(Podcast) FOSSE creator Dave Berkus uses lessons from history to predict the future of hotel technology
In this episode we chat with Dave Berkus, one of the most prolific angel investors of all time. Dave is the creator of FOSSE - the property management system that Marriott used for nearly 4 decades. He is one of the most storied entrepreneurs in hotel technology and has invested in countless travel technology startups.
In the interview we cover topics such as:
- How Dave landed the deal with Marriott to license his software
- Why Marriott used FOSSE PMS for almost 4 decades
- Why hotels in the future may not even need a property management system
- Why hotel general managers need to sharpen up on new skills or be replaced by robots
Enjoy the full podcast above, followed by a transcript of our conversation. Outside of the points covered above, Berkus shares the fascinating foundational story of the first property and yield management tools for hotels.
Jordan Hollander: So I think there's something like 700 property management system vendors globally on the market today. I know that you weren't the first but what number were you?
Dave Berkus: I think Computerized Lodging Systems was probably the third of the PMS companies. Eco was the first in Santa Ana, California. IBM was the second, and then there are several of us that contend that we were the third. But it was early. It was 1974 when I wrote it, and 1976 when it first began being installed in hotels.
Lucky for me, the IBM system was being installed at the brand new Bonaventure Hotel in Los Angeles and the Aladdin Hotel in Las Vegas. Both of those IT managers gave me a chance to sit through a little bit of the process, and the night audits. From that, I had the idea that I could do it better and faster and cheaper with a mini computer and that's how it all began. That same Miramar Sheraton was the first customer.
JH: So you created a property management system business in the days before most hoteliers knew what a property management system even was. What was the growth like in those early days? Was it really slow to start out?
DB: From 800,000 in the first year to two million to 4 to 12 to 18 to 24 to 30 million. Then these are all 1980, 1981, 2982 and 1983 dollars. About the same as a hundred million dollar business today.
JH: Wow, those are some numbers that startups even today almost four decades later would be pretty happy with. A lot of companies think that the only way to get to that kind of scale is through enterprise deals, and I know that you pioneered one of the early ones. Can you talk about the partnership that you had with Marriott
DB: I licensed it to Marriott in 1982. Marriott was to use it for a brand new concept that was being developed called Courtyard. They told me there would be 50 Courtyards, so we licensed it accordingly, and went through all the effort of getting ready to put multiple hotels on a single mini computer, which was rare, but I had done it numerous times for other smaller chains.
We got three million dollars from Marriott for a universal license for the Courtyard Hotels. That was a lot of money back in those days. We sold them the MAI hardware and the usual markup was about 25%. So I can look at about 14 million dollars that we billed Marriott. So that's not bad at all.
But they had the rights. I had no idea that Marriott would then begin to call this FOSSE and distribute it through Springfield, Fairfield, Residence Inns, all of their auxiliary products other than the Marriott and JW Marriott branded hotels. Today, it is now 36 years later. They are just coming to end of life on using it in 2,200 hotels.
JH: To most of our listeners, it's going to be pretty unbelievable that a company like Marriott kept the same systems in place for almost 40 years -- especially a company like that that's known for being at the forefront of technology. But I'd like to point out that it's really not just Marriott. We've had some massive Innovations in the consumer and industrial sector when it comes to technology, things like cloud computing and universal access to Wi-Fi. Despite all of this, there's been really no rethinking of what it means to be a property management system and the job to be done. Can you talk about where you see the property management system playing a role in the hotel tech stack of the future?
DB: The real question is where were we way back in the 80s when this became the absolute mandate for every hotel over 15 rooms, and where are we today? That story is the story we need to concentrate on.
In 1980 or 82 or 84, all of the central reservation systems were written in the 60s. And they were on mainframes. In fact, some of those systems still survive today despite the fact that Amadeus is rewriting IHGs. There are other systems like Marcia that survive from the 60s. Yes, it's true that the UI has changed but it's still flat files on mainframe computer and that will certainly evolve over time.
The central reservation systems own the guest name record; the guest name record is the critical element we need to talk about. The PMS systems are, for the chains at least, becoming increasingly less important, as they handle right now in-house functions only. So guest history, which used to be a gigantic important part of a PMS system has been stripped in most systems and is now very much part of the central reservation system. Whether you want to foam pillow or a special kind of anti-allergic something now is known chain-wide as opposed to just at that property where you made the request way back when. That's important.
How many stays you've had and where you've had them: for analytics and Big Data, is really important. In fact, that's one of the things that Cindy Estes Green's company uses now as input from many of the chains to help them to understand better who their customers are, where they're going, and occupancy/future occupancy. Big Data's being used in very important ways but certainly not from the PMS system anymore.
