in the hotel industry.

Just look at this one block in Chicago.

These might seem like three different hotels,

but they're actually all Marriott.

Over the past 20 years,

Marriott has more than tripled in size.

And we can trace this boom back to a decision Marriott made

decades ago, to move away from the real estate business

and instead, commodify its name.

- Well, of course, as you might imagine,

we think we're the best.

We are the largest, 8,700 hotels in 139 countries

and territories, really showing expertise

around the world for what we think hospitality means.

- [Narrator] And you can see the same happening

for competitors like Hilton, and now Hyatt,

because they're also following a similar playbook.

- It's commonplace to actually invest behind real estate

in order to build a brand, and then over time,

sell down real estate.

We wanted to do it in a very deliberate way.

- [Narrator] With this business model,

the brands don't have to run most of the hotels

that fly their flags, nor do they have to pay for them.

In most cases, that responsibility

falls on people like this guy.

- So independent owner-operators like us

generally own the hotels and employ the team members.

Most people think that they are Marriott employees.

They're generally MCR employees.

- [Narrator] So why did this shift happen,

and how does it affect the customers?

This is the economics of hotel chains.

The business today looks like this.

These are the names you're familiar with,

Marriott, Hilton, Hyatt.

And these are the players who actually front the money

to buy the real estate, hire the employees,

and run the day-to-day operations.

Owners pay to use these big hotel names,

referred to as flags in the industry,

and it's a departure from the tried and true strategy

of decades before.

- [Tyler] If you go back to the 50s, everything was owned,

operated, and flagged by the same person.

- [Narrator] MCR is the third largest hotel owner-operator

behind these two real estate investment trusts.

- We get all the revenue,

and then we get whatever profits are left over.

And we pay Marriott or Hilton a franchise fee

to be part of their system.

- [Narrator] That means hotel brands

mainly have money to gain with every new hotel.

- Because they were not on the hook for the asset cost,

they were able to scale up their brands much faster.

- [Narrator] Moving to franchising removed a lot

of the financial risks associated with real estate.

- One of the things we realized as those hotels

got more and more popular is that by building them all

on balance sheet and with dealing with economic cycles,

we were constrained.

Our growth was constrained.

- [Narrator] Now, Marriott and Hilton each own less than 1%

of their properties, while Hyatt owns about 2%.

But in shifting to this strategy, major hotel brands

now have to focus on a new customer.

- The owner is the one that puts the brand onto their hotel,

and that's what drives franchise fees to the brands.

- [Narrator] Those fees can amount to anywhere

from 5 to 15% of what the property brings in.

So the brands have to prove

that having the name is worth it.

Hotel brands say.

- It more than pays for itself.

- [Narrator] Because in addition to data on how lobby

should look and what amenities to have,

they also provide data to help the owner get the most money

for each room each night.

- At the end of the day, you are saying,

"What will the market bear?"

When there's a Taylor Swift concert coming into a market,

we see the rates literally out to 40 miles away go crazy.

- [Narrator] In dynamic cities, the price of a room

could change multiple times in one day.

- We get questions all the time and they say,

"I was gonna book for $199,

and now the rate just went up to $249."

You know, then you should have booked at the 199.

The prices are fleeting.

- Every one of our full-service hotels

has a revenue manager, and they take account

of what's going on in that particular marketplace.

- [Narrator] And these systems also calculate rates

that optimize for the hotel's bottom line.

- [Tyler] We don't wanna sell out our hotels

just on a Tuesday

because then that leaves us exposed on Wednesday.

So we may sell you that room

at an extraordinarily high price because what we really want

is for you to book Monday to Wednesday

or Tuesday to Thursday.

- [Narrator] This helps make up for less profitable days.

- We're giving the rooms away on Sundays.

It is the worst night of the week

because business travel does not really occur on Sundays

and neither does leisure travel.

- [Narrator] Flying a flag can also help owners

target wider pools of hotel customers,

with better fees for booking platforms

like Expedia and Booking.com.

- So if you buy a hotel room via Expedia

for a Marriott hotel, we pay a lower Expedia fee.

We, the owner.

- [Narrator] But analysts say an even bigger draw,

"Our hotel loyalty programs."

Marriott and Hilton each have over 180 million members.

Hyatt has more than 40 million.

And thanks to points, guests are incentivized

to shop within these programs.

- The points have essentially become currency.

- [Narrator] Which can help increase the customer base

for flagged hotels in smaller markets.

- If you're in a secondary or tertiary market,

you generally fly a flag because that brings people

to your building 'cause they want the points.

The idea is you earn the points in Corpus Christi

or in Yuma, Arizona,

and then you redeem them in Miami and New York.

- [Narrator] Today, two-thirds of all hotels in the US

are branded, but the franchise model

isn't always beneficial.

For owners in high-demand markets,

like those with more leisure travel,

independence might be a better option.

- The highest performing hotels in Manhattan

are independent hotels.

You have a greater elasticity of demand.

So usually, the highest performing hotels are smaller.

- [Narrator] But brands do operate some properties

mainly in this tier, whereas franchising

mostly happens in these.

- Those operations have dramatically fewer touch points

and offerings by virtue of the fact that they're designed

for a person who wants a great room to stay in,

a quick option for breakfast,

but they don't need other things.

They don't need a ballroom.

They don't need a specialty restaurant.

They don't need a spa.

- [Narrator] In the luxury tier,

those amenities are expected,

creating more complex logistics.

That's why most luxury hotels are still operated

by the hotel brand itself.

- With respect to most other full service

and luxury properties and resorts, we would prefer to manage

because we wanna control all aspects of the delivery

of the guest experience.

- Specifically at the luxury end,

we do overwhelmingly manage those hotels,

and we wouldn't, for example,

be talking about franchising an EDITION Hotel.

What having this range of brands gives us the ability

to appeal to our customer for every experience

and location that they want,

and that is really important for Bonvoy.

- [Narrator] In some rare cases,

hotel brands will still strategically purchase a property.

Marriott bought this W Hotel in New York

to use it as an incubator for new ideas and designs,

and Hyatt purchased Hotel Irvine.

- We bought the hotel.

We completely renovated it.

We will eventually sell that hotel.

- [Narrator] But by and large, more hotels are outsourcing

the owning and operating of their properties,

increasing the volume of branded properties

offered to consumers today.

- The customer now has more choices.

They have more places to both earn and redeem.

But what you have seen in the past 25 years

is a consolidation.

There are really three or four big hotel flag families now.

- [Narrator] And looking at the properties in construction,

the number of branded hotels is only set to increase.