Expedia.com, Hotwire Reportedly Pay $35M in Hotel Taxes to San Francisco

Andrew S. Ross broke the story today that Expedia and Hotwire wired some $35 million in hotel taxes to the City of San Francisco.

If true -- and I'm trying to confirm it -- the development is a shocker.

The two Expedia Inc. companies had filed a notice of appeal, meaning they intended to appeal a Los Angeles Superior Court ruling that held that they must first pay the tax to San Francisco in order to appeal the whopping assessment.

This could be just a tactical defeat for Expedia and Hotwire. Perhaps they are indeed merely paying the tax in order to vigorously appeal it.

But, it would represent an abandonment of the OTA strategy to drag out the litigation for as long as possible.

What most people don't realize is that Expedia Inc., among the online travel agencies, is the company with the most to lose. Its hotel business is so massive, that the other OTAs face a much smaller liability and threat.

For background on the case, read this story I wrote July 7.

Today's San Francisco Chronicle story said that Priceline and Travelocity, which were not part of the Expedia.com-Hotwire litigation but were involved in separate actions, were expected to pay more than $6 million, as well.

I'm reaching out to San Francisco's chief tax attorney to confirm the story. And, I have e-mailed the online travel agencies tonight to get their take on the development and to find out what actions they have taken or plan to execute.

This is a major development in the five-year old hotel tax fight, as thousands of municipalities, counties and states target the OTAs with assessments or litigation related to hotel taxes on the full retail rate.

If true, I wouldn't be surprised to see the OTAs pull out of the San Francisco market in terms of offering hotels on a merchant basis.

If they intend to appeal the assessment, as I suspect they will, then perhaps they will continue to market the city's rooms on a merchant basis while an appeal is under way.

Other municipalities could get the same treatment regarding OTA boycotts if the cities prevail in the courts.

For now, I see that Expedia.com and Hotwire still are offering San Francisco rooms using the merchant model.

The OTAs have more litigation and adverse development hitting them on the hotel tax issue than they can handle.

New York City recently adopted an ordinance that holds hotel "remarketers" as responsible for tax on the retail rate. With such explicit language, it may become moot whether the OTAs can convince New York courts of the OTAs' contention that because they are not hotel operators, they thus are not responsible for the tax on the retail rate.

And, Expedia Canada just got handed a consumer class-action complaint against it, charging that it misleads consumers by bundling its "taxes and fees" instead of breaking them out in a transparent manner.

We'll have to see what the San Francisco development means in terms of the countrywide (and now Canada, too) legal battle.

Is it merely a significant defeat for the OTAs in one city -- or the dawn of a new era in terms of the ways they market hotels online?

Will the OTAs abandon the merchant model for hotels in favor of an agency model only?

Any abandonment of the merchant model would have a whopping impact on the OTAs, with Expedia feeling the most heat.

On the other hand, we saw when they abandoned booking fees on flights, that the OTAs can come up with flexible ways to try to recover.

Stay tuned here on what the San Francisco development really means.

I'm awaiting further details on this breaking news story.

Expedia Not So Happy About United's Credit-Card Plan

Major online travel agencies have been missing-in-action about their take on United Airlines' plan to make some travel agencies foot the airline's credit card fees, beginning July 20.

Expedia recently broke the silence, if you read between the lines.

Expedia Inc. spokeswoman Katie Deines, noting that Expedia.com had not been included in the United plan yet, said: "Expedia has not received a letter on this topic from United. We won't speculate on how hypothetical actions taken by our supply partners may or may not impact Expedia's business, but we are unsupportive of actions by travel suppliers that increase costs to consumers. We are closely monitoring the developments and have no further comment at this time."

So, Expedia is "unsupportive of actions by travel suppliers that increase costs to consumers."

This means that if United forced Expedia.com to pay United's credit card fees when Expedia.com customers book a United flight, then Expedia.com likely would pass on the cost to travelers.

The development occurs just as the dust has settled on the move by Expedia.com and its competitors to eliminate consumer booking fees on flights, and could force them to reinstitute the booking fees, implement new fees of some sort or eat the costs.

PhoCusWright financial analyst Jake Fuller has estimated that Expedia and Orbitz earn about $10 per ticket in GDS incentives and commissions, while Priceline gets about $2 on retail flights. Paying the airlines’ credit card fees would cost the online agencies about $6 to $8 per ticket, effectively wiping out the bulk of their GDS incentives and commissions.

The other OTAs have been reluctant to step into the line of fire on the sensitive topic.

In late June, Travelocity stated: "We are engaged with United to understand their planned actions regarding payment processes, but aside from that we don’t have anything else to say on the matter at this time. Thanks for understanding."

And, Orbitz Worldwide and Priceline both declined to comment on the issue.

Likewise, Amadeus has been the lone global distribution system (GDS) vendor taking a stance.

Amadeus North America spokeswoman Debbie Iannaci told me: "Airlines need to be cautious about adopting policies which could potentially have a detrimental affect on travel demand in the current environment. And we have always believed that the marketplace ultimately determines the success of any model. This action could potentially shift significant costs and risk to travel agencies at a time when they can least afford the burden. That cost could also inevitably be passed on to the traveler. Those additional costs and inefficiencies could have a detrimental effect on demand at a time when the industry needs travelers traveling."

Behind the scenes, I'm sure the OTAs and GDSs have plenty to say to United on the credit card issue.

It's good to see Expedia and Amadeus, at least, having the guts to be public about it.

Critics to Founders of hotels.com and getaroom: TakeAHike

A raging debate has broken out on this blog about the launch of getaroom.com, the brainchild of hotels.com founders Bob Diener and David Litman.

getaroom.com has a back-to-the future approach to travel distribution. Consumers see published rates and some rotating specials on the website, but then have to phone a call center to get steep discounts.

Hotels thus get to distribute their rooms and put heads in beds without brand dilution, and consumers get these semi-opaque deals, but know the identity of the property and its location before they book. For more more background, see my interview with Diener here.

A chorus of getaroom critics on this blog chimed in that Diener and Litman, who helped put hotel discounting on the map before the days of rate parity and best-rate guarantees, again are taking hotels down a slippery slope to the bottom of the fiscal heap.

