Open Letter to the Office of Fair Trading

Hi Nelson,

Thank you and Francisca again for taking the time to discuss the case last Friday. I very much appreciate being kept updated on the proceedings. The O.F.T. has been far more understanding, communicative and proactive than any of the other competition bureaus I have contacted. Thank you on all counts.

Even if there aren’t any substantial signs of progress, I felt I gleaned a fair bit from our discussions as I detail below. I was also left somewhat confused as to the requirements on me to move things forward as I’ll also explain.

First then, I’ve understood that there are formal and informal referrals to the O.F.T. and this particular case has become formal to the extent that it is being looked into and the next step would be to launch a formal investigation pending a review of the O.F.T.’s internal priority schedule and a more detailed assessment of this case itself.

Concerning the legality of one or more large O.T.A.s individually enforcing rate parity, here is what I’ve understood to date both from you and from my own reading. In terms of hardcore restrictions coming into question there a few. From both Expedia and the hotels’ side there’s the overriding issue of resale price maintenance. Then there are also the knock on effects of restricting distribution on the internet and requirement that a distributor pays a higher purchase price for units sold on-line (“dual pricing”). That’s 3 hardcore restrictions all of which override the block exemptions.

I also understand that hardcore restrictions override the de minimis rule because they’re already deemed to have an appreciable effect on competition. Beyond that, and in terms of dealing with potential breaches of competition law, the O.F.T. has more cases to investigate than resources and if the de minimis rule is also found to have been exceeded, the effect on the consumer is deemed greater as is the priority of the case in question.

On the basis of this, you asked me to look into the market share data for Expedia to elicit whether they’re a dominant market force. Together with my colleagues I’ve put together some high level figures as follows:

Expedia, Inc. is the largest online travel company in the world. Gross bookings in 2009 were $21.8 billion. From their shareholder report last week I found the following:

“Gross bookings from Expedia, Inc.’s international businesses were $2.2 billion in the second quarter, accounting for 33% of worldwide bookings, up from 31% in the prior year period. “

Whilst this might seem like a staggering figure there’s a lot going into it beyond Expedia’s own branded website. Expedia Inc. also owns Hotels.com; Hotwire (a discount travel site), Venere (which includes B&Bs also); Egencia, the world’s fifth largest corporate travel management company; China’s second largest booking site eLong; and the world’s largest travel site Tripadvisor.

Tripadvisor further serves as a price comparison site for hotels, with Expedia listed first on most properties. In a search this morning on Tripadvisor for hotels in Prague, in most cases Expedia, Hotels.com, Booking.com and Venere were listed. Expedia was always listed first. So, that’s a comparison of 4 companies, 3 of which are jointly owned and the 4th of which is a competitor pushing for the same pricing strategy. Skoosh was listed on Tripadvisor for many years but dropped off 2 years ago when our return on investment dropped too low. It seems a lot of our other competitors have gone the same way.

So, where Expedia ‘agrees’ rate parity with a hotel the effects (and benefits) are passed throughout its branded sites, its affiliate sites and even its discount sites. Whilst Skoosh isn’t allowed to sell below the parity rate (also known as the Best Available Rate or B.A.R. rate), Hotwire with its ‘opaque’ proposition, sweeps up the bargain basement business. So, the consumer can either see the hotel and book through Expedia at B.A.R. rates or not see it and book through Hotwire at discounted rates. I would argue that Skoosh and the like would sit comfortably in between the two were we allowed.

Just to be clear then, Expedia owns the world’s largest hotel price comparison site which is populated (not exclusively) by its own brands. It also owns the world’s largest opaque hotel brand. On this basis, you can see price parity being economically advantageous to Expedia Inc.

In statistical terms then, I still don’t know what share of the U.K. hotel market is taken by Expedia Inc. either alone or jointly with the other major proponent of rate parity, Booking.com. On this basis I still don’t know whether they technically have market dominance in Britain. Hotels are certainly Expedia Inc.’s largest form of revenue (around 63%) and with U.K. being the largest online travel consumers in Europe by far we can expect it has major market power here.

The other evidence I provided you with was, as you say, ‘anecdotal’. It spoke of strong-armed corporate behaviour but no figures to support it. The suggestion of dominance is reflected in the angry and fearful emails and calls Skoosh has received and recorded. Here’s a reminder of how the large OTAs are using the internet to enforce price parity:

“Since our rates are now visible to the public…[we] suffer penalties from other online listings such as Expedia.com, booking.com, lastminute.com etc as your rates show up when generating rate-parity reports – which is considered a breach of contract with these other third party providers”.

Oscar Espelund
Sales Executive
Adina Apartment Hotel Copenhagen

I have many other examples, but I believe we’re all clear that rate parity is enforced contractually and not necessarily to mutual comfort.

Beyond that, I’m in a quandary as how to proceed. I got the impression that the data I’d given you on the 1st June was central to your current thinking. Whilst I was careful to provide you with accurate data (this was from a Phocuswright report purchased by Skoosh) I’m not really in the position to provide the O.F.T with statistics. At the risk of sounding workshy, I’d rather avoid the uncomfortable position of thinking that I could personally be responsible for moving this case forward or, worse, holding it back. The critical data is most likely to be costly for a private company and therefore out of my reach or in the public domain and perhaps lacking the formal gravitas you require.

There is still the question of whether Expedia is effecting rate parity in the interest of the consumer. I’ve never seen anything to support this notion. I’ve already drawn your attention to Expedia’s public statement on ‘agreeing’ rate parity with then resistant Choice Hotel chain where they argued that rate parity is necessary for their own customers rather than the consumer at large. You may also be interested in this snippet from the ex-director of lodging at Expedia, Patrick Landman. Now working for Xotels which markets software for hotels to identify breaches of rate parity, he stated last year:

‘honestly we are not in rate parity for the consumer’s sake. We just know that as hotels we have to please our distributors, and without rate parity our job would become almost impossible’.

If Expedia does have a reasonable explanation for enforcing rate parity and can argue its benefit to the consumer I’m all for it. I just haven’t heard it yet. There are times, we acknowledge, that vertical agreements may be advantageous to the market and, as such, there are various caveats in the legislation to allow for some reasoned flexibility. Whilst it would seem expedient on this basis to pose this question directly to Expedia I understand it’s probably not that simple.

As a final note, I want to reiterate that I am going to take this matter to the press in the hope and expectation that it will spark a public debate. As much as anything, this matter is about transparency. To that end, I have additionally posted this letter on my blog (dorian.skoosh.com).

I look forward to our next catch up.

Cheers,

Dorian

www.skoosh.com
Tel: +44 (0)1273 731457
Fax: +44 (0)1273 784979

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