Glassdoor: Employee Satisfaction (or lack thereof) in the Travel Industry

Glassdoor.com, a cool website where "anyone can find and anonymously share an inside look at jobs and companies" has provided an interesting peek at job satisfaction inside the travel industry.

Travel is probably an industry Glassdoor knows something about given the site's founders which include such industry notables as Bob Hohman (Hotwire, Expedia) Tim Besse (Expedia) Ryan Aylward (EzRez, Hotwire) along with a few others who serve on the board who've spent a bit of time in travel: Rich Barton, Erik Blachford and Stephen Kaufer.

And what has Glassdoor, which garners its information from current and former employees, come up with? Might as well start with the OTAs since Glassdoor practically grew up in the OTA world:

The chart above details the approval ratings of the companies themselves and their CEOs as reported by the employees who came to Glassdoor and left feedback. (Hugh Jones isn't rated because of a limited number of responses - probably because he is still new in the role.) Looks like Hotwire is a pretty good place to work - we'll leave it to you to decide if that is because all of these guys left to start Glassdoor or not. (Just kidding, Ryan et al)

Glassdoor's info gets more interesting looking at hoteliers:
The highest rated CEO, Issy Sharp, has just announced that he is stepping down - a real shame according to this report. Bill Marriott and Hyatt's Hoplamazian are just a hair behind Sharp, however.

Not surprisingly, airlines show by far the greatest variability from one to another:

Things appear pretty bleak over at American and American Eagle - with labor strife a way of life at AA, clearly Something isn't Special in the Air. Even US Airways pulls better rankings. Southwest and JetBlue, as usual, prove that they are run more like hoteliers than airlines with ratings like these. (oh, they make money like hoteliers, too)

But the big takeaway? Continental and United - look a the difference in internal company ratings. Glassdoor doesn't have a rating for Jeff, but boy do they have one for Glenn. This is going to be one interesting merger, don't you think?

New Front on the Old Hotel Chains vs. OTAs Battle: Occupancy Taxes

It appears that a new front is opening in the ever tumultuous relationships between the large hotel chains and the online travel agencies (OTAs).

The major OTAs are currently pressing for legislative relief for future occupancy tax claims by states, counties and municipalities through a proposed bill known as the "Internet Travel Tax Fairness Act" or ITTFA. For those of you interested in a reprise of the old Schoolhouse Rock Saturday morning "how does a bill become law" cartoon, the initial draft of the bill is posted here

Interestingly, the American Hotel and Lodging Association's (AHLA) take on the bill is radically different from that of other smaller, regional hotel associations.

AHLA, which represents all the large chains, has come out as a vigorous opponent of this bill to say the least. AHLA offers a detailed description of their opposition to this bill which is centered on concerns that local hoteliers will see an increase in taxes or, worse yet, be stuck with the entire tax bill. As an aside, AHLA offers that the bill is "written in such a way that it may also exempt the payment of any occupancy tax on rooms booked through online travel companies." We don't believe this is the actual intent of this bill by the OTAs (call us naive, but this simply does not square with what the OTAs are trying to accomplish) whether you agree with that goal or not.

On the other hand, the California Lodging Industry Association (CLIA,) which represents "individually owned lodging properties," has just come out in favor of ITTFA. In a recent press release, CLIA declared that they would fight "with their Online Travel Company friends" to support this legislation.

So, why the disparity in thinking within the hotel industry?

For starters, independent hotels utilize the OTAs in very different ways from the large chains. Independent hotels do not (generally) have the powerful global brand recognition of the large chains much less the global sales forces and loyalty programs such as Hilton HHonors, Marriott Rewards and SPG. As such, they depend on the OTAs for distribution reach - reaching consumers that would not have ever probably stayed with these unaffiliated properties.

Many independent hotels have become much more aggressive in developing their own consumer web business, both directly and via the OTAs. New tools that distribute inventory, develop and implement SEO and SEM strategies, etc. have made these efforts much easier for small hoteliers. The web has become a great equalizer between branded and un-branded hoteliers' ability to reach consumers.

The chains have responded by offering their distribution services for hire - witness the launch of the Autograph brand from Marriott and the resurgence of Starwood's Luxury Collection. HC colleague George Roukas highlights these efforts and the reasons behind them here in a recent article in Hospitality Upgrade magazine.

It will be interesting to see where this bill ends up - the stakes are high.

Irony - San Diego CVB: Expedia "Partner of the Year" While City Sues Expedia Over Occ Taxes

Expedia Media Solutions (the media arm of Expedia Inc.) yesterday announced that the San Diego Convention and Visitors Bureau had named Expedia.com "Partner of the Year." According to the press release, the San Diego CVB was recognized as "a top advertising partner and major sales channel for San Diego hotels."