"Sorry, I am struggling to understand where the innovation is here," said one anonymous observer. "Allowing a 4-star hotel to compete on PRICE with a 3-star hotel, is this what you call innovation? This is definitely not benefiting the industry. Hotels have fought for years to get to Rate Parity, Brand Protection, and to be able to sell direct on their own website. All I see in this new 'innovative' business is someone trying to make money quickly, but while doing that they are bringing the industry to the dark ages."

And, another getaroom.com basher wrote: "What isn't noted is what getaroom.com is taking as its cut. Hotels.com took 25%, money up front, and payment in the month following the stay. If this is their model for their new enterprise, it will only include the most desperate hotels during the worst periods of time. No one wants to be in that race to the bottom and get raped along the way."

However, a helluva lot of hotels obviously disagree as they vote with their feet. Look at all the properties that feed Hotwire and Priceline.

And plenty of properties see the value in getaroom.com. For example, Boston properties dabbling with getaroom.com include: the Colonnade Hotel, the Lenox Hotel, Wyndham Boston Chelsea, Copley Square Hotel and many more. Pick a city, you'll find plenty more.

If they weren't getting some distribution love from getaroom.com, they wouldn't be there.

What others see as another fatal flaw for getaroom.com is that consumers, finally accustomed to metasearch, online travel agencies and various trip-planning websites, will be very reluctant to dial for savings.

"In the age of the Internet why would people pick the phone to make hotel reservations?," another anonymous critic writes, taking up the theme. "I don't understand. People have moved away from offline a long time ago, and tomorrow's bookers are today's kids who do not even use email. They communicate on Facebook, YouTube, Twitter etc..."

getaroom.com certainly will not be the be-all and end-all for a lot of consumers, but why wouldn't a segment of savvy consumers, in this era when online-travel booking is so complex, phone a call center for a deal, especially when they know the name of the property and the location in advance?

Mary Song, the president and CEO of Propel Media, writes: "I think it's a brilliant idea given that hotels don't want everyone to know how low they are discounting, hence the success of Priceline and Hotwire. I agree with Dennis and would add that the subset of people who pick up the phone to make the final booking is quite large, but also that the site needs to make it more obvious that the best price to be had is actually over the phone and not online."

One anonymous defender of getaroom.com believes advocates of online-booking only aren't taking a broad enough view. "In my mind, the appeal of the getaroom.com model is the fact that it is the equivalent of saying 'Let me talk to your manager.' A website is not a decision maker and doesn't offer you a different price from Jo-Shmo next door because you pulled some strings or talked to the right person. This model subconsciously offers customers that value of a 'negotiated, rare rate' because of the strings they pulled, and frankly I think the value a consumer sees in that is currently being underestimated."

The anonymous comment-writer adds: "I think this model will be interesting to watch... Let's see what these 'kiddos' can do. If nothing else, it will be entertaining."

These kiddos, Diener and Litman, made a few pennies selling hotels.com -- now in the Expedia fold -- and own getaroom.com outright, with no VC funding. With deep pockets, Diener said they have "several million dollars" for marketing.

We're obviously comparing a few apples with acres of bananas here, but look at the strides Bing is making with, albeit a cool $80 million or so, as it seeks to blunt consumers' seemingly-automatic impulse to surf to Google.com to search.

Might not some consumers learn to halt their browsing for a bit, and dial that getaroom.com call center in Dallas?

Sounding like someone with inside knowledge, another person who commented on this blog wrote: "Getaroom.com is investing millions of dollars in promoting the site and the new way to book. By being on the site, it is massive free publicity for the hotel. The hotel controls the inventory. When a hotel needs more business they simply add inventory to the unpublished program, which they can take out anytime. Getaroom.com is being promoted now on many online sites, satellite radio, major newspapers and will soon begin a large television campaign. This all means free exposure for those hotels that participate."

The pushback to getaroom.com has been fairly heavy. Let's hope that critics aren't adverse to a company trying something new -- or should we say, something old?

As Mike Redbord tweeted to me, seemingly tongue in cheek: "Haters haters everywhere, give innovation a chance."

Voyage.tv, Mark Travel Go After the High-Hanging Fruit

Voyage.tv, in collaboration with wholesaler Mark Travel, is leveraging video on demand, dedicated cable channels and its website to target the luxury travel market.

I interviewed some of the executives and wrote about their media/transaction model in Travel Weekly.

There was an extensive industry-wide discussion in this blog several months ago about the inspiration phase of travel planning, and how the online travel agencies largely target consumers ready to book -- the low-hanging fruit.

Voyage.tv, in contrast, is taking a page from the likes of TravelMuse, UpTake and NileGuide, among others, and is focusing on the inspiration phase of the travel-planning process. Through its videos, Voyage.tv is targeting urban dwellers with visions of grand vacations and a cushy lifestyle experience at Caribbean resorts and other destinations.

This is believed to be one of the first attempts in travel to blend video on demand with website bookings, in this case facilitated by Mark Travel sister company Trisept Solutions.

For now, the videos prompt viewers to book the featured vacations online or to phone a call center to complete their transactions.

But, Trisept Solutions also is working on functionality that would enable consumers to book travel through their cable set-top boxes.

Will consumers want to book vacation packages -- a relatively complex product compared with ordering a movie or buying a book -- through their cable remotes?

It's an interesting experiment and maybe the moment indeed is approaching when video on demand makes its Mark (Travel) in travel. Mobile is said to be getting there, so why not video on demand, too.

In 2002, Worldspan stormed similar barricades when it launched the first interactive TV travel application with a U.S. cable company.

But, nothing much ever came of Worldspan's pioneering.

Well, like Worldspan and Star Trek, Voyage.tv is attempting to navigate, "Where no man has gone before."

Beam us up, Voyage.tv. Let's hope your chances are more than remote.

Hotels.com Founders At It Again

For those of you who wax nostalgic and long for the days when the sales staffs of Expedia.com and Hotels.com went after each other with figurative tire irons as they sought one-upmanship in merchant-model hotel deals, your prayers may have been answered.

