Hilton vs Marriott | The Inn Crowd | 4

0:10In a circular meeting room in Washington, D.C. Bill Marriott sits before a panel of U.S. senators and pulls the microphone towards him. The 69-year-old boss of Marriott International has come seeking help. It's October 2001, a month since the 9-11 attacks knocked the world off its axis. The Marriott World Trade Center is now rubble. America's conducting airstrikes in Afghanistan, and the hotel industry is on its knees. The government's already bailed out the airlines, but it's doing nothing for struggling hotels. Bill hopes to change that today. He peers over his spectacles at the senators and makes his case.

0:51These past four weeks have been the most difficult weeks for the travel and tourism industry that I've ever experienced in 45 years in the business. Immediately following the attack, our net reservations for our company in the United States dropped 94 percent. The lodging industry is very capital intensive, carrying about 150 billion dollars of mortgage debt, and many hotels will not make their debt service payments. Bill then asks the senators to give travelers$500 off their first 2001 tax bill if they travel and book hotels. Illinois Senator Peter Fitzgerald ducks Bill's plea. I note that the CEO, I think, of Hilton Hotels, Stephen Bollenbach, he said, I think it would be improper for us to get in line for government subsidies.

1:41It would be kind of unseemly, and if I were the government, I wouldn't give us anything. Bollenbach anticipates a quick rebound, and his dismissal of the need for government intervention leaves Marriott little choice but to roll with the punches. Marriott announces layoffs, puts a lid on spending, and anxiously awaits better times. At Hilton, there's no sense of crisis. Instead, the company sees the lull as the ideal time to renovate its hotels and attempt to snatch market share away from weakened rivals. But for Marriott and Hilton, the tectonic plates of hotel keeping are shifting in unanticipated ways.

2:22A new generation of travelers is emerging, and it has different sensibilities. It rejects lookalike rooms and uses the web to book rooms in hip hotels with quirky furniture. And that trend is about to rock the hotel trade's entire business model, pushing both Hilton and Marriott to either adapt or die.

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4:55From Wondery, I'm David Brown, and this is Business Wars.

5:24On the last episode, Hilton battled to survive the 90s buyout wars, Marriott cast off its debts, and 9-11 flattened the hotel industry. Now new trends are threatening their business models. A younger generation of guests prefer relaxed to refined service. Travel websites are on the attack. And the biggest growth prospects lie overseas. This is Episode 4, The In Crowd.

6:02Starwood Hotel's executive Casey Kavanaugh walks with her 70-year-old mom through Times Square. The Christmas decorations are up, but Manhattan's tourist hotspots are quieter than usual. It's three months since September 11th and people are still leery about travel. But this evening, the blonde-haired Starwood exec wants to show her mom Starwood's latest hotel. She points it out from across the street. Above the doors is an enormous bright red W. This is it, Mom. The W New York Times Square. It's the first hotel to open in Manhattan since 9-11, and the latest addition to Starwood's W chain. W began three years back.

6:48The idea was to bottle the cool, hipster appeal of boutique hotels and create an upscale brand for Generation X. Even Starwood doubted the plan. It named the chain W so that it could quickly convert it into a Westin if the experiment failed. But instead of bombing, W became the hottest hotel chain in the nation. Now W's are opening fast, charging$240 a night, and luring guests away from the luxury trappings of Ritz-Carlton and other high-end hotels. Kavanaugh leads her mom to the bar. The place is buzzing despite the shortage of tourists. Like the boutique hotels it inspired, W's bars and restaurants are designed to be chic hangouts, not just amenities for guests.

7:38Lamps illuminate the bronze-gold interior and its stylish furniture. The bar is bathed in alternating red and blue light. Nearby, a young couple plays foosball. Mom, what do you want to drink? What did you say? I can't hear a thing. It's so loud in here. I said, what do you want? To be somewhere else. This place is terrible. Kavanaugh takes her mom back outside. Mom breathes a sigh of relief and turns to Kavanaugh. Casey, I don't know about this Starwood company you're working for. If that's where Starwood is putting its energy, you should go back to Hyatt. Mom, you're not supposed to like it.