That leads to the question of: do we need a PMS system in the future? The answer is, for the short-run, yes. Property-based systems get rid of the problem of dependence upon any form of Ethernet or outside communications. In some areas of the country, the reliability of those systems still is a problem.
If we look ahead ten years, and certainly beyond 10 years, it would be easy to see a single cloud based system integrating everything from CRM to reservations to the accounting functions at the properties, all the way through all forms of marketing and follow-through.
Then we have a single guest named record that doesn't have to pass through from one system to another to be validated that they are the same -- what happens if someone changes and address when he's standing in front of the front desk -- all of those things go away.
JH: When you say there's going to be a single PMS system or centralized system that's going to take care of all of those functions, do you mean to say that hotels are only going to have one type of software or do you think that there's room for specialists in different categories?
DB: So you're always going to have best of breed in some areas. Take for example, revenue management, which is a very important part of all of this. It can either be a feature in a central reservation system or it can control everything else depending on where the real revenue is coming from.
So Revenue Management Systems may end up being more important, for example, then CRM systems. Certainly both of them more important than just a simple accounting system at the front desk. We have some things to understand and to evolve over this next half a decade to decade and it's going to be interesting. This is not a stagnant industry, despite the fact that people think that every hotel has a system, therefore the industry is mature.
JH: You briefly touched on the growing importance of systems like CRMs, customer relationship management, CRS central reservation systems and even touched on Revenue Management Systems. I know you have quite an extensive history in the revenue management space. Can you talk about your experience there and how it's informed your view on the market today?
DB: So I was called at the time by both Marriott and Hyatt, both of them called me to their offices -- Hyatt, Chicago. Marriott, Washington -- to talk about their system and how it could be made into something that was much more. That was something more like the airline system.
In the case of Marriott, they had what they had termed tier pricing. You become eighty percent occupied at a future date, then you close to government and other cheap rates. You become 90%, then you raise the rates by 10%. You become 100%, then you raise the rates some more. That was tier pricing and that's all they had. Hyatt had nothing. So both of them said what can you do?
I went home from both of those meetings and said, what can I do? The thought immediately occurred to me to copy the airlines. I happened to be a reseller for Burroughs, which became Unisys. And Burroughs let me in to see what was going on at Piedmont Airlines, and Piedmont had copied Sabre. I mean, this is all very insipid industry, isn't it?
So I came in and saw the Piedmont system, came back and said even I can do that better. As I came back on the airplane from seeing the Piedmont system, I was up all night in a overnight flight designing what I thought to be a yield management system that would work for hotels. I wanted something different.
Artificial intelligence was one of those terms you threw around back in those days, like we are today. In those days it was much more much more gravitas. So I called somebody I knew who had three programmers from MIT who knew how to program in the LISP language, which was the programming language of artificial intelligence. It ran on a UNIX-based machine that was made by Texas Instruments. So I found these three programmers and hired them.
I went to Texas Instruments, literally by flying to Austin, and having a meeting with them telling them what I intended to do and getting their buy-in. Together, we designed the very first artificial intelligence yield management system. So we had two systems, two hundred and fifty thousand apiece. The owner of Sonesta refused to pay for it because he thought he could do it on the back of a napkin.
I bought back the system from Sonesta and I told my chief programmer to take this code, forget the fact that it's artificial intelligence, and make it a feature in the reservation system. It probably had 80% of the functionality, which we released as an $8,000 'check the box' feature and virtually every customer we had at the time began to order it. Yield management became something people could afford so they bought it -- even if they didn't use it in many of them didn't. That was the beginning and that was 1988.
JH: So that year, 1988, was really the year that hotel started using data to make decisions about pricing globally. It's a huge transformational shift in the industry. As we look forward, what do you think the next 5 10 15 years look like and where some of the most important changes happening in the market?
DB: Analytics are everything. Decisions are going to be made by analytics that are created by machines. There are a lot of people who will lose their jobs, and then maybe be retrained or other people take those jobs, that are now menial, especially in the back office. These roles have to be replaced by people or by machine analytics and people then act upon those analytics.
The most important single change that's going to come is the fact that every piece of data that arrives at the central source, whether it be from a query and a lost sale, whether it be from a booking at a low price that might have been up-sold, whether it be an honored guest that was rebuffed because there was no occupancy.
I'm giving many examples but there are hundreds of them. Each will be analyzed. You're going to find that much more capable decisions will be made to maximize revenue than have ever been possible before based upon AI and data analytics. That's your future.
JH: I definitely agree that business intelligence is a huge part of the future as we get a more sophisticated and granular understanding of where people are coming from, and how profitable certain segments are. To a large extent, hotels are still using some of these tools and datasets of the past and are waiting around on Tuesday for their compset report.