Tom Botts of the Hudson Crossing Travel Industry Insight blog scooped me again (you gotta cut it out, Tom) and reported that hotels.com founders Dave Litman and Bob Diener have launched hotel website getaroom.com.

You might want to think of Litman and Diener as the E.E. Cummingses of the hotel space as both hotels.com and getaroom.com are lower case.

With their five-year noncompete agreements having expired by Jan. 1, 2009, maybe it is poetic justice that the duo is back in the game.

You have to love it when entrepreneurs sell their baby, in this case in bits and pieces to Barry Diller's USA Interactive (USAI) in 1999 and 2003, and then reconvene years later to compete against their offspring.

Likewise, some of the key players in the early years of SideStep, unhappy about SideStep's dismantling after Kayak bought it, introduced Voyij.com , and are blazing a path that Litman and Diener are following, as well.

Back in the day, when Expedia.com and Hotels.com were consolidated inside USAI, they had such a hold over merchant model hotel deals that one hotel executive told me in 2002 "they've [almost] created their own distribution system."

Today, Expedia Inc., the parent of Expedia.com, hotels.com and Hotwire, still is a dominant player in hotels among the online travel agencies.

How dominant? Consider that when the City of Anaheim, Calif., billed Expedia, Orbitz, Priceline and Travelocity $21.3 million in back hotel taxes and penalties earlier this year, Expedia, hotels.com and Hotwire owed $17.7 million -- and Orbitz, Priceline and Travelocity owed a mere $3.6 million combined.

In getaroom.com, Diener and Litman are approaching the market in a different way, as the website focuses "on a limited number of major destinations and selects the properties in each destination that offer you the very best values. By focusing on a select group of properties, we are able to negotiate better rates for you."

But if that is a new twist, then some aspects of getaroom.com have a familiar ring. hotels.com was founded in 1991 and bookings were made on discounted rooms by dialing a toll-free number.

And, in that tradition, getaroom.com displays a toll-free number at the top of its home page, although online bookings undoubtedly will be the predominant booking method.

Times have changed since the days when hotels.com and Expedia.com were at loggerheads, and even more powerful than they are today. Hotels have reasserted their control over pricing with best-rate guarantees, and the merchant model is under pressure.

Still, it will be interesting to see what kind of mark these two hotels.com veterans can make.

Tire irons, anyone?

Bing Travel Outage a Real Downer

As of this writing, Bing Travel (a.k.a. Farecast) has been down for almost a day-and-a half.

Various news reports, including this one, indicate a fire in a downtown Seattle data center, probably caused by a blown transformer, took down Bing Travel and a host of other nontravel websites.

A photo depicts an unidentified person from one of the impacted websites hauling a server out the door of Fisher Plaza, the site of the fire.

A notice on Bing.com/travel stated:

Sorry, Bing Travel is currently unavailable

A fire occurred at Fisher Plaza in downtown Seattle just after midnight on Friday morning, July 3. A blown transformer knocked out power to the entire building, which is home to the Bing Travel servers. This is isolated to Bing Travel only, and there has been no impact to any other aspects of Bing. We're hard at work to restore service following this unexpected event and appreciate your patience.

In the meantime, you may use Microsoft's travel partner, Orbitz, for your travel needs.

The usual travel link on the Bing homepage was removed, but the outage seemingly doesn't impact other services on Microsoft's new search engine (excuse me, "decision engine"), Bing.

The Bing Travel outage, however, does impact Bing's slew of travel industry partners, including technology providers, airlines and hotels, and certainly won't inspire consumer confidence.

However, the reputation hit may be short-lived. After all, there are few customer service issues involved because Bing Travel, as a metasearch site, is not a travel agency and doesn't book any travel.

There's no further detail yet from Bing Travel about what happened and why a back-up system, if there was one, didn't kick in. Bing Travel is a relatively small company, but Microsoft would certainly have the monies and resources to power a solution for such outages.

There will be lessons learned from this fiasco about data center security and redundancy. Many large travel companies, including Amadeus, have back-up data centers. Amadeus's data center is located in Erding, Germany, and a clone of that one is positioned 30 kilometers away.

TechFlash reported that a fire occurred at the same data center in June 2008, and a Redfin official outlined some of the steps the company took to avoid what author James Baldwin might have characterized as "The Fire Next Time."

Especially since 9/11, data center security is paramount.

Meanwhile, it was interesting this morning that a Google search for Bing Travel retrieved Bing Travel's outage announcement as the top organic result.

Conversely, a Bing search for Bing Travel produced no word of the Bing Travel unavailability, at least on the first page of results.

And, the second-highest Sponsored Link in a Google search for Bing Travel was from Kayak, which reportedly has accused Microsoft of copying Kayak's look and feel.

The other day there was a Twitter debate about whether some of the underlying technologies that help make Bing Travel and Kayak go dictate the allegedly similar GUI. I'm no expert on that question, but I tend to doubt it.

Both metasearch sites use ITA Software to power the bulk of their air searches so they can largely avoid scraping airline websites.

And, both Bing Travel and Kayak count Orbitz as a key online travel agency partner.

No, for conspiracy theorists out there, I don't think the Bing Travel outage was the result of a foray by a Kayak hit team.

Seriously, Kayak and Bing Travel, while ardent competitors, have a lot of respect for one another and both have great products.

I was just about to write that both Kayak and Bing have great tech teams, too. Well, for Bing Travel this weekend, the jury has to be out on that question.

United's Fee Passalong Could Tilt Playing Field Back Toward Airline-Direct Channel

United Airlines' decision to test the waters and have some travel agencies foot the fees for credit-card transactions when selling United flights could conceivably tilt the airline-online travel agency marketshare-skirmish back toward the airlines.

As Tom Botts noted in the Hudson Crossing Travel Industry Insight Blog: "If adopted even more broadly and applied to the Online Travel Agencies, they would be forced to reinstate some sort of booking fee in order to cover the costs of paying credit card merchant fees. This would return a pricing advantage to the airline.com websites that has recently been removed by all of the major players in an attempt (which we have heard has been successful) to drive growth."

