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.

Pay Now or Pay Later: A New Choice at Priceline - And the Next OTA Battleground?

Priceline.com has begun including "pay-at-checkout" inventory alongside traditional, "pay-in-advance" merchant model hotel inventory at select hotels. Priceline has developed a jazzy new logo and tagline: “Pay When You Stay” to highlight this option.

Users are then given the option of paying upfront or at time of booking when they click to select the hotel.

And this isn't a matter of simply including traditional agency inventory sourced via a Global Distribution System (GDS) such as Sabre or Travelport. This stroke of genius is actually the latest convergence of booking.com inventory with Priceline.com non-opaque (i.e. Travelweb) inventory.

Booking.com's rapidly expanding inventory base within North America now enables Priceline to offer multiple sources of inventory with multiple payment options for the same hotel. At the same time, as more hotels roll out, Priceline has removed one of the largest perceived negatives to booking with an OTA - upfront payment.

The gap between supplier.com and online travel agencies continues to close. First booking fees fall, then change and cancel penalties disappear and now this latest game-changer.

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.

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.

Priceline's New TV Ad Brings Revenue Management 101 to the People

Today, Priceline.com launched a new TV ad campaign featuring a new Shatner side-kick known as "Big Deal." Not only is the Big Deal big, but he also appears to have a deep understanding of hotel revenue management (in addition to some really nice tats.)

In the spot, Shatner calls in Big Deal to help negotiate with a hapless front desk clerk who initially refuses the $65 price Shatner suggests. Big Deal intones "is it wise to allow a perishable item to spoil?" Shatner follows with "Is it wise to leave a room empty" to which Big Deal adds "The additional revenue easily covers operating costs." Shatner closes the negotiation with "$65 is better than no dollars." As you would expect, the clerk relents.

A rather high-brow discussion (lead by a decidedly low-brow, knuckle-cracking, meat head, no less) of the principles on which Priceline operates is an interesting advertising ploy. Educating consumers of the intricacies of the model is a first - some hoteliers are still trying to figure it out, let alone consumers. But it may expand the market if more consumers can get comfortable with how Priceline actually gets such good pricing.

And how will hoteliers react? Given the revenue they are seeing from Priceline these days, they will probably just take a deep breath and keep offering those $65 rates...

Watch the ad:

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 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.

Priceline Negotiator Trades Phasers for an iPhone

Priceline.com launched a cool new iPhone application today that not only functions well but is also really fun. Finally, a great app from an established company that also has some whimsy. Priceline is obviously serious about mobile bookings but isn't taking themselves too seriously with this app - we like that.

Most importantly, this isn't just a re-skin of the regular Priceline website crammed down to fit on a small screen - The Negotiator app is actually a different experience tailored for the iPhone and a fun one at that - the music between the screens adds to the fun.

Most fun is the "shake down" feature which leverages the iPhone's location functionality to display winning bids nearby. Shake your iPhone and see what your options are - perfect for last minute bookings and much more useful than a randomized restaurant listing!

It is also easy to toggle between "Name Your Own Price" hotels and regular, published hotels through a tabs at the bottom of the screen labeled "Negotiate" or "Browse." When "negotiating," the app allows users to perform Priceline bidding functions with some nice touches for choosing your bid amount like a recommended price to bid, and a slider to increase or decrease the bid with great tag lines like "See if you can bag this deal, too!"

And because you can book up until 11PM for same day arrival, we bet more than a few travellers who find themselves stuck in a city for whatever reason (you can think of a few, I'm sure) will love this app. Priceline has long allowed for same-day bookings but firing up your laptop for a last minute room isn't exactly a lot of fun - Priceline has created an elegant and fun solution.