EU Rate Parity

As rate parity falters, what OTAs and hotels may do next

In Europe, rate parity is a piñata that everyone’s taking a whack at. But not everyone in the industry agrees about what they’ll find inside.

Probes in Britain, France, Germany, Italy, Sweden, Ireland, and Austria continue to investigate rate parity, or contract clauses that stop operators from offering discounts on their brand.com websites.

Here are a few updates:

Britain’s Competition and Markets Authority (formerly the Office of Fair Trading) is due to announce its decision on hotel rate parity practices. Its earlier ruling had been partly overruled by a tribunal.

On 2 April, the German Federal Cartel Office (the “FCO” or “Bundeskartellamt”) sent a cease-and-desist letter to Booking.com over its rate parity clauses.

UPDATE: 7amET Booking.com makes changes to rate parity clauses in Europe

The move followed its parallel proceedings against its smaller competitor HRS that were upheld by a higher court in January. HRS deleted rate parity clauses from its contracts last year. Proceedings against Expedia continue.

In France, Accor and other hotel owners are participating in discussions among Booking.com (owned by Priceline Group), hotel unions, and the French Competition authority to establish more balance between the OTAs and hoteliers.

In December, Booking.com partly removed some of its rate parity clauses, enabling hotels to offer different rates for their rooms to other OTAs.

In January, France’s competition authority tested this solution to see if consumers were still, in its view, being harmed. Its verdict is expected soon.

The European Commission said that a settlement with key countries like France will be made valid for all of the Continent.

Finally, authorities in Sweden, France and Italy have this week also united to push Booking.com into making some changes.

Après la parité, le déluge

With or without rate parity, hotels are under tremendous pressure in Europe because OTAs and metasearch websites drive 70% of bookings, on average — significantly higher than the 35% to 50% range said to be typical in the United States.

Guilain Denisselle, an expert who has written about the rate parity debate for Tendance Hotellerie, told Tnooz that even if regulators curtail or stop rate parity, hotels still face a tough market:

“Many hotels will die. The estimation in France is that 3,000 to 4000 hotels will die out of the 18,000 actual hotels: too small, too old, not enough revenue, etc…

The hotels that can win are the ones that already understand the concept of rate integrity, that do not discount too much, that invest a lot in their product every year, and that talk to their customers and get their engagement.”

Some small OTAs also doubt that rate parity will level the playing field. Uwe Frers, owner of Berlin-based OTA Escapio, explained it this way:

“Sometimes Escapio gets a rate for a hotel that is lower than what is available on Booking.com. When that happens, within about six hours, Booking.com calls the hotel demanding parity.

Given that Booking.com has 50% market share in Germany, hotels listen and match the rate. That makes it harder for us to compete on price.”

Frers said that he hopes that the European Commission ends rate parity because the practice is wrong. But he is skeptical that things will change for small OTAs as long as Booking.com has such enormous market power.

Expedia and Booking.com in trouble?

A counter-argument to the gloom-and-doom comes from Dorian Harris, the owner of small travel website Skoosh and a prime instigator of the British investigation of rate parity.

In Harris’s view, Expedia and Booking.com — two of the largest players in Europe, along with HRS — have huge distribution costs.

Paid search is expensive: Expedia’s and Booking’s parent companies buy 5% of all of Google’s AdWords. Last year, Expedia Inc. alone spent $2.4 billion on marketing across its portfolio.

The key message of these Google ads is the “best rate guarantee,” the consumer-facing equivalent of hotel rate parity.

Without rate parity, these sites won’t be able to make the best rate guarantees a plausible part of their pitch to consumers. That will presumably weaken click-through. Harris said:

“Post-parity one of them could cut down on their Google advertising but, if it did, it will immediately lose market share to the other one and to upcoming competitors in this fickle market. Their shareholders wouldn’t be impressed.

Worse still, they have big affiliate costs, such as partnerships with airlines.

These partnerships will break down if Booking.com, for example, started discounting to its direct partners, thereby going into competition with its commercial partners.”

Metasearch may be hampered, too

Harris is also skeptical that metasearch will be able to thrive at the expense of hotels and smaller OTAs. He said:

Trivago also has huge distribution costs in the form of TV advertising.