In fact, PhoCusWright financial analyst Jake Fuller, in his recent report, Does the Model Work Without Fees?, cited "indications of a mid-teens increase in air-transaction volume since waiving fees [in March and April] suggests a rise in [OTA] share to 37% and that OTAs would be able to offset at least some of the lost fees through volume."

Fuller pegged the OTAs' share of online-flight bookings at 32 percent in 2008, down from a peak share of 44 percent in 2002.

So if a bunch of major carriers follow United's lead on credit-card fee avoidance and the OTAs are forced to reinstate some form of consumer-booking fee to shoulder the new burden, then the increased volumes that the OTAs have seen in the last few months may evaporate as some consumers return to airline websites for flight-booking.

And, as Nadine Godwin notes in her Travel Weekly piece, United's initiative could drive more travel agent bookings to United.com, as well.

Godwin writes: "Alternatively [instead of agents absorbing the fees and booking United flights using their own merchant acounts], it could push agencies to book at the carrier's website rather than the GDSs, leaving United to pay credit card merchant fees but bypass GDS fees."

Travel organizations quickly are taking sides on the issue.

ASTA (American Society of Travel) has taken a dim view of the United plan and reportedly stated that it would be asking the Justice Dept. to monitor possible airline collusion on the issue since carriers have openly aired their feelings on the question of reducing credit-card fees for some time.

And Robert Joselyn, a prominent travel industry consultant, reportedly is urging travel agents to book carriers other than United as a form of protest to convince the airline to rescind its new credit-card policy.

After greatly reducing their GDS fees several years ago, many airlines identified credit-card fees as the next battleground in the drive to reduce distribution costs -- but United's is the first potentially game-changing attempt.

In a July 2007 Travel Weekly article, Al Lenza, then Northwest's vice president of distribution and e-commerce, said credit card fees were soaring and it was critical for Northwest to trim its "dependence on credit cards."

Lenza was the point man in Northwest's ill-fated drive in 2004 to have agents pay a "shared GDS fee" in an attempt to reduce Northwest's distribution costs. After vehement protest by travel agencies and the GDSs, Northwest withdrew the plan.

Lenza left Northwest in 2008 when it merged with Delta, and The Beat reported in February that he began working at United on distribution strategy.

Industry Insider: Hotel-Tax Battle 'Could Get Ugly'

When the microphones and tape recorders are switched off, what are travel industry insiders saying about the protracted hotel-tax battle that municipalities and the online travel agencies are waging in court rooms and tax assessors’ offices across the country?

Someone, whom I shall call "Industry Pundit" to protect the innocent, exchanged some e-mails with me after I let him know that Expedia began remitting taxes on the retail rate for merchant-hotel bookings in Columbus, Ga., to comply with a court order. And, of course, news of that development leaked out after the Georgia Supreme Court gave Expedia a bashing.

Industry Pundit: But didn't Expedia just move to retail (GDS) rates in Columbus rather than pay taxes on the full consumer rate that was still sold on a merchant basis? I'm not at/near a computer so I can't really tell.

Dennis: Expedia stopped its merchant-hotel business in Columbus before a court order in mid-September ordered them to pay taxes on the retail rate. But they had bookings in the pipeline [meaning guests would complete their stays after the court order took effect] so Expedia paid taxes on the retail rate for these to comply with the court order.

Not much money is involved, but I think this is the first time that money has changed hands and taxes paid on the retail rate.

Industry Pundit: Interesting. It could get ugly.

Dennis: How could it get uglier? I can see the OTAs withdrawing from Georgia. Period.

Industry Pundit: Texas is next in line. California after that. New York, too. Lots of people [meaning cities and states] with their hands out.

Dennis: Ugly:) And, so much for the OTAs having the momentum (not).

Industry Pundit: But we'll see. I do think they need a new strategy. Juries will see them as just another corporate bad-guy stiffing people like AIG. Not good for lawsuits or sales.

-----

Alas, that was the dialogue. The speculation about the OTAs' next moves on the hotel-tax front continues.

Another insider, who's really inside the loop, told me: "Getting lots of feedback/theories as to why Expedia paid."

Meanwhile, Robert K. Cole , who is not the Industry Pundit or other industry insider cited above but has some ideas of his own on the subject, believes more OTAs will swap merchant for retails sales as margins get compressed and settlement and legal costs rise.

Indeed, the genie is out of the bottle.

Historic: Expedia Remits Hotel Tax on Retail Rate

Did Expedia cross the Rubicon or just put its toes in the water?

At any rate, Expedia.com silently made hotel-merchant model history over the last few months when it remitted taxes on Columbus, Ga., hotel bookings based on the retail rate, which includes taxes and its service fee.

Until now, as online travel agencies fight hotel-tax battles and even win their share of hotel-tax lawsuits across the country, they have been assessed and penalized in some jurisdictions, but no additional tax money is believed to have changed hands as legal appeals were under way.

But, Expedia confirmed to me yesterday that it remitted taxes on the retail rate -- and not merely on the net rate it negotiates with hotels -- in the months since it dropped out of the Columbus, Ga., market so it could comply with a court injunction.

This issue of whether online travel agencies should be taxed on the net rate or the retail rate in merchant-model hotel bookings is at the heart of the tax dispute.

The reason Expedia.com had to remit the taxes on the rate it charges consumers, so it could comply with the court order, is because although consumers pre-pay merchant-model bookings, the hotels invoice Expedia only after the guest stays at the hotel.

This meant that while Expedia stopped selling Columbus, Ga., hotel rooms by mid-September 2008, before a court ordered it to start remitting taxes on the retail rate, the OTA had bookings in the pipeline and travelers staying at the city's hotels after the injunction was issued.

So, Expedia complied with the court order while it was appealing that case to the Georgia Supreme Court. And, earlier this week Expedia lost that appeal in Georgia's highest state court, setting the stage for Columbus, Ga., to dog Expedia for hotel taxes going several years back.

On the Rubicon versus toe-dipping question, I tend to think the latter is in play because the OTAs have indicated they would rather abstain from selling merchant-model hotel rooms in jurisdictions with adverse tax rulings than remit taxes on the higher retail rate. And, on a relative scale, there isn't much tax money involved, perhaps a couple of million dollars at the most, in Expedia's Columbus bookings.

