It is no contest, the best as a hotel is the Observatory (it would make a top 20 hotels of the world list). But Sydney is full of fine hotels and some have other features. The Park Hyatt might be the best PH in the world and has a better view, while the Four Season might be the worst FS in the world but has the best swimming pool in Sydney. And the W is located in a marina (great if you have a boat) and next to some of the best food in the city (starting with Cafe d'Wheels). I'd still go with the Observatory if you can afford it.