deal also maims Hilton Hotels. At the time of the deal, TWA's stock was worth$87. Within 18 months, the stocks lost half of its value, thanks to rising oil prices. Conrad's traded away his overseas hotels and control of his brand outside America for what now feels like peanuts. With Hilton Hotels now confined to the United States, Barron looks for alternative sources of growth. Building hotels is hugely expensive, so to grow without heavy borrowing, Barron embraces franchising, selling the right to use the Hilton brand to hotel owners nationwide. Then, in 1970, he buys two casino hotels in Las Vegas for$50 million.

12:32The Las Vegas Hilton and Flamingo add tens of millions to the company's earnings and makes gambling Hilton's biggest growth engine. But Hilton's not alone in looking beyond hotels.

12:52It's spring 1970, and on the banks of the pond at Dulles Airport, an archer takes aim at the red balloon suspended above the water. A bead of sweat dribbles down his face. He can sense the impatience from the crowd behind him. They're here for the opening of Marriott's new airport hotel. which aims to profit from the thousands of people who fly in and out of Washington, D.C. every day. His job is to shoot that balloon so that the ceremonial key inside it falls irretrievably into the pond. It's meant to signify how this hotel's doors will never close. But the wind's high, and he's missed three times already.

13:34He focuses, aims, and fires. The arrow shoots forward, only to get blown off course again. Marriott's hotel chief, Bill Marriott, puts on a brave face as an employee wades into the water. The employee pops the balloon with a pin. The key tumbles into the water. The crowd clap half-heartedly. But then, they spot something in the sky. The crowd's interest picks up as they spy three parachutists sailing through the air carrying Marriott flags. The plan is they'll land on the island in the middle of the pond and plant the flags there. But the wind drags two of the parachutists off course, their last seen heading towards Maryland.

14:24But the third parachutist is still approaching for another symbolic display. The crowd holds their breath as he battles the breeze to stay on course. Then, at the final moment, a gust of wind knocks him off course. He hits the ground fast, trips and falls face first into the island's muddy bank. But high winds aren't all that's buffeting Marriott. Wall Street is, too. Since starting in 1957, Marriott's hotel business has grown fast. It now has 19 hotels with 5 ,800 rooms. But Hilton's got more than 40 ,000 rooms. What's more, Marriott Corporation still makes most of its money from catering and restaurants.

15:13But its success in hotels has convinced investors that Marriott can do anything. So, egged on by Wall Street, Marriott broadens its horizons. It opens a travel agency, invests in Mediterranean cruise ships, and builds theme parks. Stockholders even pressure Bill and J.W. Marriott to follow Hilton into casinos. As devout Latter-day Saints, the thought horrifies them. To their relief, Marriott's board rejects the plan to join Hilton in Vegas. But Marriott's new side hustles soon hit trouble. Rival travel agents respond to Marriott's move into their business by directing travelers away from its hotels.

15:57The outbreak of war in Cyprus sinks the cruise ship business. The theme parks require enormous sums to build and drain capital from the hotel division. By the late 1970s, Marriott returns to the business of food and hotels. To grow fast, Marriott needs to build dozens more hotels. But each hotel costs tens of millions, meaning Marriott will borrow heavily. J.W. Marriott fears debt. He remembers how it dragged millions into poverty in the 1930s. But without more capital, Marriott will never catch up with Hilton. It seems like a problem with no solution. Right up until one executive changes the equation.

16:54Southbound on I-95, Bill Marriott steps on the gas. It's early 1977, and he's heading to a meeting in Richmond, Virginia. In the car with him are Marriott finance executives Gary Wilson and Al Checke. They're no ordinary bean counters. They're financial wizards, masters of the arcane arts of the ledger book. and they've been cooking up a new monetary magic trick. As the Virginia countryside rushes past, Wilson turns to Bill. I know we've got a meeting to prepare for, but could you spare a few minutes to hear out an idea Al's got? Bill nods. He became Marriott Corporation's CEO five years ago and unlike his opinionated father, he listens to others before making up his mind.

17:43Wilson and Cheki exchange excited glances. Cheki leans between the two front seats. So our goal is 20 % growth every year? Mm-hmm. And we know hotels are the best way to do that. But hotels cost tens of millions to build, and there's only so many giant mortgages we can take out, right? Well, that bottleneck slows us down, especially when it takes ten years for new hotels to recoup their construction costs. Yeah, sure, but what's new? Wilson stops guzzling coffee and interjects. Well, Al's got an answer to that. Tell him, Al. So, yeah, my idea is we sell our hotels at a discount price, but as part of the deal, the buyers have to give us a long-term deal to manage the hotel for them.

18:29Wilson leaps in again, jittery from the caffeine. So the hotels remain Marriott Hotels, run and staffed by us. And for doing that, we get 10 to 20 percent of the hotel's revenues. Checke finishes the pitch. And we then use the profits from selling the hotels to fund the building of more hotels. Bill eases on the gas as he processes the plan. So you're saying we borrow money to build the hotels. Then we sell the hotels with a long-term contract for Marriott to manage the hotels, right? We take a cut of the hotel's revenues as a management fee. and the hotel's new owners keep the rest. And the more hotels we sell, the more hotels we can build, and the faster our earnings grow.