In September, the trial court in the Columbus, Ga., case also ordered Expedia "henceforth" to separately break out hotel taxes and service fees to consumers instead of lumping them together as "taxes and fees" in merchant-model bookings. The court said Expedia.com should detail the taxes and fees either when travelers book on Expedia.com, when they occupy the hotel room, or at both times.

Being transparent about their services fees and therefore their margins is anathema to the OTAs and some of their hotel partners for competitive reasons.

And, this is my problem with the merchant model, as currently practiced. Whether they are legally required to do so or not, the OTAs should spell out to consumers in a transparent manner how much the OTAs charge as a service fee and what the various hotel taxes amount to.

Consumers absolutely have a right to know what they are paying for.

If the OTAs are customer champions, as some claim to be, then hiding behind "taxes and fees" is untenable.

The OTAs have lost recent cases in Columbus, Ga., and Anaheim, Calif., although certainly it is debatable, as Elizabeth B. Herrington, an attorney representing Orbitz, argues, which side has the momentum.

If the OTAs are forced to abandon or severely restrict their merchant-model business, this development would certainly place their business operations under significant stress.

With the recession in full swing, the OTAs already are feeling additional pain because they eliminated booking fees for flights and some have reduced service fees on hotels, as well.

In a new report for PhoCusWright, "Does the Model Work Without Fees?," Jake Fuller details how the OTAs, particularly Orbitz and Travelocity, are experiencing a profit crunch from the fee loss, although waiving fees might enable the OTAs to pick up share from supplier sites.

"Our analysis suggests that OTAs would have to increase ticket volume by 45-90% to fully offset lost fees, and air bookings' share of OTA sales would have to increase from 32% in 2008 to 46-61% (versus the 44% OTA share at the peak in 2002)," Fuller writes.

These pressures are one reason that Expedia is throwing a lot of money into its TripAdvisor advertising/media business, Orbitz is trying to develop a media business and Orbitz and Kayak might be perfect together.

The joke at a recent travel conference was when would Expedia Inc. subsidiary TripAdvisor buy Expedia?

A far-fetched idea, but...

Taking You Inside Expedia's Hotel Merchant Model

The South Carolina Administrative Law Court in February ruled that Expedia owes the state almost $6.4 million (actually $6,376,454.71) in accommodations tax for its merchant model hotel bookings from July 2001 to June 2006.

As I wrote, Expedia and the other major online travel agencies face these sorts of administrative tax proceedings by states and municipalities across the country.

For example, in addition to South Carolina, Expedia has received tax assessments or notices of audit from the states of Texas, Pennsylvania, Florida, Georgia, Indiana, New Mexico, New York, West Virginia, Wisconsin and Kansas.

And, as Expedia fends off and fights for its position in these state proceedings, the above list doesn't even take into account all of the counties and cities that independently are going after Expedia and other online travel agencies on similar grounds.

Although many of aspects of the OTA merchant model are generally known to industry peeps, the South Carolina decision puts it all together in a way that I found very informative.

The South Carolina court said that Expedia, which fully cooperated with the audit, contracted with 364 South Carolina hotels on a merchant-model basis during the five-year period under review.

Both the state and Expedia stipulated that the merchant model works like this:

• The Expedia-hotel contracts assign pre-negotiated net rates for rooms;

• The hotel makes available to Expedia a base number of rooms;

• But "the hotel retains the right to book the reservations itself through channels other than" Expedia's;

• Expedia faces no liability if it doesn't sell the number of base rooms available;

• Expedia's retail rate to consumers includes a mark-up of the net rate, an additional margin in the form of service fees, other fees including resort fees, and tax recovery charges based on the net rate;

• Expedia is the merchant of record in the consumer transactions;

• The hotel invoices Expedia for the net rate and the accommodations tax, which is based on the net rate.

• Expedia pays the invoice to the hotel for the net rate plus a tax recovery charge based on that net rate.

• Expedia has not filed accommodations-tax returns and has not paid accommodations tax to the South Carolina Dept. of Revenue;

• And, the hotel pays accommodations tax to the state based on the net rate it gave Expedia.

Hence the gap and the issue because South Carolina -- and others of the thousands of taxing jurisdictions in the U.S. -- want Expedia and other online travel agencies to pay tax on Expedia's margin, including service fees.

The South Carolina administrative court found that Expedia "was liable for sales tax on its entire gross proceeds of sale, including not only the net room rate, but also Petitioner's [Expedia's] margin and service fees."

Expedia and other online travel agencies have won a handful of the court decisions that were decided on the merits, but they have faced setbacks in Columbus, Ga., and adverse administrative proceedings in locales including Anaheim, Calif., and the states of South Carolina and Indiana.

In addition, a U.S. District Court in San Antonio, Texas, last year certified the City of San Antonio's hotel tax suit against the major OTAs as a class action on behalf of all the state's municipalities that collect occupancy taxes.

It is easy to see why, facing the pressure from thousands of tax authorities, Expedia, Hotels.com, Travelocity, Priceline and Orbitz have adopted what I referred to in a podcast as a Google Earth strategy, placing pins on a map and removing their hotel sales from cities where tax rulings have gone the wrong way.

The OTAs, engaged in this game of hardball, may find new allies in local hotels.

David Cassell, general manager of the Columbus Marriott in Columbus, Ga., told me that the city's hotels are down hundreds of thousands of dollars in revenue since the OTAs pulled out of the city and the properties have been unable to recoup the sales through discounting and other promotions.

Cassell believes that the city is shooting itself in the foot. "In my opinion, the taxes lost on the revenue that would have been generated could have far outweighed the money they [the city] would have received in back taxes," Cassell said.

The Google Earth hotel-tax battle continues.

Holy Pegasus! Ratio of Travel Lookers To Bookers Is Off-the-Charts

Do you want to know why online travel agencies are doing everything they can to enter the media/advertising business?

Do you want to understand a key reason why Expedia eliminated consumer fees on airline bookings?

Do you want to comprehend in a concrete way why airline, hotel, car rental and OTA websites don't appreciated metasearch screen-scraping?

