While sitting in the lobby of the JW Marriott at LA Live last month, John F. Davis III couldn’t keep his phone quiet. The CEO of Room Key was already a popular man, but now he was getting message after message about what Michael Shannon had just said on stage at the Nokia Theatre during the Americas Lodging Investment Summit. The managing director at KSL Capital Partners said the new hotel search engine was too little and too late in its bid to regain some control from the online travel agencies.

It was the first real industry criticism of Room Key since its debut on Jan. 11 and Davis was hearing about it from his colleagues who were listening to the CEOs panel.

Choice Hotels CEO Steve Joyce and InterContinental Hotels Group CEO Richard Solomons, flanking Shannon on either side, were quick to defend the new venture. Choice and IHG, along with Marriott International, Wyndham Hotel Group, Hyatt Hotels and Hilton Worldwide, funded Room Key and hired Davis to run it as an independent company.

Since the launch, there have been plenty of questions on exactly how it will work, and plenty of debate over whether it will. Joyce firmly believes Shannon is wrong, saying in an interview the night before the ALIS session that Room Key has “enormous potential” and will keep OTAs in check.

Whether Room Key will be the game changer many in the industry hope for remains to be seen. What follows are answers to all the others questions that have come up since the launch.

What are the true goals of Room Key?
That depends on whom you ask. The answers range from providing consumers with the kind of shopping site they want that also allows them the trust of booking direct, all the way to driving a stake in the heart of online travel agencies thriving on the backs (and wallets) of hotel owners.

“If you believe a hotel company’s job is to provide guests to the hotel at the highest rate and lowest cost, the industry has ceded the relationship with millions of customers to third parties,” Wyndham Hotel Group CEO Eric Danziger explained during an opening session of ALIS last month. “We need to take back that customer relationship with a better cost structure.”

A distribution channel analysis published by STR and HSMAI showed brand.com bookings represented 16.4% of all room demand and 18.5% of revenue in 2010. The OTAs’ share grew substantially from 2009, totaling 10.7% of demand and 7.7% of revenue. In 2010, roughly a quarter of U.S. hotel revenues came through third parties (OTAs and GDS) and the study projects that to double by 2015.

The ultimate goal of Room Key is to create a lower cost alternative to OTAs for owners, and if that competition brings better negotiating power and lower commission rates, all the better for the founding partners and the lodging industry as a whole. OTAs draw an average commission rate of 25%, with merchant models like Expedia in the 20% range and opaque channels like Priceline at 35% to 40%, says Mark Lomanno, the former president of STR and a new board member of newBrandAnalytics.

Ron Burgett, an executive vice president of development with Northcott Hospitality whose AmericInn brand hasn’t yet signed on with Room Key, said that without even selling a single room, the new hotel search engine was already effective: “They’ve put Expedia and Orbitz on notice.”

Can Room Key really and effectively compete with the OTAs?
Brooke Hempell, a partner with HawkPartners, a marketing research and strategy firm that recently completed a hotel channel usage study, believes Room Key is perfectly positioned to fill a void currently in the online space. “The actual format is so appealing, and beyond just the graphical design, one of the things missing from aggregators is you don’t get a sense of what the brand is,” she says. “The way Room Key presents the options highlights the brands and hotels very well and consumers will have more trust of that.” Her study concluded no channel owned the sweet spot of high-trust and high-breadth of information, but with the addition of review sites, Room Key could “break through the clutter and saturation” of all the choices currently out there.

The challenge for Davis will be getting the Room Key website and name in front of consumers, who are already well aware of OTAs that spend twice as much on TV advertising as hotel companies and four times as much in paid search advertising, according to the report from HSMAI and STR.

Adding more brands and independents is Davis’ other task. A quick and less than scientific hotel search comparison between Room Key and Expedia reveals why inventory matters so much: A search in Manhattan returns 524 hotels from Expedia and 40 from Room Key. For a small city like Cleveland, the difference is 26 to 19. Room Key provides only 29 offerings in Las Vegas.