The press release continues:

"'As a promotion partner, Expedia not only grew San Diego's room nights year-over-year by 26 percent, but in these tough economic times they were able to grow revenue by 11 percent – exceeding ROI estimates and generating a significant return on investment of 125 to 1,' said Joe Terzi, President and CEO of the San Diego CVB. 'Serving many different consumer segments—from families booking a summer vacation to individuals arranging a quick weekend getaway—Expedia gives us a highly effective way to share San Diego's message to a broad audience of travel shoppers and potential visitors.' "

Hmmm. Interesting that the CVB is so enthusiastic given that the City of San Diego is one of the many municipalities currently suing Expedia and the other major online travel agents. An administrative hearing has been held on the case but before any decision was rendered, the Judge in the similar Anaheim case rendered her opinion in favor of the the OTAs.

And just how does the San Diego CVB receive most of its funding? You guessed it, occupancy taxes. According to the CVB's own website, "the majority of funding is derived from San Diego Tourism District Assessment Funds." Again from the CVB's own website, the current transient occupancy tax is 10.5% in the City of San Diego. There is also an additional 2% occupancy tax levied for the San Diego Tourism Marketing District. If you enjoy reading tax code, here is the actual language from the City of San Diego's municipal code.

Anyone who has been following the ongoing saga of the tax lawsuits against the OTAs knows that the issue is if the taxes above are levied on the net or wholesale rate actually charged by the hotel to the OTA or the marked-up, retail rate sold by the OTA.

So now we have an interesting situation: The very agency (the CVB) charged with promoting San Diego (whose funding comes from the occupancy taxes in question) is holding out an OTA (Expedia) as a great partner. At at the same time the city of San Diego is suing Expedia et al for non-payment of occupancy taxes that largely fund the CVB!

So, San Diego (and other cities) which is it?

Priceline: "Name Your Own Price" Takes a Vacation

This morning Priceline announced a major change to their vaunted Name Your Own Price Model that has been the basis of their opaque hotel product since inception. Billed as a "limited time offer" until the end of March, Priceline is actually showing winning bids and allowing consumers to simply tag-along and buy the same thing, assuming availability still exists. No bidding, no guessing - just a posted price. Its not perfect because Priceline may not have availability for the dates you are checking (vs. what the last consumer bought.)

Yes, you read that right, a posted price. In the example below, Priceline is offering a 4 Star hotel room in Boston without any bidding. Not so much "Negotiation" here - just "Big Deals"

Scrolling down, a user can simply enter their credit card details and buy - on the same page. No bidding, no guessing. Again, the bid may not be accepted so it isnt fool-proof.

Priceline is pitching this as a limited time offer - but we've seen this movie before. Remember the first OTA to cut fees? Yep, that was Priceline and that was a "limited time" offer as well.

It would appear this business model simplification is a direct swipe at opaque competitor Hotwire.com (full disclosure: I formerly worked there) which has always used a similar no-bidding model.

And this will also take some of the gas out of "cheater" websites like www.biddingfortravel.com which have long suggested bidding price points for use on Priceline.com. Of course, biddingfortravel.com also posted which hotels actually fulfilled the bids - and nothing is changing regarding opacity during the booking process.

We'll see where this goes, but we doubt this is any more "temporary" than booking fee rollbacks were over a year ago.

Ctrip and Home Inns: How Different China Really Is

Just heard Ctrip CFO Jane Jie Sun speak here at the Goldman Sachs Technology and Internet Conference in San Francisco.

Obviously, as we all know, Ctrip has been growing like crazy and sees lots of room to continue those numbers - and for good reason. A few snippets in no particular order:

• Only 2% of travel in China is booked online today - and Ctrip has 50% of that market

• 80% of air travel is sold by agents - and airlines are generally happy with this "outsourced" distribution model
  

• High speed rail presents a minimal threat because main stations are located far from the city center, stations themselves have few amenities and the trade-off just isn't there yet on a time or money basis

• In fact, CTrip sees rail as a growth opportunity - not from selling train tickets but from selling more hotels as rail travel increases

• Ctrip feels that at least 50% of hoteliers would pay more than the average 15% commission they currently ask for but Ctrip believes this is poor for the long-term partnership

• The Shanghai World Expo is expected to be very positive because, unlike the Olympics, it is a six-month long event. The Olympics were so concentrated that many people stopped traveling to Beijing. The opposite is expected for the World Expo - business travel will continue into Shanghai and Ctrip expects large amounts of domestic tourism, particularly families with children to visit during the Expo.

• The Chinese government in general "likes travel" and has designated travel as a "pillar of economic growth" which is always nice

But the biggest take away, however, was her discussion of Ctrip's recent investment in lodging operator Home Inns. If you are not familiar with Home Inn, you should be - they operate nearly 600 moderate hotels in China.