DB: You gotta think of STR and Concur and a lot of these others as the equivalent of the central reservation systems of the sixties. It's nice to have them, they just haven't figured out yet how to make it actionable enough to be worth. So little for the money we need to pay today.
JH: So STR is up for disruption, property management system, CRS, CRM -- pretty much everything is on the chopping block here. What are some of the most exciting opportunities that you're seeing today?
DB: If we look at hotel tech and expand it to travel tech, which is really where Wayfare Ventures, our latest firm investment firm, operates, there are a lot of ways to do things that have nothing to do with what we were used to in the past. If you can get a plane in and out of a gate five minutes faster, and multiply that by the number of planes and gates that there are going in and out of airports in the US, you can save multiple billions of dollars. I mean that sounds strange over a year's time.
If you can do the same thing in hotels by better serving a guest, by up selling that guest, by finding out whether guest satisfaction is a problem or an opportunity. Meaning: can you sell them meals even if the meals are delivered by a third party from outside the hotel?
Whatever it be, there are a lots of opportunities now for revenue that weren't easily available in the past but are today. But the whole point is if guest satisfaction goes up and guests are able to do things they couldn't do before, like order a meal from text, then you're going to have better revenue and more satisfaction. Those are the ones the applications that are going to make some sense.
JH: I agree with you there. We're seeing a huge amount of demand for our guest messaging software on Hotel Tech Report. We also see a lot of hoteliers looking for merchandising and up selling tools that can help them improve the guest experience while generating more revenue per guest, which is really a win-win on both sides. When you look at the investment landscape and your current portfolio, are there any companies that you're really excited about today?
DB: Think of the hotel pool, the hotel spa, all of those things -- even the gym -- which lay fallow during many hours a day, especially in city hotels that are principally business occupied.
So a little company called Resort Pass, which is one of our companies, came along and said what would happen if we contract with the hotel to bring in outside guests who are members of Resort Pass who make a reservation to use the pool for two hours when the pool would have never been used at all.
The answer was these hotels love it because it's ancillary revenue for fixed assets that really have no other form of revenue generation because they're free to the guest.
JH: Resort Pass has been really well received by the market. Like you said, it's almost a no-brainer for hotels. Why wouldn't you want to leverage and get some more revenue out of these underutilized spaces? I don't know the Resort Pass team personally, but I know a lot of the other founders that you've invested with, people like Adam and Richard over at Cloudbeds and John and Chris over at Whistle. Are there characteristics that you think really make great entrepreneurs stand out from the pack?
DB: I love it when somebody in marketing or sales develops a company and says I feel the pain and let's try and solve the need. As opposed to what I see most often, which is an engineer says I really got an idea and I'm going to make that idea work. It's like pushing the rock up the hill because they didn't do the research. I have good stories about companies that flamed out, including some of my own, that didn't do the research and end up paying the price.
JH: I know when you're investing in companies, you will generally look at the founders and see the quality of the team as one of your key drivers or Theses around an investment, but the other huge aspect is how big is the market and what are the market trends going on. So I wanted to ask what are some of the trends that you're seeing in the market and that you think have the strongest legs behind them.
DB: That is a moving target. If you were to say I had an app 8 to 10 years ago, we might have been really excited because there weren't enough apps out there. Today, if you say you have an app, we're just gonna face the other way.
So the today answer is we're looking very much at AI, robotics and data analytics. Tomorrow is going to be something else and it's going to be more sophisticated. So if I had to answer it today, it's those three things.
JH: As we have a large hotelier audience on the show, do you think that the role of a general manager and a hotel is going to change in the coming years? It seems like we're moving away from an operationally-focused GM -- not to say that that's not important anymore -- but in the future, there's actually a huge shift towards being more analytical and almost acting like a product manager. What do you think that the GM of the future looks like?
DB: The high-tech keynote that I gave in Toronto two years ago was entitled "Will tech take your job and it was addressed toward those managers and to the financial managers who were there in the audience.
The answer is there are so many things that will be taken over -- not necessarily by robotics, that's the cleaning and the other things perhaps delivery to guests -- it's more the kinds of things that a manager has to learn to do to add value.
A manager has to be able to add value by adding revenue and by increasing guest satisfaction. Those two things are not operational necessarily. As the operational thing that a manager today normally concentrates on. Tomorrow that manager is going to be a data analyst and he's going to be very much a marketing person, despite the fact that he'll have a department that supposedly assist at the property or in the chain to do that for him or her.
JH: And where there's crisis there's always opportunity. I think that the general managers that are able to capitalize on this trend and sharpen up their skills are going to find that there's more opportunity than ever before in this market to add value and really take their careers to the next level.