Why the UK Office of Fair Trading (and the European Union) are Getting this All Wrong
Resale Price Maintenance, as manifested by the global hotel industry, is procompetitive and in the best interest of consumers.
The points below highlight the principal arguments that RPM should be outlawed due to a negative impact on consumers. Clearly, none of these scenarios apply to hotel RPM policies.
Hotel RPM practices are not anticompetitive, because they do not:
- Eliminate retail price competition between brands that independently establish Resale Price Maintenance
- Reduce intrabrand competition. (Many distribution alternatives exist for any single hotel property)
- Set absolute pricing on a brand level. (Absolute hotel prices are set at the unit level – especially because most are independently owned, managed and/or branded)
- Establish a fixed or minimum retail price. (Nearly universally, hotels are variably priced; RPM only applies at each hotel’s absolute price level before it is changed based on market conditions)
- Enable promotion that exploits consumer information gaps through misleading or fraudulent retail sellers
- Facilitate cartel conduct at the supplier or retailer level
- Threaten efficient or innovative retailing
Additionally, RPM does not reduce competition among hotels or Online Travel Agents for the following reasons:
- If an OTA has market power, it can be exerted through wholesale pricing discounts or most favored nations agreements, not resale price maintenance
- Hoteliers have no incentive to discourage competition among retailers. (History shows retailer cartels sell less than competitive retailers, so Hoteliers are worse off if retailers form a cartel)
- It keeps discounting retailers from riding free on other retailers presale services
- Typically, when brands are strong, gross selling margins of suppliers tend to be high and retailer margins tend to be small. (This is not the case with hotels (during the economic downturn, OTAs had record hotel profits while hotels had record losses)
- No evidence that Resale Price Maintenance for hotels reduces total product sales
- The hotel industry is not dominated by brand selling. While Brands sell aggressively through national and regional sales offices, selling remains largely distributed at the property level.
- Hotel unit or brand market share does not exceed 15% (a level the European Commission uses as a standard.) While not directly relevant, RPM terms are stricter in Europe than the US)
- Even under the merchant model, OTA/Hotel relationships are largely agency relationships with the OTA incurring limited selling risk. (OTAs normally do not take inventory risk on stand-alone hotel sales.)
Finally Hotels utilize several other alternative methods independent of RPM to optimize hotel sales:
- Lowering the product’s absolute price
- Increasing advertising and promotion, or making those efforts more effective
- Offering contractual promotion incentives (promotion allowances) to retailers
The above represents 18 examples of ways RPM could potentially be used to constrain trade, but none of these examples apply within the hotel industry. This compares with ZERO examples provided by the UK OFT of ways hotel RPM was anticompetitive. If the OFT legitimately has a case (despite the fact that they don’t feel they need one) it would be tremendously enlightening to understand its basis.
A Reality Check – Why Rate Parity is Beneficial to All Parties
Hotels need OTAs to augment their own wholly controlled distribution channels. Brand.com works fine for loyal frequent guests, but for the large audience of brand agnostic deal seekers, or travelers unfamiliar with a brand (or its presence in a given geographic market,) OTAs are a consumer-friendly, convenient alternative.
Las Vegas casinos were never been big fans of OTAs as distribution channels, but despite dominant market share, large group and convention blocks and legions of loyal players, and resources that are the envy of the rest of the hotel industry, they can not fill their rooms alone.
With 40,000+ and 23,000+ rooms respectively available for sale every night, even gaming powerhouses like MGM Resorts International and Caesar’s Entertainment, now have OTAs ranking among their largest tour operators.
Complicating the matter further, the casino groups must strike a managerial balance between strict corporate governance and property managerial autonomy when it comes to pricing strategies. Unpredictable demand swings create a tenuous equilibrium somewhere between a logical brand positioning-based pricing continuum and cannibalism of sister property volume and margin through pricing tactics to fill property distressed inventory gaps.
Despite the fact that a small OTA created this mess in the first place, RPM actually helps smaller players by leveling the playing field against the behemoth OTAs. With RPM in affect, start-ups and innovative small OTAs are able to sell rooms at the same price as the hotel brands and the OTAs as opposed to being disadvantaged by larger players that have negotiated higher agency commissions or deeper merchant discounts on net rates.
