By Drew Johnson
The same state that encouraged disruptive businesses like Tesla, Uber and Airbnb to flourish is on the verge of suffocating the next exciting new business model.
California regulators have declared war on Oyo Hotels, an innovative hotel concept that is providing clean, comfortable, budget-friendly rooms to travelers, while allowing independent hotel owners to attract new guests and make more money.
Oyo has more than a dozen locations in the Golden State, including several in Southern California. The business operates much differently than old-school franchise hotel chains. Rather than asking entrepreneurs to cough up hefty franchise fees in exchange for affiliating with a hotel brand, Oyo pays owners of existing independent hotels to join the Oyo network.
In exchange for rebranding their property as an Oyo hotel, the facility receives a major renovation at no cost to the owner. The owner also receives a sign-on bonus and a share of all revenues generated by the hotel.
Rather than franchise contracts, Oyo and the hotel owners sign “Marketing, Consulting and Revenue Management Agreements.” These agreements outline licensing rights and ensure Oyo pays for hotels to meet branding standards. Unlike franchise arrangements, the hotel owners pay no fees for branding, and there are no minimum advertising requirements.
The hotel concept was started in 2013 by Ritesh Agarwal, an Indian entrepreneur who began selling SIM cards on the street as a 13-year-old. By the time Agarwal was 19, he had developed his revolutionary hotel concept.
OYO has about 200 properties in the U.S., including its most famous location, the Oyo Hotel and Casino, located a few steps from the Las Vegas Strip. While the brand is still fairly small in the American market, its impressive success in Asia has allowed Oyo to become the third-largest — and fastest-growing — hotel chain in the world.
Because Oyo is such a unique model — more similar to Airbnb or Uber in its operation than it is to a traditional franchise hotel — regulators have had a hard time figuring out how to categorize and oversee the company. Rather than treating Oyo as a disruptive tech company that manages bookings, and collects and distributes money, some state bureaucrats throughout the U.S. are trying to shoehorn Oyo into existing regulatory frameworks.
This is particularly true here in California, where state regulators recently fined Oyo more than $200,000 for offering and operating dozens of franchises without state approval…despite the fact that Oyo clearly neither offers nor operates franchises.
According to a spokesperson, Oyo “disagrees” with the state’s ruling and is appealing the fine on the basis that the company is a technology and hospitality firm, not a hotel franchising company.
California has also issued orders banning hotel owners from operating as Oyo locations until state bureaucrats decide whether to approve additional locations. “Oyo is vigorously appealing the California orders,” a company spokesperson said in a statement.
Unfortunately, California’s unreasonable attack on Oyo is having detrimental effects on heroic healthcare workers and struggling hotel owners during the current COVID-19 crisis.
Oyo has been providing free rooms to healthcare workers where they can rest and relax in their precious moments away from serving coronavirus patients. The number of rooms available to California’s courageous doctors and nurses is being limited by the state’s irrational freeze on new Oyo locations.
While the company has set up a relief fund for hotels struggling to attract guests during the COVID-19 shutdown, California’s treatment of Oyo may have a lasting impact on the state’s independent hotel owners.
The Oyo model will become even more appealing in coming months as independent hotel owners fight through coronavirus-related economic distress and disruption in the travel industry. These embattled independent hotel owners could have the opportunity to join Oyo’s network of locations and have their facilities upgraded, draw more guests, create more jobs and earn a guaranteed income. But that won’t be an option if short-sighted California bureaucrats get their way.
California is known for being on the cutting edge, encouraging disruptive business models that have helped to make the state the fifth-largest economy in the world and Silicon Valley the greatest center of wealth creation in human history. But in the case of Oyo Hotels, California needs to get with the times. The state should embrace this exciting new revolution in a stale industry, rather than applying outdated and ill-fitting regulations in an attempt to stand in the way of innovation.
Drew Johnson is the former national director of Protect Internet Freedom and currently serves as a senior fellow at the National Center for Public Policy Research, where he researches economic and tech policy issues. He earned a master of public policy degree from Pepperdine University in Malibu.
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