She said the investment has allowed Ctrip to gain access to deeper inventory and that Ctrip and Home Inns are in the early stages of connecting their systems to allow electronic distribution. She also mentioned that she saw this reservations connectivity and inventory management as a catalyst for other domestics chains - as Home Inns goes, so goes the industry.

We've known that business in China is different for a long time, but can you imagine if Expedia was to invest in Intercontinental Hotels? Or Choice? Even back when Cendant owned Wyndham and Orbitz/Cheaptickets etc, many in the supplier community thought that back door dealings were probably going on. (I've been since assured that Cendant was way too dysfunctional for that to actually happen.)

It will be interesting to watch how this relationship develops - but I'm not looking for it to be replicated here anytime soon.

Orbitz For Travel Agents Pays 10% Commissions

Orbitz has launched a new platform for traditional travel agents which enables them to book stand-alone hotel rooms as well as vacation packages. This matches (for hotel only anyway) agentaccess, a program which hotels.com has offered to the agency community for some time.

The Orbitz for Agents platform offers a 10% commission to agents on stand-alone hotel bookings and 4% on packages which include air and hotel or car and hotel.

And, in an effort to sign up agents, the first 500 agents to register will be paid 12% commissions.

So now we have Orbitz, partially owned by Travelport, pushing agents to book outside of the GDS. And Orbitz is offering a strong economic incentive (at least for the 1st 500 agents) to do so. But will agents abandon their beloved green screens in large numbers? I doubt it - but plenty of small, independent agents may be interested.

And what of suppliers? It gives you some clue as to the level of margins Orbitz (and Hotels.com) are able to extract from hotels if they are able to not only match the industry standard 10% rate but still cover the other costs associated with the merchant model (e.g. credit card fees, fraud, customer care etc) which are normally borne by hoteliers under the agency model.

And it is a good move for Orbitz. Orbitz has a choice to drive incremental bookings - they can pay an agency 10% or Google. Stands to reason they already pay Google enough so this is an interesting way of lowering reliance on paid search.

Orbitz does allow for agents to add their own service fees - could this be the distribution model of the future in the hotel industry much as it has become the standard for airlines? Wait and see..

OTAs Prevail Against Anaheim: Court Calls Prior Rulings "Logical Fallacy"

The major Online Travel Agencies today notched a huge win in Anaheim, California where a judge threw out a $21,326,881.30 ruling against Expedia, Travelocity, Priceline, Orbitz and their related subsidiaries with a strongly worded rebuke to the Anaheim City Hearing Officer's earlier findings.

This case was originally heard by the City's Hearing Officer who made the determination that the OTAs did, in fact, operate hotels under Anaheim's definition. The Hearing Officer originally found that each OTA is both "the proprietor" and the "managing agent" of every hotel in the City of Anaheim. Wow. As such, the Hearing Officer found that the OTAs owed the princely sum of ~$21M covering back taxes, fines, interest and, no doubt, extra donuts for the office.

We'll get the whole decision up shortly for reading on your next flight but here are the highlights:
The big take away is that the judge who decided this case will also be presiding over several other similar cases currently in various stages of litigation in California. These include cases in Los Angeles, San Diego and a particularly nasty one in San Francisco where the OTAs have already paid significant damages in order to even have the right of appeal under the City's "Pay to Play" rules. (Note: Anaheim had this rule as well but the OTAs were able to get it overturned.) While no one can predict how a judge will rule and each case is obviously different, this judge clearly understands the issues at hand.


The ruling states "OTCs do not control and run hotels. The Hearing Office's factual findings list several functions performed by OTCs with the respect to resale of hotel rooms" including marketing functions, determining mark-ups etc. The Court correctly determined that "none of these facts comprise incidents of control of a hotel or give the OTCs the right to run the business of a hotel. The hotel control the production of the product sold, the quality of production, the channels of distribution of the product and the pricing of the product." This discussion of Marketing 101 and the " Four Ps" reminds me of my first marketing class in college - sounds as if the Judge may have taken a similar class along the way.

In one of the stronger worded sections, the judge concludes that the Hearing Office that it is "a logical fallacy to conclude, as the Hearing Officer apparently did, that because a hotel operator is responsible for collecting rent and taxes from [guests], any entity that collects rent and taxes from a [guest] must be an operator [and be liable for the occupancy tax] " The footnote explains it more clearly still: "Principles of formal logic demonstrate that when the statement 'if A then B' is a true statement, it is incorrect to conclude that the converse 'if B then A' must be true. Yet the Hearing Officer accepted this reasoning." Ouch. Basic logic, right?