8:22It's for young people, and they want hotels that are less fussy. Kavanaugh's mom shakes her head. Well, I don't get that. Isn't the whole point of staying at a hotel to be fussed over? For years, hotel chains sold themselves on reliability. The promise was no matter where you were, they'd always deliver a comfortable, if predictable, stay. Now that desire for refined service in cookie-cutter lodgings is giving way to a hunger for quirky and relaxed rest stops. And hotels are having to respond, not just with how the rooms look, but how they come across online, where more guests are booking rooms, because Expedia is catching on fast.

9:07So how's it coming? Good. This one looks pretty exotic. Cool. Mosquito nets. Look! Maybe not that exotic. Great. Everything you need to choose the hotel that's right for you. Expedia.com Before the likes of Expedia and Booking.com, people had limited knowledge of the hotels in their chosen destinations. They relied on friends or travel agents for guidance, or chose name-brand hotels they could trust. But now people can view every available hotel, compare prices and amenities, and see what it looks like, all from their desktop computer. That makes it easier for new hotel brands to break out. New chains like W can now get widespread recognition simply from being listed on these websites, and the interchangeable-looking rooms of the big brands seem dull in comparison.

10:06But these sites also disrupt the booking model. They become the middlemen between guests and hotels, and undercut the rates offered by Hilton and Marriott. That's where websites take their cut. To do this, they exploit the conflicting priorities of property owners and hotel brands that manage their hotels. Hotel management companies like Hilton, Marriott, and Starwood want to hold the line on price to protect their brand's image. If their brands get devalued, their ability to woo guests and win hotel management contracts will wither. But hotel owners see the world differently. They want heads-on beds, and if Expedia or Booking.com can fill those empty rooms, they're willing to discount.

10:52If a hotel chain objects, the owners can switch to another brand when their management contract expires. The travel downturn after 9-11 only accelerated this change. Hotels are less than half full, and the travel sites use the opportunity to extract even bigger discounts from property owners. That undercuts the effort by Hilton and Marriott to hold the line on prices with guests who book with them directly. It's a major threat to the hotel giants. Their brands, their pricing models, and their connection to their customers are all being eroded by these dot-com upstarts. So, they declare war on the travel sites, with Hilton leading the charge.

11:39In 2003, Hilton strikes a deal with Expedia. Hilton agrees to list its hotels only on Expedia. In return, Expedia reduces its commission and agrees not to undercut Hilton's own prices. Then, Hilton announces that its 13 million H Honors members will only earn rewards if they book directly with Hilton. Within a year, almost all Hilton reservations made online are made on the company's own website. It's a win for Hilton. Other hotel companies follow Hilton's lead and strike similar deals with the travel websites. By then, the post-9-11 recovery is underway. Hotels are filling up again and room rates are rising.

12:28And as guests return, beds, the actual beds, become the new battleground. By the late 90s, the typical hotel bed was draped with an uninviting dark polyester bedspread to hide stains. And the polyfoam mattress beneath was chosen not for comfort, but because it's easier to clean and harder for dust mites to live in. And that left the door wide open for Starwood's W-Chain to glam it up. It created a new bed with superior foam, an inner spring system, and higher fabric density. This new comfy bed proved so popular that Starwood branded it the Heavenly Bed and spent$30 million putting it into every Westin in North America.

13:19It's a canny move. Only high-speed internet connections rank higher than comfortable beds on guests' wish lists. and with travelers now opting for Weston's in the hope of a better night's sleep, Marriott and Hilton must respond.

13:41It's January 2005, and in Bethesda, Maryland, Bill Marriott's having a pajama party with his three adult sons in front of a gaggle of journalists. The 72-year-old CEO sits on the edge of a bed wearing plaid PJs and a white Marriott bathrobe. He smiles for the cameras as one of his sons hugs a teddy bear. Today we're announcing the introduction of this bedding in 2 ,400 hotels. Bill pats the bed. Instead of a dark bedspread, it's got fluffy white duvets and a surplus of pillows. We also promise that these duvets will be washed for each new guest. This is a$190 million investment in giving our guests a great night's sleep.