Then consider these statistics from hotel-room distributor Pegasus Solutions, with 86,000 hotel properties in its global portfolio:

• As of March 2009, the average number of looks per reservation on each website in the Pegasus network was 1,900 to 1. That's a 26.7 percent increase in the past year.

• A Pegasus spokeswoman explained that "we have some sites whose ratio is in excess of 10,000 to 1 or more. The trend is certainly indicating substantial growth in shopping activity."

• Pegasus stated that the look-to-book ratio was 1,100 to 1 in March 2007 and 1,500 to 1 in March 2008.

What this means is that increasingly few consumer-shopping inquiries lead to actual bookings. One can only speculate on the reasons: Increased bargain-hunting given the current economic woes; increased Internet adoption by travelers; heightened competition; and perhaps the complexity of the travel-planning and travel-booking process.

So, when you see Expedia allocating huge sums of money into TripAdvisor's media business and its global expansion, you can better understand why an OTA would pursue a high-margin media business given the increasingly fruitless quest to close a hotel transaction.

In fact, TripAdvisor's strategic value was apparent in Expedia Inc.'s first quarter results. TripAdvisor's operating income before amortization of $48 million accounted for 36.9 percent of Expedia Inc.'s OIBA. And TripAdvisor's $48 million contribution represented a 37 percent jump over the $35 million it produced a year earlier.

Orbitz Worldwide, too, sees building a media/advertising business as an imperative.

And, after Expedia eliminated -- at least temporarily -- booking fees on flights in March, officials explained that it was losing too many lookers to airline websites so it erased the fees to stem the tide. With pricing parity on flights with airline websites, Expedia hopes to diminish its look-to-book ratio.

And, with look-to-book ratios soaring, it is understandable why supplier and OTA websites would be angered by screen-scraping, even if new metasearch entrants like Voyij.com engage in screen-scraping lite.

There is a cost associated with each one of the 1,900 searches required to bring home a booking.

Holy Pegasus!

Hotel Taxes: Travelocity Makes the Thickened Plot Even Thicker

Not talking baseball here, but Travelocity has executed a Baltimore chop.

As I reported in Travel Weekly today, Travelocity.com earlier this year ceased selling merchant inventory from 14,000-room Baltimore, Md., because the city enacted a law to tax online travel agencies' service fees in 2007 and sued the major OTAs late last year.

This follows the news that Expedia, Travelocity, Orbitz and Priceline nixed merchant offerings from Columbus, Ga., after a judge in November ordered Expedia to begin paying hotel taxes.

Travelocity's decision to go solo on Baltimore, with Expedia, Priceline and Orbitz so far not following its lead, produces an interesting competitive scenario.

You can find Expedia.com offering rooms at the Baltimore Hilton on a merchant basis, but at Travelocity there is no pre-paid option for the Baltimore Hilton.

So, Expedia earns its hefty fees for the property and Travelocity merely collects a commission.

Perhaps some of the other OTAs soon will adopt Travelocity's stance on Baltimore, too.

At any rate, as I noted yesterday in a post, the major OTAs increasingly will choose which hotel markets to embrace and which to drop if tax decisions hit the OTAs adversely.

With the Baltimore and Columbus, Ga., chops, the OTAs are playing hardball.

I wonder if they soon will turn their attention to Annaheim, Calif., where a hearing officer tagged them for $21 million in back taxes. The case is being appealed.

What they are saying, in essence is: If you seek to tax us on the merchant model, which is the heart of our businesses, let's see who will suffer the most.

Will it be municipal tax coffers and local hotels if we don't market your properties, or will it be the OTAs?

That is the taxing question.

Online Travel Agencies and Hotel Tax: The Plot Thickens

With the news that Expedia, Orbitz, Priceline and Travelocity have removed from their hotel pages merchant-hotel offerings from properties in Columbus, Ga., the plot thickens.

It is easy for the online travel agencies to erase room offerings from a relatively small municipality like Columbus, Ga., with its 3,200 hotel rooms, when a court rules that the OTAs need to pay occupancy taxes on the retail rate.

But, what happens if things don't go the OTAs' way on the hotel-tax front in a few large cities?

Although it is under appeal, a hearing officer in Anaheim, Calif., ruled that the OTAs owe the city around $21 million in back taxes.

So far, the OTAs are still booking merchant-hotel rooms in Anaheim.

Boycotting large cities in terms of no longer offering their rooms on OTA sites could be a bit more painful for the OTAs than erasing Columbus, Ga., from the OTA map.

Meanwhile, given their current strategy, the OTAs hope that Columbus, Ga., feels some hurt for dogging the OTAs' about room taxes.

Other than Columbus, Ga., and Anaheim, Calif., the OTAs have won the handful of hotel tax cases that have been decided on the merits, even as hundreds of states and municipalities pursue administrative tax remedies against the OTAs.

The OTAs are trying to minimize their tax exposure and are sending a message to other cities around the country that if they pursue lawsuits against the OTAs and prevail, it will come with a price.

The underlying message is: Go after us for taxes, then see what it's like to try to put those heads in beds on your own.

For now, the OTAs would rather lose some business around the edges than change their merchant-business model.

The Deal About a New Metasearch Site's Scraping Ways

Voyij.com is putting its claim down on a metasearch niche as it focuses on aggregating "deals" from users' home airports.

But, as I wrote in my post, "SideStep Dream Team Launches Voyij, but Parts of the Voyage Appear Shaky," the self-funded start-up, which launched last week, risks earning the wrath of online travel agencies and suppliers by its Web-scraping tactics.

A Voyij spokeswoman conceded that the metasearch site is not using ITA Software, as do several other metasearch sites, for aggregating airline information directly from the carriers' reservations systems because it would be relatively expensive. And, using ITA for these purposes also might not be especially helpful because Voyij primarily is interested in deals inventory and is not conducting more comprehensive, real-time searches of airline fares.

And indeed, the spokeswoman said, Voyij has yet to form relationships with the wide array of sites -- including most of the major OTAs, major airlines and hotel chains -- that it is collecting data from.

For example, Voyij gets data from Travelocity, which told me that it has no partnership with the new site.

On the screen-scraping issue, the Voyij spokeswoman said: "Yes, old-fashioned, but based on the content we are going after, specifically 'deals' and 'sales,' this is currently the best, if not the only, way to get it."