Without RPM, which also makes it much easier for hotels to manage pricing and inventory with hundreds or thousands of distribution relationships, hotels are more inclined to limit the number of wholesalers and retailers that they work with.
For those that believe this may not be the case, consider the airline industry, where the need for RPM was eliminated by instead eliminating travel agency commissions and dramatically reducing access to discounted wholesale fares. In a non-RPM environment, airlines can afford to be picky with their partners.
BookIt.com is a decently sized, second-tier OTA. When Delta Airlines elected to simplify its online distribution relationships, BookIt was cut off from access to selling Delta fares – completely. BookIt was not singled out, as that same round also cut off CheapOAir and OneTravel. A later round eliminated CheapAir, Vegas.com, AirGorilla, and Globester.
Those changes took place in December, 2010 and January, 2011. This was not mere posturing by Delta – to date, none of these relationships has been reestablished. ATL-MSP city-pair search results on these sites look a lot like a travelogue of connecting airports compared to the larger OTAs.
Plus, CheapOAir is not an insignificant player – they work with 450 air carriers, just not Delta. In August 2013, CheapOAir ranked higher than Travelocity, Hotwire and Orbitz and third behind Expedia and Priceline in US market share based on website visits.
Such reduced choice among distributors is not beneficial for consumers. With the high degree of fragmentation of hotels, the opportunity to exclude secondary distribution players is even greater within the hotel industry.
Ironically, partly due to RPM, Skoosh was able to start working with hotel groups before the contractual violations shut them down. Without RPM, it is unlikely many hotel groups would work with Skoosh based on its ability to generate incremental booking volume.
Now humorously, Skoosh is publicly ridiculing the OFT because the government didn’t eliminate RPM for all consumers. Being unable to gain competitive advantage by capitalizing on a large, well established frequent guest program, it seems Skoosh’s initial self-serving complaint, did not produce its desired outcome.
To a certain extent however, Skoosh is right. If the issue was seriously about addressing an unfair condition for consumers, why would consumers be forced to create a profile and purchase a hotel room through an OTA to gain access to a discount? Or what of under-privileged consumers that lack access to computers or a credit card typically required to guarantee a hotel room when booking online?
The commitments dictated by the OFT do nothing to to correct an inequity (since none really existed,) while creating new barriers for some to gain fair access to the best available rates. The OFT has now inadvertently disenfranchised certain travelers, undermined the legitimacy of best rate guarantees, and structurally created an indefensible downward pressure on hotel profitability. Not bad if you like your lose – lose – lose scenarios.
A World Without Hotel Rate Parity
If rate parity vanishes, all bets for the financial viability of the hotel industry are off. This could manifest itself in many ways. Like Delta, hotel groups could potentially cherry pick relationships with OTAs who would not be subject to rate parity.
If the OFT “solution” becomes the norm, I foresee OTAS using market power and cross-brand shopping capabilities to a) aggregate demand b) gain superior business intelligence, c) offer best rate guarantees that simply shave off a bit of margin d) usurp responsibility for defining hotel retail pricing from the hoteliers.
Since these discounts may be offered through a discounted price or commission rebates, integrated wholesaler/retailers like OTAs have an extensive arsenal of pricing weapons to play with.
Lacking resale price maintenance, a hotel loses its ability to properly manage its retail pricing structure. This is particularly problematic for perishable services like hotel rooms where unsold inventory immediately loses its value once a specific date passes.
Hotel inventory is now largely priced dynamically and travel seller compensation is generally based on a fixed commission percentage (agency model) or a net wholesale rate that is discounted by a specific percentage from the best available retail price. Most often, the only absolute price that is set is the BAR that serves as the basis for the other prices.
On a retail basis, it becomes impossible for a hotel to match a travel seller’s discounted/rebated price. Even if the hotel reduces its price to match, the competitor possesses a mechanism to match or undercut any rate the hotel may offer a prospective guest – to the point the hotel offers a rate that is equal to the net (or net-of-commission) rate provided to the travel seller.