14:27But Hilton's going even further. In 2005, it splashes out a billion dollars to launch its answer to Weston's heavenly bed, the Hilton Serenity Bed. Soon, every hotel is trumpeting their thread counts and burying beds under mountains of pillows. As the bed brawl continues, a new battlefront is shaping up in Asia. The economies of China, South Korea, and India are exploding, and every global hotel brand is racing to build a presence in these emerging economies. But while Marriott and Starwood charge into Asia, Hilton Hotels finds itself stuck at home, because it sold its international division in 1967.

15:17Outside North America, the brand belongs to the British-owned Hilton Group. The American and British Hiltons have worked closely since 1996, but their pact only goes so far. The U.S. operation has little say over what the brand does in Asia. Hilton CEO Stephen Bollenbach decides that the status quo can't continue. So in 2005, he bites the bullet and pays$5.7 billion to buy back the international operation. The deal reunites the Hilton brand, adds 400 hotels to the company's roster, and dramatically shrinks Marriott's lead to just 13 ,000 rooms. But the noise made by Hilton's multi-billion dollar reunion soon attracts bigger fish.

16:20It's July 4th, 2007, and on his driveway in Virginia, Chris Nassetta loads his fishing gear into his SUV. He's a 44-year-old with salt-and-pepper hair and the boss of Host, the hotel developer spun off from Marriott back in 1993. But today is Independence Day, and the only thing on his agenda is going fishing on the Chesapeake Bay with his daughters. He closes the trunk. Hey, everything's packed. Time to go fishing. As he waits for his daughters, Nassetta checks his Blackberry. He's not expecting anything. After all, it's a national holiday. But his inbox is full of emails. He immediately thinks something bad's happened.

17:06He opens one of the emails as his daughters rush past and into the SUV. It's not bad news, but it is shocking. Yesterday evening, the private equity firm Blackstone bought Hilton and ended the Hilton family's long connection to the business. But that's not the most shocking part. Dad, hurry up! Naseta doesn't move. He's too gobsmacked at how much Blackstone's paid for Hilton. $26 billion. That's 40 % more than Hilton's market value. It's one of the biggest leveraged buyouts of all time. Hilton is now a private company with enormous debts. It's also got no CEO because Stephen Bollenbach isn't staying on.

17:58And whoever steps into his shoes will inherit a company in danger of being buried under a mountain of debt.

18:12It's summer 2007, and in a booth at the Occidental Grill in Washington, D.C., Blackstone's real estate chief Jonathan Gray is hyping Hilton to host CEO Chris Nassetta over bowls of salad. Gray is the 37-year-old brainiac behind Blackstone's takeover of Hilton. He's got a five o 'clock shadow and receding curly black hair. Nassetta also clocks the air of a man who's worried. The mega deal he brokered to buy Hilton just a few weeks ago is already going south. The flood of cheap credit that fueled the recent spate of leveraged buyouts. is drying up. A month ago, Blackstone's acquisition of Hilton looked like another sign of private equity's growing power.

18:56Now, it looks like the final act of hubris right before the fall. Even some of the banks that coughed up the billions Blackstone needed to buy Hilton are looking sickly. He looks at Naseta. The loans mature in 2013, and that's not as far off as it sounds. We need a superstar CEO. Your capabilities are unmatched, and we want someone we like and trust. What I'm trying to say is we want you. Nassetta puts down his fork. He's done deals with Gray before, and he likes him. But this job isn't for him. John, I'm really not interested. I'm happy at host and committed to what I'm doing there. Gray isn't about to give up.

19:42At least look Look at the stocking compensation package, okay? It's worth tens of millions. John, I don't want to move my family to Beverly Hills. I'm an Arlington guy. I want to stay close to my family and friends. Gray changes tact. Flattery and money aren't working. Nassetta needs a better reason to take the job. He leans back in his seat. The reason I got Blackstone to buy Hilton is because it's full of wasted opportunity. It's got all these brands, but it only has some Hiltons and a few Conrad's outside the U.S. It's got massive untapped potential internationally. Nassetta nods. It should also focus more on managing rather than owning hotels.