However, the judge clearly leaves the door open for the City to base an occupancy tax on the total amount paid by the guest for the hotel room if the law was drafted (as New York City has attempted to do) and constructed to facilitate such a tax. "There seems to be no reason why such a tax scheme could not be drafted and considered." But before Anaheim goes off to re-do the tax wording, consider the Courts further discussion in regards to the City's position that times had changed (with the advent of the merchant model) and that the taxation laws should simply morph to fit the times: "where a taxing agency has not anticipated a new revenue opportunity, the court may not act to fill what might be perceived as a 'gap' in tax coverage. Creation of a larger tax rate or larger tax base requires voter approval pursuant to Proposition 218. California Proposition 218 states that "A taxing methodology must be frozen in time until the electorate approves higher taxes"

This ruling came down to carefully interpreting the current tax laws on the books. Clearly, opportunities exist for taxing authorities to adjust those laws (at least outside of California) to change with the times - but a go-forward tax is a far cry from a huge retroactive tax from the OTA's perspective.

Jetsetter Speaks Out at HEDNA on Marketing and Distribution

Jetsetter CEO Drew Patterson was a panelist at this week's HEDNA convention in Las Vegas and had some great insights into marketing, distribution and revenue management.

Drew began his remarks with an observations that what is really missing in the online travel industry today is inspiration. Paraphrasing, the major OTAs are not really about exciting people to travel or getting them to book an incremental trip - they are largely order takers. (My words, not Drew's!)

Drew's comments are similar (but not as blunt) to Harrah's CEO and President Gary Loveman's remarks at this year's PhoCusWright conference during which he lamented that the OTA industry has done little to actually drive tourism and increase trips - most energy (in his opinion) is spent on beating up one another (OTA vs. OTA as well as OTA vs. supplier) vs. actually driving and inspiring consumers to travel (and stay in his hotels, obviously.)

Drew also commented on the often difficult relationship between Revenue Management and Marketing within the hotel industry. In Drew's words, "RM and marketing have to work in partnership to stimulate activity. Lowering rates without communicating the price change just dilutes an existing customer base. At the same time, marketing communication without value or a reason is a waste of money because consumers will see through it. The two have to be integrated to have an impact." Sage advice for hoteliers and distribution partners.

Clearly, Jetsetter aims to solve for these issues, but they alone can't be the total answer for what ails the industry today. (Drew has big plans but it is a big world out there.) Will anyone step up in 2010?

FlightSearch.com: An Interesting Twist on Search Aggregation

Does the world really need another search aggregation website? Well, we are about to find out. FlightSearch.com has gone live (in beta) with an interesting approach to searching multiple travel sites.

Unlike some other players such as TripAdvisor's bookingbuddy.com, TravelZoo's SuperSearch, FlightSearch searches multiple sites without opening window after window after window as each separate site is searched. Users are able to simply tab between results from Priceline, Orbitz, CheapTickets, Vayama, Kayak and others. (Does Kayak's inclusion make FlightSearch a meta of metas?) FlightSearch is a really nice take on an oft-copied model. And not a bad URL either.

FlightSearch is led by travel industry vet Ted Perlstein (full disclosure: Ted worked for me at Starwood as a summer intern once upon a time - he probably considers it a dark period in his career) who has also has been at Orbitz and once upon a time, carried a business card with the title of "Head Sherpa" when he was at an earlier incarnation of lastminutetravel.com

As we mentioned, FlightSearch is still in beta so there are a few things we'd still like to see improved, but we'll be watching to see when other OTAs (and metas?) join up. And how about a few suppliers? Where are you American and United et al? Obviously, driving traffic in this hyper-competitive space will be a challenge but we like the approach Ted and team are taking...

Expedia and Choice Hotels Kiss and Make Up

Expedia (EXPE) and Choice Hotels (CHH) tonight announced they have signed a new, long-term deal that will return Choice's inventory to Expedia's global family of websites including Expedia and Hotels.com. The three year term is even included in the press release but maybe that is standard for a deal negotiated in the press.


More of note, the jointly issued press release begins with a quote from Dara Khosrowshahi, CEO of Expedia Inc, that makes it very clear to anyone wondering about the deeper issues of the dispute (LRA and rate parity as we discussed here) as where the two sides ended up: "We’re pleased to be working with Choice in an agreement that respects the guiding principles which we operate under." In other words, Choice agreed to similar terms that everyone else has: coup averted.


Choice Hotels CEO has a line as well but not nearly so telling: "Choice Hotels and Expedia worked together to establish a new agreement that is mutually beneficial and enables hotels in the Choice system to effectively manage their businesses."


Glad this thing is over - relationships negotiated in the press are never positive for either side. A public spat like this does little for the industry (hoteliers or OTAs) and takes the focus away from what everyone should be concentrating on in times like these - generating revenue.

