The OFT has said that it expected the commitments agreed with InterContinental Hotels Group, Expedia and Booking.com to to promote competition across the hotel online booking sector.
The sector has been left in some confusion about what this means for rate parity, how the commitments, which are set for two years, will be implemented and what real impact they will have, with one observer describing the conclusions as “wishy-washy”.
The OFT said that it had ended its investigation and would not be proceeding to a decision on whether or not the Competition Act 1998 and/or the Treaty on the Functioning of the European Union had been infringed.
Angus Coulter, partner, Hogan Lovells, told Hotel Analyst: “As a lawyer I would have liked a clear view one way or another. The acceptance of these commitments does not give any absolute conclusion on whether people have been operating legally or illegally. I would have liked to have seen something more definite, not this wishy-washy conclusion to four years’ investigations.”
Gaucho Rasmussen, director at the OFT, said: “The commitments address the OFT’s competition concerns by allowing greater competition on price between OTAs, and also between OTAs and hotels. They should also enable new online agents to enter the market or expand by offering attractive discounts.”
The agreed discounting scheme is at the centre of the commitments. The OFT described them as “a minimum type of discounting freedom” for OTAs in relation to room-only (non-package) rates, under which discounts can be provided to members of OTA closed groups (for example, OTA membership schemes), where those members have made a prior full-price booking with the OTA. The same discounting rules apply to members of similar hotel groups.
The first full price purchase needs to be made after the customer has signed up as a member of the loyalty scheme. The OFT said: “There should be no limit to the amount of discount a hotel can offer.”
The OFT said that these discounts by OTAs should be funded out of their hotel commission, although did not offer a mechanism to monitor this.
On the issue of rate parity, which many hoped the investigation would resolve, the OFT advised OTAs that “you should take advice to ensure that any rate parity provisions in place between you and your hotels do not apply to discounts to such closed group members”.
The OFT acknowledged that the commitments’ principles did not prevent another OTA insisting that a discounted rate being offered to a closed group was matched by them under rate parity agreements. The OFT said: “If we become aware that rate parity obligations are being enforced against hotels in a way that makes it very difficult for hotels or their OTA partners to give discounts to members of closed groups who have made a prior full price booking, we will consider our options carefully.”
Coulter commented: “[the investigation] hasn’t looked at rate parity, it was widely expected it would do and thought that it would have more impact. By not doing so, they have more or less signed off on it.
“I don’t know how many people are going to sign up to these groups. My suspicion is that this isn’t going to have an big impact at all, that although the OFT has said that it shouldn’t be onerous to do so, it will be people on the margins.”
When asked how greater competition would result from the commitments, Rasmussen said: “IHG have committed to seek to ensure that ALL their OTA partners are able to offer the discounts provided for in the commitments. The commitments have been offered by Booking.com, Expedia and IHG in relation to their dealings with each other and their other hotel and OTA partners.
“However, we expect the commitments to promote competition across the hotel online booking sector. As a result, we think that, in relation to room-only accommodation, it is likely that non-IHG hotels in the UK and OTAs other than Booking.com and Expedia will want to introduce, as a minimum, discounting schemes for closed group members who have made a prior full-price booking with them.”
Tom Page, partner, head of hotels & leisure group, CMS Cameron McKenna, added: “It leaves everyone in an uncertain place, it doesn’t help anyone understand what’s allowed and what’s not”. Page said that there was “maybe” an issue of competition between OTAs, but “that’s not what’s at issue. There’s plenty of competition within hotel rooms.
“The market is fragmented. When you look at monopolistic practices, it’s companies which have 50%, 60%, 70% of the market share. There is real competition between the providers of hotel rooms and that’s where customers get keen pricing.
“People have been calling the end of rate parity for some time anyway. As yield management gets more sophisticated there will be less rate parity. Hotels have always found ways to discount if they wanted it – there has always been secret discounting going on through limited channels.”
The OFT’s investigation into “suspected breaches of competition law in the hotel online booking sector, in particular in relation to arrangements between hotels and online travel agents” was triggered by a campaign started by the owner of online travel agency Skoosh, Dorian Harris.
He has said on his blog that “rate parity is tantamount to price fixing” and has claimed that he had lost several hotel clients because he failed to abide by their rate parity demands. Skoosh’s model sees it acquire rooms from wholesalers at a net rate and then add a margin, often less than the larger OTAs, allowing it to compete for consumers on price.
Harris, as with much of the sector, said that the changes did not go far enough and pointed to efforts in Germany, where price agreements are to be made illegal. He called for a free market for hotel rooms and said that the proposals would not offer any “meaningful” savings.
HA Perspective: [by Katherine Doggrell] In September 2010, the OFT launched its formal investigation into suspected breaches of competition law in the hotel online booking sector, in particular in relation to specific vertical arrangements between hotels and OTAs. And on the face of it, it certainly did look fishy, with a few dominant players seemingly controlling the market.
What the OFT appears to have discovered as it got closer to the matter is that it was a whole lot more complicated than it looked. The OFT’s mission is to make markets work well for consumers and, as Tom Page points out, there are plenty of price points available. If you don’t want to pay for a Four Seasons, then you can stay at a Travelodge. The ever-growing number of brands means that the consumer has never had as much choice and IHG do not own enough of the market to influence price in that way.
Rate parity worked for hotels in that it kept things simple. In many ways, rate parity has worked for the consumer, as it allows for best rate guarantees, even if it doesn’t make for a thrilling search for bargains on the internet. The OFT feels that the ‘discounts to closed groups’ commitment will deal with this, so expect to see hotels pushing their loyalty schemes even harder in the wake of this agreement, as they compete with those of the OTAs.
However, while the horizontal has been taken care of, the OFT had concerns around the vertical. Any resale price agreement has been viewed as against the public interest since the introduction of the 1964 Resale Prices Act, which is where the OFT came in. That it has been unwilling, or unable, to make a call on whether the three acted uncompetitively suggests either a lack of evidence or a bafflement about the sector.
The decision not to pursue rate parity may have saved the sector from a shock, rather than the more manageable evolved end which it is currently seeing, would have damaged hotels suddenly forced into negotiations with all their distribution partners as opposed to sticking with a one-size-fits-all approach. For the consumer, this may well have meant the benefits of a sudden price war, but one in which hotels would have suffered.
The decision by the OFT to end the investigation here, rather than with a clear conclusion on the illegality of the actions of IHG, Expedia and Booking.com has left everyone in limbo. The good news for the online sector is that consumers now know that to get a discount, they HAVE to be online. More bad news for the High Street or those without access to the internet.
The UK-based market will now look to Europe, where legislators are more willing to draw a line. While nothing can be applied to the UK unless the European Commission gets involved, these commitments could yet fail to see the two years out.