20:23Gray leans forward. Exactly. It's got some of the most prestigious hotels in the world, the Waldorf Astoria, London Park Lane, but it can't do anything with them. What do you mean? It lacks the discipline. It's sleepy. It's complacent. To realize its potential, it's got to enforce basic standards like Marriott does so Hilton guests don't get uneven experiences. The right person could fix that. And the way I see it, you've been in training for this moment your entire life. With those words, Naseta's competitive spirit kicks in. It dawns on him that he's already achieved everything he wanted to at Host, and then some.

21:07It's time for a new chapter. He's going to California to get Hilton into shape, and his goal is nothing less than to take it back to the top of the hotel industry. But he'll get more of a challenge than he bargained for. The economy's about to plunge off a cliff, and that's going to leave Hilton in the quicksand. Weighed down by its debts and sinking fast.

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23:17It's February 2009, and in Beverly Hills, all of the 600 people who work at Hilton's head office are packed into the cafeteria. And they're all wondering what this afternoon's town hall meeting is for. In the middle of the room, two employees trade theories between sips of their takeout lattes. It's job cuts, definitely. I can feel it. No way. If they wanted a call, they would have done it already. So what then? A new brand. They hired those two Starwood executives, right? I bet they're working on something new. Hmm. Might be. The atmosphere in the room suddenly changes. Hilton CEO Chris Neseta's just walked in, and the head of HR is right behind him.

24:01The man sipping lattes leans over to his colleague. See that? He's got HR with him. That means job cuts. Neseta clambers onto a table and looks out at the faces in the room. They look back at him, and they can all tell from the steely look on his face that this meeting won't be pretty. I have an announcement, and it will affect all of you. Hilton Worldwide's headquarters are relocating. We are leaving Beverly Hills and California. We are moving to the Metro D.C. area, and most of you aren't coming. Almost everyone gasps in shock. Hilton's called Beverly Hills home for almost 70 years. Someone starts to cry.

24:49Even those who anticipated job cuts didn't expect this. Naseta pushes on. We cannot do what we need to do here. This is a disjointed company. It's grown in large part through mergers and acquisitions, and we have teams all over doing their own thing. We have to align under one mission, one vision, one set of values, and one set of priorities. To do that, we need to reboot the culture and move somewhere new. And it just so happens it's moving to your old home state? Nassetta answers the heckle. We considered several options. Dallas, Atlanta, and Chicago were on the short list, too. You didn't even consider staying in Southern California?

25:37No. We're an international business with major operations in Europe and Asia. The West Coast time zone is not ideal. The D.C. metro area made sense because it's a hotel industry hub. Marriott, Host, Choice and other hotel companies are already there. It has the talent we need to change. Exactly how many of us are you leaving behind? Neseta exchanges a glance with the company's HR chief and then looks back at the 600 people in the room. Every one of them is hanging on his answer. He pushes his own emotions aside and presses on. Around 130 of you will be invited to relocate with the company. The rest of you, I am sorry to say, are being laid off.

26:25Several employees burst into tears. A few shout, but most of them just look sad and broken and resign to their fate. For Nassetta, a clean break with the past is crucial to resetting the sleepy culture he inherited at Hilton. On becoming Hilton's CEO, he spent 90 days touring the company's operations around the world. And he didn't like what he saw. Instead of a cohesive company, he found a loose federation of fiefdoms, each jealously guarding their corner of the Hilton empire. Different hotels followed different policies. Everyone seemed to have their own HR, finance, and legal teams. And what they wanted most from the head office was to stay away.

27:14Not that the head office had much to offer. It had none of Starwood's appetite for innovation or Marriott's relentless attention to detail. Hilton's plodding mantra could best be described as, hey, still works. So, he's moving Hilton to the Washington suburb of McLean, Virginia to reboot. And only the very best of the existing team will join its journey east. But moving cross-country won't fix Hilton's biggest problem. It's massive debts. Since Blackstone bought Hilton, the economy turned into a rolling disaster. Lehman Brothers, one of the banks that lent Blackstone the billions it needed to buy Hilton, has gone bust.

28:02And the economic outlook is getting darker. Hotel revenues are down 20%. Hilton's valuation has crashed 70 % since the buyout. And the worse things get, the bigger the risk that Hilton's debts will force Nassetta to break up the business before he can fix it. and things do get worse.