Expedia drops phone booking fees

Expedia announced today that they are removing booking/service fees on all travel products sold through Expedia's call centers.

From an airline perspective, the move is interesting in that it will now be cheaper for consumers to book with an OTA then calling the carrier directly. (Except, of course, for Southwest which does not charge extra for a call center booking but they don't participate in the OTAs anyway.) The move is another example of how the OTAs have continued to differentiate themselves from the suppliers in terms of service, functionality and price. The list of enhancements the OTAs have made this year is long and compelling and great for consumers. Just to tick off a few: Orbitz TLC, Orbitz Price Assurance, Expedia's SeatGuru reviews, Priceline's iPhone app all come to mind.

And what of the timing, by the way? Interesting that Expedia announced this change the same morning as Orbitz announced earnings - particularly when Orbitz had this say in their statement: "This net revenue decline was due primarily to the removal of most air booking fees and the significant reduction of hotel booking fees on the company's domestic websites, as well as a decline in average hotel room rates globally."

Today's move by Expedia along with the OTAs' other enhancements this year should be a wake-up call for suppliers - Airlines and hoteliers cannot continue to sit still while they are out-innovated by the distributors. Piling on more fees or other dis-incentives for booking through specific channels only further harms the supplier's brand and the overall customer experience. Suppliers, wake up!

Expedia Billboard Effect: Cornell agrees that it is real

Expedia and other OTAs have long touted what has become known in the industry as "the billboard effect" whereby they have claimed that positioning on their sites generates not only bookings through the OTA but also a halo effect on the hotels' own sites by generating brand awareness. Non-loyal consumers start many of their searches at an OTA to gain a perspective on the options available, relative costs and positioning of the hotels in a given market against one another. Then, they often check other sites to compare pricing - usually including the website of the hotel they are interested in.

Personally, I saw strong evidence of the billboard effect while I was at Starwood and Expedia has long claimed that for every booking generated on Expedia, another booking is generated on the hotel's own website.

In a new whitepaper, Cornell assistant professor Chris Anderson has measured the billboard effect with a several branded and unbranded hotels. The results are striking, particularly for the independent hotel in the test.

For the study, Prof. Anderson worked with Expedia and JHM Hotels, an ownership group with hotels under the Starwood, Marriott, Hyatt and Hilton flags to cycle specific hotels on and off of Expedia over a three month period. That is, the hotel was listed at the top of the search results when the hotel was participating on Expedia and and removed altogether from search results listings when the hotel was dark on Expedia. By the conclusion of the study, each hotel was listed on Expedia for 40 days and dark for 40 days.

The results are below:

According to the study, the hotels saw a boost in reservations ranging from 7.5% to as much as 26% for the inde hotel when they were listed on Expedia vs. when they were dark.

Prof. Anderson suggests that the branded hotels may not have seen as large of a boost because when consumers go the brand websites they are presented with other "in-chain" hotels, e.g they are searching for a Marriott but upon arriving at marriott.com they are presented not only with the Marriott they saw on Expedia but also a Courtyard where they may actually end up booking.

We'd like to see an expanded test at some point with some slightly different parameters. For example, what happens if the hotel isn't listed at the top of the search results on Expedia? Could the brand numbers be further refined if the test was conducted in markets without sister hotels nearby? What would the results look like for resort hotels? How did the booking curves differ? And the cancellation rates? Could leveraging the billboard effect actually be cheaper than buying google key words? And of, course, what do the bottom line ROIs look like after all distribution costs are taken into account. Those questions may be ripe for another study - any of you OTAs or chains reading ready to sign up? Lets talk....

Florida AG sues Expedia and Orbitz - If cities can, we can too

Bill McCollum, the Florida Attorney General filed suit against Expedia and Orbitz this afternoon, opening the next chapter in the ongoing fight over occupancy taxes. Florida is the first state to take such a step - all of the previous actions have been filed by cities or groups of cities in a specific state.

It is not clear why the suit was only filed against Expedia and Orbitz - in the past these actions have usually been taken against all of the major OTAs including Priceline and Travelocity, among others.

In reading the actual complaint, there does seem to be some confusion in how the merchant model actually works.

For example, in Section 9: "each Defendant purchases and receives inventories of hotel rooms at negotiated rates from the hotels." and "re-sells the rooms to consumers at rates determined by that particular Defendant." Lets take a look at these two statements. Does Expedia, in most cases anyway, actually purchase a block of rooms and hold the inventory? No, not since the early days of Hotels.com - most, if not all, rooms are not purchased and held in advance. As far as determining the rates paid by consumers, again, certainly in the case of the chain hotels, the OTAs are not setting the prices - the chains are through their contractual agreements.