It would only take a new metasearch site to come into the market with lower distribution costs than Trivago, and to offer OTA partners and hotels lower commissions in return for lower advertising prices.

Trivago would also have to cut back on its advertising spend to compete.”

2 things that may happen after rate parity

How will hotels and OTAs of all sizes respond to a world where rate parity is restricted in Europe? We interviewed several experts, and a consensus formed around the following likely trends:

1. OTAs would push for more “Most Favored Nation” (MFN) status with more regional hotel chains

Robert Cole, founder of Milwaukee-based hospitality and destination consultancy RockCheetah, said:

“You get rid of rate parity and the intermediaries will have greater leverage to start talking about MFN clauses with major hotel brands. An OTA may say that, it wants to make sure its, say, 20% discount isn’t exceeded by anybody else.”

MFN is a distribution agreement that is separate from rate parity. To explain how it works, here’s a made-up example.

Say that Accor is better at negotiating with Booking.com than Starwood. Say that Accor haggles so that it only has to pay 15% in commissions to the OTA, while Starwood agrees to pay 19% — all other things being equal.

Booking.com may then go to Accor and require MFN status, meaning that the hotel chain cannot distribute its inventory at a lower percentage discount to its OTA rival Expedia.

Flo Lugli, of the New York-based hotel consultancy Navesink Advisory Group, explained:

“OTAs could insist on specific agreement around MFN on any rates that are distributed to other third parties, in return for perhaps lower margins, a marketing fund concession, or other value that would be exchanged.”

Accor, assuming again that it is a sharp negotiator, could insist on better marketing terms in exchange for MFN status. For example, it might — we could imagine — require higher placement for its hotels in search.

To use our example again, say that Accor gives three percentage points greater discounts to Expedia, then Expedia could afford to sacrifice a point or two by undercutting Booking.com’s price while still making the same margin as its competitor. MFN status might prevent that.

2. TripAdvisor could enjoy a stronger poker hand

Frers believes that the collapse of rate parity in Europe could give TripAdvisor the lure it needs to enlist hotels in its alternative distribution channel, TripConnect.

Harris explained the underlying context this way:

“The essential characteristic of the hotel industry, and one which separates it from most others, in that the majority of people who stay in hotels only ever stay there once.

The obvious advantage goes to the OTA which can split the cost of marketing across hundreds or thousands of hotels.”

Even if rate parity falls — and hotels can start to charge less on their own sites than they offer via OTAs, they still face a competitive disadvantage.

Consumers prefer to shop in an aggregator model, because they’re not brand loyal to the typical hotel, on average.

Enter, TripAdvisor. Its platform offers direct bookings, where hotels get the information on the customer, plus lower commissions than what OTAs charge.

TripAdvisor also offers a presence on the most visited travel website in the world and, via Instant Booking, a mobile optimized booking experience superior to most hotels’ own websites.

The upshot: TripAdvisor might eat Booking.com’s lunch.

Other large hotel brands might feel empowered by the end of rate parity. Said Lugli:

“Many hotels and brands that know how to manage their rates and inventory may like to see rate parity go away, given some of the restrictions they operate under, especially for niche channels and short term promos.”

FYI: In the US, courts have repeatedly deemed hotel rate parity agreements to be legal, such as in a prominent case last year involving Marriott, Expedia, and Priceline.

3. Greater complexity of offers

Priceline Group’s acquisition of Rocketmiles offered a hint of how OTAs might fight in the future. Rocketmiles incentivizes hotel bookings through mileage bonuses with more than two dozen airlines.

By competing on a new-style of package price that includes mileage rewards, an OTA avoids rate parity issues.

Moe Ibrahim, CEO of the OTA Journeyful, said:

“OTAS could switch to tours and activities and other lead-generation package products. This way the hotel rooms, like air tickets, can just be lumped into a package price where naked pricing is never exposed.

The OTAs can make money from exclusive deals or other high margin products.”

Cole said he could envision other types of creative loyalty schemes, like 5% cash back.

BREAKING: Booking.com makes changes to rate parity clauses in Europe

EARLIER: HRS loses rate parity appeal, calls for unified approach

Priceline’s Booking.com eases rate parity after European pressure

– See more at: http://www.tnooz.com/

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