What kind of marketing power can Room Key develop to attract consumers to the site?
This may be the only question that matters, or the one that answers all the rest. Without consumers coming to the site, and booking rooms, Room Key cannot succeed, let alone compete against the likes of Expedia and Google.

“We’re going to be very aggressive and creative,” Davis says. “These companies didn’t write billion-dollar checks so we’re not spending big on TV campaigns. But we do have six of the biggest hotel companies as owners and we can leverage their marketing expertise.”

Interstitial is a word Davis said he’d never heard when first briefed about the idea of Room Key, but it’s the one that got him to leave his job heading e-procurement company BirchStreet.

Interstitial is defined as an empty space or gap, and in Internet terminology, it describes the pop-under window that will appear with offers from Room Key as consumers close out of brand.com sites without booking a room. An equal proportion of those exiting customers will be redirected to Room Key from each of the founding partners sites, Best Western and any new partner or customer Room Key adds.

Davis says the conversion rate at brand.com sites is 5%, so 95% of all traffic leaves without booking a room. An undisclosed percentage of those shoppers will see a pop-under window when they close the brand.com site. It will have the previous site’s brand logo top left to reassure the exiting consumer, and the Room Key logo to the right for brand awareness, and in between it will show the seven closest hotels in the same segment class as the consumer originally searched. Those will be listed in a completely random order.

Davis says the exit traffic from the current inventory of approximately 27,000 hotels will drive more than 10 million travel shoppers a month to Room Key.

Will that be enough? “We’ve tested it all summer,” he says. “We’ll make money.” But will it be enough to compete with Expedia? “We just want to be one of the ones. We’ll get there and build on it.”

Simple math suggests Davis can be correct if the 10 million number is accurate. If just 0.1% of those redirected shoppers book one $100 room through Room Key, that will drive $1 million in revenue a month and Room Key’s cut will be approximately $100,000 (with fees at 10%). If Room Key converts 1% of those redirected shoppers, add a 0 to the bottom line and Davis’ company earns $1 million.

As Room Key’s inventory expands, so will the redirected traffic volume and opportunities for exposure. In addition to the pop-under windows, some marketing dollars will be spent on SEO efforts and print or electronic advertising.

Will some of Room Key’s business come from customers who would have eventually returned to book at the brand.com site?
Yes, just about all brand execs said that would happen, but a much larger share of Room Key’s business will come from those who were booking with costlier OTAs, they believe.

Lomanno says research has repeatedly shown demand is inelastic, meaning lowering rates and creating new channels will not increase demand overall. He also explains that there is a direct correlation between brand.com and third-party intermediaries. “When one goes up, the other goes down,” he says. “They’re all fishing in the same pond.”

The data guru says Room Key will snare some portion of the demand share OTAs are getting, but the continued growth in online bookings means both channels will increase. He estimates the overall pie will increase between the two channels, from 27% of bookings in 2010, to maybe 31% this year, and brand.com will jump to 19% and OTAs to 12%.

If Room Key is successful, could it lead to brand companies pulling out of OTAs? Or will it create a stronger negotiating position for brand companies?
No one has said they believe a brand company would or could pull out of an OTA as a result of Room Key, but almost everyone believes the launch and potential success will lead to a stronger bargaining position.

“If that’s an outcome, it would be welcome, but we’re very supportive of our friends and partners out there,” Joyce says with a smirk. As he continues, the smirk leaves his face and his voice deepens. “What we aren’t supportive of is people not working in our best interest. This gives us one more lever to make sure everyone is working to the same end, and that is for distribution opportunities where customers can buy in a way that is fair and in a place that that treats them well, but most importantly is fair and friendly to those who have taken the risk and invested their dollars in these hotels. We will continue to make sure our hotels are treated fairly by the distribution channels important to them.”