The greatest factor however, potentially impacts existing customers of the travel sellers or hotels. First, travel sellers gain a second structural advantage – by definition, they sell product across multiple product categories and hotel brands. Any previous airline booking, hotel stay, car rental, etc. regardless of the travel supplier’s geographic area or brand creates a pre-existing customer relationship and eligibility to access hotel rates below market pricing.
Even the largest hotel groups can only establish a customer relationship if a traveler makes a purchase from their specific brand. The order of magnitude is staggering. Booking.com has a portfolio of 300,000 hotels alone. But this is dwarfed by the aggregation of customers across parent Priceline’s portfolio of product that includes Priceline, Kayak and RentalCars.com. TripAdvisor’s meta-search product selling 500,000+ properties and registered relationships with millions of reviewers takes the notion of a customer to a new level. Apple, with the world’s largest database of user credit card numbers, or Google, across all of its registered product relationships dwarf the hotel brands, not to mention the single unit, independent hotelier.
The daunting competitive scope however may have less bearing than the most damaging impact – hotel guest profitability.
Hotel frequent guest programs, largely driven by corporate bookings, represent the most valuable guest segment for the hotel. Relatively brand loyal, these individuals sport both the greatest repeat stay frequency (which lowers marketing costs) and the highest average daily rates, since like airlines, business travelers tend to see higher pricing than those traveling on leisure trips.
With all research indicating that price reductions do not drive incremental demand creation, hotels face the reality that discounting only serves as an effective method to shift share from competitors.
Having been involved with negotiating hundreds, if not thousands of hotel deals (from both sides of the table) throughout my career, I can safely say that if a group can demonstrate scale, pricing power and a high degree of customer engagement, those benefits will be leveraged during negotiations. While rate parity protections may be stricken by new resale price maintenance rules, the ability for OTAs to negotiate most-favored nations pricing concessions – either on a net rate, discount percentage or commission basis – are not.
Hotels may be forced into deciding between two undesirable options – a) discontinuing relationships with distribution partners (resulting in a share loss to competitors) or b) forfeiting control of their retail pricing structures to intermediaries.
Hotels attempting to mirror OTA discounts directed at frequent guests would be structurally discounting business sourced from their least price sensitive and brand loyal market segment – a cannibalistic marketing strategy that would nearly guarantee lower profitability.
Unlike the airline industry that eliminated travel agency commissions and dramatically reduced access to wholesale pricing, the high degree of fragmentation within the hotel industry will not result in an industry-wide adoption of a more stringent business model. As a matter of fact, if hotels attempted that course, the intermediaries would immediately cry foul and head to court with accusations of restraint of trade.
For hotels, the dilemma is worse than being stuck between a rock and a hard place. It is more like being stuck between a rolling boulder and an abyss. Fundamental changes resulting from the UK OFT case, and its expansion to cover the EU, will affect the global hotel business and create a new normal that cannot be easily undone through business practice or legal appeal.
When UK consumers who are registered with OTAs start getting access to across-the-board discounts on hotels in the EU, the genie will be out of the bottle. As these are private sales, OTAS will be eager to extend the practice beyond UK citizens and EU hotels.
As few incentives will exist to confirm UK citizenship/residency the creation of sockpuppet accounts will be rampant, perhaps with a cottage industry arising as affiliates learn how to cleverly facilitate access to the reduced pricing. This could get very ugly – very fast.
Clearly, the merchant and agency models will not disappear. Hotels will continue to work with OTAs, but the OTAs will be able to attract and retain consumers with financial incentives to grow market share. The only question will be how much share do they gain and how quickly can the hotels reestablish equilibrium to the distribution equation.
Hopefully the David v. Goliath relationships between European hotels and OTAs will not devolve into a global Bambi v. Godzilla match-up.
Hotel industry leadership globally – not just in Europe – needs to begin contingency planning for this eventuality now – procrastinating will only bring greater earnings losses and increased market share deficits. the demise of rate parity / resale price maintenance policies may represent the single greatest strategic challenge facing hoteliers in the decade ahead.