"The main point here," the Voyij spokeswoman continued, "is that we're doing something new and unique in the industry by focusing on this specific content and, as hopefully you can appreciate, we'll certainly have some of the growing pains associated with any start-up doing something new."

Indeed, despite some of the search glitches on Voyij that I referenced the other day, a tech guy at another online travel company told me he likes the clean look of the Voyij GUI, especially the way the search for deals from the departure city takes place on the home page and further decisions are pushed off to the next page. The techie also likes the way Voyij integrates Twitter.

Regarding partnerships, the Voyij spokeswoman said: "We needed to launch to get credibility and to get someone to pick up the phone at an OTA. We will be looking to formalize our relationships with the OTAs as well as other suppliers now that we are live."

It is shocking to me that Voyij management, with all of its experience at SideStep, can't get OTAs to answer their calls.

But, I have the feeling that the OTAs now will be answering Voyij's calls -- or will be making their own calls or writing formal letters to complain about the scraping.

Speaking of SideStep, Kayak bought the company in 2007 for around $200 million.

The SideStep expatriots who now are running Voyij feel "bitter sweet" about SideStep's imprint in Kayak because you'd be hardpressed to see any trace of it other than in the Kayak Deals section these days, the Voyij spokeswoman said.

"We are very happy with the sale, but do wish we could point to a site and say, 'see that's what I spent so many years of my life building,' the Voyij spokeswoman said. "Given the choice between the two, I think everyone at SideStep would pick 'exit.'"

Kayak CEO and co-founder Steve Hafner had no comment.

In Block-ade-Buster Move, Orbitz Launches 'Open Cuba' Campaign

Orbitz is offering a $100 coupon toward a four-night vacation package to Cuba and the online travel agency's Away.com brand is featuring a Cuba Travel Guide, with tips about exploring Old Havana and the Afro-Cuban heritage in Santiago de Cuba.

Imagine that.

It's all part of a petition campaign and website that Orbitz is officially launching tomorrow that calls on Congress and the Obama administration to end the 50-year-old Cuba travel ban. The petition reads:

"We call on you to reverse our failed policy of isolation and end the 50-year ban on travel to Cuba in the United States. We believe that every American should have the freedom to travel to any country in the world, including Cuba, because the interaction between peoples from different countries is the single most powerful way to advance the causes of peace and prosperity."

In light of the Obama administration's steps to loosen travel to Cuba by Cuban families, I heartily endorse the effort.

Americans should have the right to travel anywhere, and I give credit to Orbitz for taking the bold step to take a leadership position in the travel industry on this issue.

Orbitz and market-research firm Ipsos released a poll in tandem with the campaign launch that shows that 67 percent of respondents would back a plan to allow travel agents to book Cuba travel and 63 percent supported allowing online travel agencies to do so, as well.

I believe this was a bold move by Orbitz because the OTA risks a boycott and a backlash.

And, it's also curious that the Interactive Travel Services Association, the trade group that represents major OTAs and global distribution systems (GDSs) like Sabre, Galileo, Worldspan and Amadeus, didn't lead or at least join in the effort.

Perhaps there is some dissension in ITSA about the move.

As much as I applaud Orbitz's Open Cuba campaign, I have to say that offering the $100 coupon for Cuba travel cheapens the effort.

Signers of the petition get emailed a promotion code, which is good toward a four-night Cuba air-hotel vacation package if you register on Orbitz.com and once the federal government approves travel to Cuba for the general public.

Orbitz officials plan on presenting the petition to U.S. officials in Washington, D.C., later this year, but the coupon offering opens Orbitz to charges that the petition signers may have been swayed by the discount.

At any rate, I hope other major travel companies and nontravel companies join the campaign.

It is not only a travel issue, but a human rights issue.

There is growing momentum toward lifting the Cuba travel ban and travel companies, including some airlines, are getting excited. AirTran Airways and Allegiant Air already are dusting off plans.

In the Orbitz-Ipsos poll, 72 percent of respondents said they believe restarting U.S.-to-Cuba travel would benefit the daily lives of the Cuban people.

Clearly, the boycott hasn't worked and only has served to cause greater suffering for the Cuban people.

Let's take this opportunity to push travel to Cuba and to put pressure on Raoul Castro to open up the society.

Dara and Barney: Gamesmanship and the Orbitz Zero-to-Hero Hotel Plan

In a post, Expedia's Booking Fees: The Trigger Point in late March, and in the finest traditions of New York Post Page Six and TMZ, I recounted a rumor making the rounds that Expedia CEO Dara Khosrowshahi had supposedly gone after Orbitz and eliminated flight-booking fees because he was angered at Orbitz for hiring Barney Harford, an ex-Expedia exec, as the Orbitz Worldwide CEO.

Actually, the flight- and hotel-fee wars, which Expedia kicked off March 11, had nothing to do with personalities and much to do with Expedia losing bookings to airline sites, as well as to Priceline, which nixed air-booking fees last year.

And, the timing of Expedia's booking-fee deletion also coincided nicely with subsidiary TripAdvisor's launch of its flight metasearch product. With the air-fees gone, Expedia could compete nicely on flights with airline websites.

But, if Dara wasn't miffed at Barney's hiring in January, Khosrowshahi should be upset about it now.

That's because Harford is hellbent on putting some muscle into OWW's relatively small hotel business, and in the process he's taking on Expedia's sweetspot.

In the process, some of Harford's actions have caught Expedia flat-footed.

Since late April, Orbitz has reduced its hotel-booking fees, a development that impacts Expedia at a rate of around $3 million per month because Expedia matched Orbitz's trims.

And, Orbitz also began displaying the total cost of a room in initial display results, and this week introduced its Hotel Price Assurance program, both of which were industry firsts.

And, Harford, who helped build Expedia's hotel business in Asia-Pacific a few years back, promises much more to come on the hotel front.

"We believe that the hotel business is the long-term area of focus for us and we are committed to making the appropriate investments behind that," Harford told financial analysts yesterday.