The AG claims that the OTAs are using a "purchase and resale" model which just isn't the case.

The big issue is that the model roughly described by the AG has been in place long before the Internet came around - how do they think all those rooms at Disney World are filled? Thousands of rooms are sold every night in Florida under the wholesale model - I bet more than in any other state in the country except for maybe Nevada. These wholesalers also remit the taxes back to the state based on the wholesale or net portion of the room rate, not on what the consumer actually paid for their package which may include Disney tickets and plenty of other things also bought on a wholesale basis.

Texas Cities vs. PCLN, EXPE, OWW et al: A Draw at Best

Late last week, a jury in San Antonio delivered a verdict on a class-action suit against the major OTAs that was brought by around 170 cities in Texas. The verdict against Expedia, Orbitz, Travelocity and Priceline is for $20M plus court imposed penalties and interest.

While this sounds dire, (and if you read the lawyers press release you would think this was a slam-dunk) a detailed analysis beyond the headlines should give the edge to the OTAs. Why?

First of all, the jury rejected the municipalities' claims that the OTAs willfully pocketed tax dollars that were collected (as taxes) from consumers. This precedent setting verdict finally makes it clear, once and for all, that the OTAs are not collecting taxes and pocketing it - a position that many of the other lawsuits have taken and one that was sure to ring true with juries, particularly in this day and age. The "tax and pocket" position was a highly emotional stance that anyone who truly understand the true economics of the merchant model would obviously reject. Yes, taxes and fees have long been bundled together but the spirit and goal was clearly not to defraud consumers or rob cities and towns of tax dollars - the intent was to protect the underlying contractual agreements around margins.

Secondly, the jury rejected punitive damages against the OTAs because they agreed that the OTAs were not, in fact, pocketing tax revenues. Obviously, this is a no-brainer.

Interestingly, the jury did find that the OTAs "control hotels" and therefore are required to remit the occupancy taxes required by hotel operators. Knowing more than a few hotel General Managers, I can't imagine a statement that would boil their blood faster (except, maybe to say that "corporate" controlled their house!) than to say an OTA controlled the hotel. By now, everyone knows that hotels set pricing, inventory, discounts and room allocations either on the fly or during negotiations with the OTAs. The OTAs then re-market those rooms that have been offered to them to sell. This is hardly control. Furthermore, the hotel is clearly in control of the guest experience - after all, it is the hotel that decides which rooms to allocate to specific guests and who to "walk" when things go wrong.

Lastly, we believe the jury's definition of "control" may expand well beyond the OTAs. Put in the context of the ruling, traditional tour operators control rooms as well. Traditional tour operators (which pump a lot of rooms into Texas resort cities) have always paid the occupancy taxes based on the net rate of the room, not the gross selling rate. This has been going on long before the Internet and the OTAs came along.

Bottom line: if Expedia and the like are hiring, firing, allocating capital, negotiating with unions, customers, franchisers and managing to get the beds made and the bacon crisp, we'd agree that they control the hotel. Last I checked, these functions were not part of the OTA business model.

Expedia and Choice Hotels: Spencer Has His Say

In Part Two of our Ghosts of the Internet Past interviews, we caught up with former Expedia executive Spencer Rascoff. Spencer is now the Chief Operating Office of real estate website Zillow.com but was ran hotel supplier relations during the IHG/Expedia stand-off six years ago. Prior to Exedia, Spencer and I worked together at Hotwire.com where Spencer ran the hotel side of that business and I brought him coffee and donuts.

TomBotts: “Spencer, first off, do you miss travel?”

Spencer Rascoff: “Well, of course I miss travel. Real estate is fun – things are going very well here at Zillow. But I still follow the travel industry closely – several of us who were at Expedia during the IHG smack-down have been emailing back and forth and reliving the old days.”

Tom: “So, has anything changed this time around in your opinion?”

Spencer: “The biggest change is that the suppliers have developed much stronger direct selling capabilities. Six years ago, the brand sites were pretty much second class sites. That has changed radically. The brand sites are a lot more reliable alternatives to the OTAs now and the brands have developed tactical marketing capabilities to successfully drive traffic directly.”

Tom: “When it comes to the current breakdown between Choice and Expedia, what you see as the major issues based on what you know?”

Spencer: “It seems that the negotiations are almost exactly the same as they were six years ago - you can copy and paste “IHG” for “Choice”. So little has changed. Amazing that the industry has changed so little that they are arguing about the same 3 issues – LRA, sell rate and margin – it’s been the same for ten years!”

Tom: “Does it make a difference this time around that it is Choice rather than IHG?”