Nancy Johnson, an EVP with Carlson Rezidor Hotel Group and the AH&LA chair, says Room Key is a “great, great idea” because it will create competition to the OTAs and Google. La Quinta CEO Wayne Goldberg took it a step further:

“We have certain distribution channels that are out of touch with reality in what they should receive as a percentage of a stay. A lot of these channels have no capital investment in the property and no risk of capital exposure, and for them to be getting percentages of a room they do in some cases is out of balance and out of sync with the reality of where the risk is. If this platform helps brings those numbers in line, it’s a good thing.”

Vantage Hospitality’s Roger Bloss says if Room Key “becomes what it could be, we may not allocate nearly as many rooms to the outside.”

What are the long-term plans and goals for the site?
“The concern is not only does this need to be friendly [among the partners] now, but 15 years from now when it grows into something massive,” Joyce says.

Davis won’t reveal the founding partners’ investment, or how long they committed to providing the exit traffic, but he says they’re “committed to this on a very long-term basis.”

Lomanno believes Room Key will be successful — in baseball terms, he says, “at least a single, but up to a home run” if it can connect with a new breed of intermediaries like Google, Facebook or Apple by providing them back-end help.

Room Key could allow those companies easy access to inventory without them having to deal with all the lodging companies directly. If, for example, Apple launches a hotel-booking application standard on every iPhone or iPad, Room Key could provide a seamless connection between Apple and hotel inventory without the customer even knowing about the middleman powering it.

When will Room Key also include other components of the travel industry (air, car, cruises)?
“We’re hoping airlines would want to become founding members with us and see the ability to make sure they have a friendly channel,” Joyce says.

“One day at a time,” says Davis when told of Joyce’s comment. “I’m completely focused on making this the best hotel site.” Although he has no plans of courting the airlines now, he didn’t rule it out down the road.

What will attract other chains to join the group?
Lower commission rates are the obvious answer. “I don’t know why you wouldn’t want to be on as many shelves as you can,” says Flo Lugli, EVP of marketing for Wyndham Hotel Group.

Starwood said in a statement it opted not to make an equity investment as a founding partner and would take a wait and see approach. Judging by the positive comments from Johnson (Carlson), Burgett (AmericInn), Bloss (Vantage Hospitality) and Goldberg (La Quinta), it appears those brands are very interested. In fact, Goldberg says he’s already met with Davis and is working out the details on how La Quinta can participate.

How about attracting independents?
It won’t be as simple, but Davis and the founders all agree adding independents is critical. The challenge will be the interface connecting to individual properties rather than brand.com sites.

Davis says the easiest route would be through their representation companies like TravelClick, Pegasus Solutions or Sabre Hospitality. The backup option to that, he says, would be working through a hotel’s property management system.

“We know how to do it, but it gets more difficult and costly for a one-off,” Davis says. “But it’s pretty standard and not that complicated.”

What is the actual cost for franchise owners and could some look at the costs as double dipping?
Davis says commission rates begin at 10% and will range up to 15%. The founding partners are locked into the lowest possible rates, presumably at or just below 10%.

As part of a standard franchise agreement, owners are already paying marketing and reservation fees, which are at least indirectly covering the costs of maintaining the brand.com site. Now, potentially, a franchisee will be paying 10% to 15% for some reservations booked at the brand.com site they’re already paying for, if the consumer gets there by way of Room Key.

Davis says the fees will be going to Room Key, an independent company, not the brand companies. And beyond that, he says, commission rates are so much lower than the alternatives that he’s heard no concerns over the idea of double dipping.

Both Wyndham’s Lugli and Choice’s Joyce said they haven’t heard any negative feedback from a single franchisee. Mark Laport, whose Concord Hospitality has a portfolio of 80 properties and owns or manages hotels with five of the six founding companies, had nothing but positive things to say about Room Key and its commission fees.

How is this different than TravelWeb?
“TravelWeb is a good example of where we went wrong,” Joyce says of the earliest attempt by hotel companies to create their own OTA in 1994. “It got formed, was successful and the brand companies declared victory, took a profit and moved on. Shame on us for not recognizing what should have been.”