19:17Wilson grins. Bill's got it. Exactly. With this, we could open dozens of hotels a year instead of a handful. This flips the hotel business on its head. I'm telling you, instead of being slow, capital-intensive, asset-heavy, we'd be fast and light. Bill smiles. I like it. Great. Do you think JW will back it? Bill stops smiling. JW's still the chairman of Marriott. Bill knows he will hate this debt-heavy plan with every fiber of his being. And normally, what JW wants, JW gets. But this time, Bill won't back down. This plan could turbocharge Marriott's growth and leave Hilton choking on its dust.

20:10So if JW doesn't get out of the way, Bill's ready to run him down.

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22:29Marriott Corporation's directors jump in their seats as J.W. Marriott slams his fist on the boardroom table like a furious toddler. No, no, no. We're in an inflationary economy and you don't sell real estate in times like these. Inflation hurts stocks, devalues cash, and makes property more valuable. The board members sink lower in their chairs. There's no escape. They know where this is heading. They've seen it many times before. From the other end of the table, J.W. Sun and company CEO Bill Marriott fires back. If it was up to you, we'd still be nothing but a restaurant company. You're holding us back.

23:12It's June 1978, and these father-son flare-ups are becoming more frequent. Bill's plan to turbocharge Marriott's growth by selling their hotels and focusing on hotel management infuriates J.W. And he won't back down. The 77-year-old's fists start hammering the table. I built this company. I approved our first hotel. I put you in charge. And you want to load up on debt? Assuming people will always buy our hotels? Your plan's reckless. Idiotic! Don't bother trying to intimidate me. We've wasted 18 months debating this with you. We've got a$92 million offer for five hotels on the table, and you're standing in the way.

24:01J.W. glares at his 46-year-old son. They've been butting heads for hours. He knows Bill's not budging. Not this time. J.W. folds his arms. Fine. Let's vote. I vote no. This plan stinks. Bill snaps back. Well, I say yes. The father and son stare at each other as the rest of the board casts their votes. One by one, the director's back builds plan. J.W. is the lone objector. After the final vote is cast, J.W. stands. Well, I guess we're doing this then. Congratulations, son. Bill puts the plan into action fast. Marriott ramps up hotel construction and starts selling off its old hotels. Wall Street hails the new strategy as a stroke of genius.

25:03By the end of 1978, more than half of Marriott's 17 ,000 rooms are now in hotels run but not owned by Marriott. and revenues are skyrocketing as the deregulation of the airline industry makes flying cheaper than ever and sparks a travel boom. Hilton, meanwhile, is grounded by its past.

25:32In a private room at a hospital in Santa Monica, California, a physician stares at his wristwatch and checks the pulse of his bedridden patient. A minute later, he lifts his fingers from the patient's neck. Time of death, 10 p.m., January 3rd, 1979. The doctor turns to Conrad Hilton's now widowed third wife and his son, Baron, the head of Hilton Hotels. I'm sorry for your loss. After 91 years, Conrad Hilton, the world's most famous hotel man, is dead from pneumonia.

26:13Conrad leaves behind 185 U.S. hotels and a$700 million fortune. But only one and a half million of that fortune will go to his family and friends. The rest goes to the Conrad N. Hilton Foundation, which makes the charitable foundation the most powerful stockholder in Hilton hotels. Rather than surrender control of the company, Barron sues. And as the legal slugfest between Barron and Conrad's estate drags, Hilton Hotels drifts. It becomes ever more addicted to the big bucks it makes in Vegas, and ever more reliant on franchising to add to its network of hotels. But Marriott's gobbling up market share all the time.

27:03Its new strategy of building hotels that it then sells and manages is reaping big rewards. In two years, Marriott slashes Hilton's lead from three times as many hotel rooms to just twice as many. Then, in August 1981, President Ronald Reagan's new administration introduces hefty tax breaks in an attempt to kickstart a construction boom big enough to lift the nation out of recession. It's a move that gives Marriott a major boost. Marriott uses the tax breaks to attract a rush of investment in its hotel construction projects, and those tax savings are a rich inducement. For every dollar invested, investors can write off$8 from their tax bills.

27:52And when the hotels are sold, the investors share the profits, and Marriott gets another hotel to run. For investors, it's a tax shelter packaged as a hotel construction project. For Marriott, it's a way to get more hotel management contracts faster. Soon, Marriott's got hundreds of hotels in its development pipeline. Most rivals replicate Marriott's tactic. But not Hilton. Hilton's two Las Vegas casinos now generate nearly half its income, so it's more interested in getting into Atlantic City than selling hotels as complicated investment opportunities. It just keeps on franchising and finding new ways to part high rollers from their dollars.

28:40But Marriott's about to sling more curveballs Hilton's way.