Spencer: “In my opinion, IHG was more important in 2003 than Choice is to Expedia in 2009. I would give the edge to Expedia in this bout. The dirty little secret out there in the OTA space is that they don’t really need all hotels for leisure consumers. They need to have a good mix of star levels and locations but they don’t need every single hotel for this customer base. The OTAs are focused on the key cities that make up the bulk of their business and there are several key properties – about ten or so in each that are fundamental must-haves. For example, you can’t sell hotel rooms in New York and not have the Waldorf=Astoria. IHG has (or had) many of these key assets – I’m not convinced that Choice is in the same position of strength and brand power.

Tom: “Does an OTA need to have all hotels for business customers?”

Spencer: “Yes, business travelers are a different breed – they book much more on location, loyalty program, habit and of course negotiated rates. If all of a sudden the hotel where their company has a negotiated rate is gone this presents a major issue for the supplier, the company, the TMC and the traveler.”

Tom: “So when IHG pulled GDS inventory from what was Expedia Corporate Travel (now egencia) how big of a deal was that?”

Spencer: “It was a nuclear bomb – we didn’t see it coming and it took us and our mutual customers by total surprise. It was the one thing that really brought Expedia back to the negotiating table. I don’t think Choice has the same amount of leverage, however. Their hotels are just not as important to the corporate travelers that use a booking tool as the IHG properties were and are.”

Tom: Any other key levers you see either player having in this game?

Spencer: “The other lever is understanding how much control the franchisor has over the franchisees when it comes to distribution. Negotiating with IHG was a three legged stool between corporate, the owners and Expedia. Jim and IHG did a great job of ensuring that the franchisees would toe the corporate line. The franchisees were unhappy but IHG was really effective at keeping them in line. I’m not sure Choice has the same power.”

Tom: “Do you think Choice can replace the demand through other channels?”

Spencer: “It will certainly be easier this time around but it is still really hard. One key fact that is hard to ignore is what we used to call the ‘billboard effect.’ I’m not sure what the recent research shows but we found, back in the day, that for every booking that occurred on Expedia.com, the supplier site generated a direct booking as well. Consumers were exposed to the hotel on Expedia and then went off to book it on the supplier site. This demand generation is nearly impossible to replace.”

Tom: “Yes, we saw similar results in testing when I was at Starwood. So, does the lack of Choice hotels really hurt Exedia?”

Spencer: “I highly doubt Expedia’s conversion will take a hit. Consumers just book a similar hotel from a different brand. Now, this would not be the case if we were talking about a key marquis property – but for run of the mill hotels, consumers simply book something else.”

Tom: “Any parting thoughts?”

Spencer: “Well, in my mind, the wild card here is really egencia. It is very difficult to grow that business if potential customers see the TMC as at war with the suppliers. I’m not sure where things stand between egencia and Choice, but it is certainly Expedia’s Achilles Heel in this negotiation.”

Choice Hotels and Expedia: Former IHG Exec Jim Young Strolls Down Memory Lane

As we discussed earlier, all of the relevant parties to the last major public flare-up between an OTA and a major brand (Expedia and IHG) have moved on to new challenges. However, we’ve tracked the two key witnesses down, and they both have agreed to discuss the current situation between Choice and Expedia. First, we are talking with former IHG SVP Jim Young. We’ll follow shortly with a discussion with Spencer Rascoff, former VP of Supplier Relations at Expedia, and now COO at Zillow.com

Tom Botts: “Jim, you lived through a similar situation a few years back when you were with IHG. What has changed since you went to the mat with Expedia?”

Jim Young: “It feels like the industry hasn’t learned a thing. Suppliers seek leverage in the good times when demand is high and Distributors take advantage when demand is low. I suppose you could argue that is just capitalism, but it sure isn’t sustaining and somewhat unproductive”

Tom: “Is the landscape still the same in your opinion?”

Jim: “Some things are different. I think there is greater price transparency and channel awareness with meta-search now in the mainstream. Hotels have greater ability to communicate with customers through social networks like Twitter and Facebook. Finally, I think that both hotel companies and OTAs have done a better job establishing their brand position in the market.

Tom: “Talk about the role of hotel brands in this puzzle”

Jim: “Hotel brands are in the business of franchising their trademarks, providing development and marketing expertise, as well as reservation services. They make money by charging fees, normally based on a percentage of total rooms’ revenue. Hotel owners sign franchise agreements in order to be part of a bigger system. It gives them access to services and scale they either can’t get or are too costly to procure on their own. As far as room distribution is concerned, the brand represents all their system hotels and negotiates the participation terms with all major travel sellers, offline and online and processes them through the reservation system. Some brands have very strong franchise agreements that clearly establish the brands rights to set the terms of these agreements. Other brands are just glorified representation companies with minimal design, quality, and compliance standards.