Davis agrees there were some similarities, but “that was the wild west of the Internet” and that the brands first had to get “their houses in order” with rate parity. The core difference between Room Key and TravelWeb is the modern-day venture is a true meta search engine, not a pure OTA like TravelWeb.

Joyce sees Avendra as a better example of how the industry did it right. The supply chain and procurement services provider celebrated its 10^th anniversary last year after being launched by competitors like Marriott, Hyatt and IHG and others not involved in Room Key. “That started as a co-op and has significantly benefited the players in it and continued to attract more and more independents and brands,” Choice’s CEO said. “It has allowed for consolidation for buying and is a very friendly place for owners and franchisees.”

Could this be considered collusion since six competitors created it? Might it draw the attention of the government because of anti-trust laws and concerns over price fixing or supply manipulation?
“We’re very careful not talking about anything we shouldn’t,” says Davis, who has prior experience with similar ventures like THISCO and TravelWeb, adding that legal counsel is present at all board meetings.

As long as safeguards like that are in place, Allen Bachman, an attorney specializing in anti-trust laws with Eckert Seamans Cherin & Mellott, says he sees no reason why Room Key would launch an anti-trust investigation by the government. “I don’t see any red flags,” he says. “There’s always concern when a group of competitors get involved in an enterprise like this. You need to be careful of competitive information being shared and you have the obligation to act at all times as competition.”

Bachman says creating a venture like this to help consumers shop for hotel rooms is creating competition for the likes of Google and OTAs and the government looks favorably on competition because it’s generally good for the consumer.

A Primer on Room Key

On Wednesday, Jan. 11, the best-kept secret for the past 18 months went public with the launch of Roomkey.com, a bold venture developed by Choice Hotels International, Hilton Worldwide, Hyatt Hotels, InterContinental Hotels Group, Marriott International and Wyndham Hotel Group.

The idea and backing came from the brands, but the man now leading the independent company has plenty of experience with similar ventures. John F. Davis III, the CEO of the new hotel search engine, led startups like THISCO (The Hotel Industry Switch Company now known as Pegasus Solutions) in 1989 with 16 hotel company board members and TravelWeb, one of the first true online hotel booking engines launched in 1994.

The beta version of Roomkey.com went live in January and the consumer launch is slated for next month. The site is powered by Hotelicopter and a technology platform purchased by Room Key in a quiet asset deal last year. The website allows consumers to easily search, shop and then book hotels directly with the properties and brands offered by the six founding companies, and now Best Western, the first commercial partner that was announced a day later. Roomkey.com will focus on U.S. travelers initially, followed by expansion to the rest of the world.

The site offers travelers access to approximately 27,000 hotels in an easy-to-view and use format, comparing properties and prices from the now seven major competitors and all their brands. One click on a hotel gets more property information like a room description, images, amenities and a map, while the “book” button directs customers to the brand site with the previously inputted property and date choices already there. The motivation for the founding hotel companies is to drive bookings to a less-expensive direct channel than online travel agencies like Expedia, Travelocity and Priceline. Brand.com bookings also give consumers the chance to earn loyalty points and allow hotels to handle any customer-service issues from the moment guests book. Like many third-party distributors, Room Key charges hotels commissions for the reservations the site delivers.

Davis says the fees are negotiable based on various factors, including the size of the hotels or chain, and range from 10% to 15%. Davis expects to have as many as 80,000 hotels participating by the end of the year, and global expansion is also being discussed ahead of schedule, he says.

Other upgrades planned for the first year include social media sharing, a mobile application, improved mapping capabilities and ratings and reviews from existing websites like TripAdvisor. — Eric Stoessel

CLICK HERE FOR A LONGER VERSION OF THIS STORY, WHICH WAS PUBLISHED THE DAY AFTER THE LAUNCH OF ROOM KEY.