Tom: “What is the power of a brand in your mind?”

Jim: “A hospitality brand is a lot more than just the sign, the room decor and the attitude at the front desk. The brand is the market power you give to hotel owners to sell rooms. That is what it is all about, after all. If you are a 200 room hotel in a big city crowed with many competing properties or an 85 room hotel at an interstate exit with 5 other hotels on the same strip, having a strong brand is a big deal and it helps you beat the competition. If, however, an owner perceives that they can get better marketing, distribution and reservation production by going direct to the distributor, then the brands value starts to diminish. That is what keeps franchisors up at night. If they are not perceived as a strong well marketed brand, then they can’t grow their system”

Tom: “So, why now? Why is this fight happening at a time when most hoteliers are pretty happy to get any revenue at more or less any price?”

Jim: “Like I mentioned earlier, I don’t think the industry learned anything from the last exercise. The cyclical nature of the business constantly creates winners and losers in contract negotiations. Expedia’s timing is dubious – kicking hoteliers when they are down is a tough card to play. Choice and Expedia were operating under the previous terms of their agreement which had, apparently after a number of extensions, expired. It sounds as if Expedia saw an opportunity to bring Choice’s corporate agreement into the realm of what they claim is their accepted norm with other chains. Both would have been better served to build an agreement that would survive the normal cyclical nature of the business – building an agreement that survives good times and bad for both.”

Tom: “And so what of Expedia’s attempts to bypass Choice and go directly to the owners/franchisees?”

Jim: “As you said in an earlier post, ‘we’ve seen this movie before.’ It is exactly what they attempted with IHG. We had tough guidelines in place that prevented our franchisees from deviating from the corporate strategic position. I’m not sure if Choice has those same standards in place. Going directly to the hotels is disingenuous if you really want to do a deal at the chain level. Expedia could drop a whole bunch of market managers if they focused on the chain level relationships rather than focusing on the hotels.”

Tom: “Choice has talked a lot about other efforts they are pursuing to replace the lost revenue from Expedia. Steve Joyce has placed the number at around $100M per year – not a small number given that it probably flows to a disproportionate number of hotels. You worked hard to replace the business you lost when you were dark on Expedia – did you make it up?”

Jim: “Well, we came pretty close. I can’t share exact numbers of course, but we were able to leverage some other key strategic partners to drive some pretty impressive numbers which demonstrated to its hotel owners the power of its brand system."

Tom: “So, could you have driven those numbers and retained the Expedia business for a net overall share gain?”

Jim: “Great question – the answer is probably somewhere in the middle. Some things are only possible when you switch allegiances and create the burning platform that forces everyone to react to the change – just look at Continental and SkyTeam vs. Star! I’m sure Continental will get an early benefit from being a full partner in such a large alliance.”

Tom: “Old airline guys (myself included) never get the Jet A out of our veins, do we? What is the net net of this situation?”

Jim: “I think, in the current state of mind of both hoteliers and OTAs, that this will end up as a giant, zero-sum game for both. Expedia will look a little less complete when their customers realize that Choice’s 5000+ hotels are missing from the display and Choice won’t have access to Expedia’s distribution reach. Something has to change.”

Tom: “What needs to change in your opinion, Jim?”

Jim: “I think there is a balance somewhere out there. In market segments where Choice has a strong brand presence and can easily tap the demand directly to their website, they don’t need to rely on the OTAs as much and should focus their efforts there. However, where Expedia can demonstrate that they can more cost effectively merchandise and deliver a room reservation to a hotel in a market that Choice is not as strong in or not targeting directly, then Choice should find a way to pay for that value delivered.”

CHH CEO on EXPE: LRA and MFN

Choice Hotels' CEO Steve Joyce just spoke with Hotels Magazine about the current issues at hand - taking the fight into the streets.

According to Joyce, it sounds as if the issues came down to six letters: LRA and MFN. In other words, Expedia is asking for Last Room Availability whereby they will have access to the entire hotel's inventory during both periods of market strength and weakness. MFN refers to a Most Favored Nation clause by which Expedia is asking for parity vs. other channels.

Choice is concerned that they will still have to offer rooms to Expedia (at the standard margin) even when the hotel is expected to sell out, depressing yields. In contrast, Expedia's concern focuses around providing consumers with inventory at all times, not just when the hotel "needs" business - it is about product consistency.

Choice would also prefer not to offer Expedia all rate plans and programs - possibly to allow special rates or packages on their branded websites etc. Obviously, Expedia would like to always have competitive pricing in order to keep consumers coming back in a hyper-price competitive marketplace.

These are gross simplifications of the issues at hand - Expedia is certainly not getting any style points right now in what is being pitched as a David vs. Goliath war.