The company that was founded by major U.S. airlines almost a decade ago, before being bought by Cendant/Travelport and then spun off into an IPO, now is refocusing its tech teams and hoping to transform its hotel infrastructure and clout.

Harford characterized the global hotel business as "huge, yet the online hotel distribution landscape is still very immature."

"We have scale at the level of customer demand and have the opportunity to close the gap by focusing on initiatives that make it easier for those customers to book hotel(s)," Harford said.

Meanwhile, Harford claims that Orbitz has been able to weather Expedia's booking-fee attack and will be able to offset its own loss of those fees.

Factors in recouping the lost fees, Harford said, include increased air-ticket volumes because of the fee elimination; incremental bookings of vacation packages; the renegotiation and rationalization of e-marketing agreements; an increased focus on SEO (Search Engine Optimization) and CRM; $40 to $45 million in expense reductions since November; and a year-over-year jump of 12 percent in Orbitz’s advertising and media business to $14 million in the first quarter.

Considering these offsetting factors, Harford added, Orbitz has “the flexibility” to “sustain” its actions on air- and hotel-booking fees.

Translation? This could be Barney's smoke-signal to Dara that if Expedia intends to drive the online travel agency business into the ground by making permanent the now-temporary implementation of flights-without-booking fees past the end of May, then Orbitz can survive the pressure and will maintain its own reduction in hotel-booking fees, which causes Expedia great pain.

On Harford's part, this could be gamesmanship or it could be resolve.

Barney Harford and the Orbitz Flip

There has been much speculation this year that Orbitz is in play, that online travel agency consolidation will take place this year. Various analysts have talked about the possibility of Expedia acquiring Orbitz or perhaps Orbitz and Travelocity buddying up in a merger.

One industry analyst, who playfully describes himself as "one unusually brilliant and insightful industry analyst," even recounted speculation that Orbitz CEO Barney Harford, who was hired for the top post at the beginning of the year, was brought in with the express purpose of "flipping" Orbitz to a prospective buyer.

Actually, another possibility that is not getting much air time is a scenario where Travelport would reacquire Orbitz, and there are plenty of clauses in Harford's employment agreement that relate to that possibility.

Meanwhile, as the industry speculates about Orbitz's fate in 2009, Harford, who previously helped Expedia Inc. build its hotel business in Asia-Pacific, has been busy attempting to turn around the company and is looking like a pretty smooth operator.

And, indeed he has executed a "flip" of sorts, repositioning Orbitz with a marketing message that points to its consumer advocacy.

That is a helluva transition from its less-than-humble beginnings as what the trade press often referred to as "the controversial airline-owned website."

This blog has been buzzing as of late about "legacy OTAs" and their difficulties in differentiating. For more on that see, Travel's Best and Brightest on 'Legacy OTAs' and State of Online Travel 2009.

Although we'll have to see how long it lasts, Orbitz certainly has stepped out from the OTA pack with its Orbitz Hotel Price Assurance , and its moves to trim hotel booking fees and to display the total price of hotels up-front. Last year, Orbitz also led the OTAs in offering price assurance for flights.

Travelocity had carved out a marketing niche as a "customer champion," but it appears that Orbitz is stealing some of Travelocity's thunder.

Travelocity, Expedia and Priceline are sitting tight for now, waiting to see if Orbitz's price assurances actually reassure consumers and translate into bookings.

The predominate opinion among analysts is that Orbitz has come up with a nifty marketing message, and that the Hotel Price Assurance won't hurt the Orbitz bottom line too much because of the restrictive nature of its terms.

But, for now, it appears that consumers actually have a reason to book flights and hotels on Orbitz -- Harford's assurances are in place.

And, I'm not being flip about it.

Travel's Best and Brightest on 'Legacy OTAs' and State of Online Travel 2009

The comments below from travel company founders, CEOs and presidents; industry analysts; and veterans initially appeared under my post, GDS Full-Content, Twitter Metasearch, Southwest, Expedia, TripAdvisor.

They largely came in in response to an Expedia statement that I cited about the tough competitive environment for "legacy online travel agency companies."

You'll find comments below from top execs like Gregg Brockway (Hotwire, Classic Vacations, TripIt), Kevin Fliess (TravelMuse), and Valyn Perini (OpenTravel); analysts Henry Harteveldt (Forrester) and Lorraine Sileo (PhoCusWright); and a slew of industry veterans from Joe Buhler to Robert Cole.

These comments are noteworthy not merely for the fancy resumes attached to their authors, but for their often-mind-blowing insights. Many of the comments could stand as blog posts in their own right.

Feel free to add to the thread, which amounts to a State of the Online Travel Industry 2009.

Kevin Fliess said ...

I do think that the OTAs suffer from what Clayton Christianson termed "the innovator's dilemma" whereby incumbent, market leaders struggle to innovate out of fear of disenfranchising their installed base. Translations: People are comfortable with the OTA experience, which makes it very hard for the OTAs to change their experience.

Yet the reality is that there are an array of vexing problems in the online travel space that are yet to be addressed:
- helping consumers discover their ideal travel experiences based on their individual preferences and needs
- helping consumers more easily organize and plan travel (the 95% of effort that comes before booking)
- providing more relevant content based on web history (think Amazon's Gold Box)

Consumers are frustrated with the booking myopia and sameness of content and UI of the "legacy online travel providers."

I came from the Enterprise Software space and there are some very interesting parallels emerging in consumer online travel. In Enterprise Software the established players (SAP, Oracle, IBM) continue to wield great power, however a whole host of new players have emerged that have created composite applications that consume data and services from the giants.

TravelMuse and and other emerging travel 2.0 leaders are leveraging the web in new ways and innovating on top of existing systems to deliver value to the market in new ways.

The new models coming to market today (focusing on discovery and planning) will, over time, become the established models of tomorrow.
May 1, 2009 11:53 PM

Henry Harteveldt said...

I agree with Kevin. I also think this issue of innovation in the online travel planning and booking process goes even further.

I don't think that it's the traveler who's holding back the OTAs or, for that matter, any online travel seller. It's the travel sellers themselves.

For whatever reason(s), travel sellers are generally unwilling to truly innovate their planning and purchase processes. Few mainstream travel Web sites offer something as basic as theme-based search (e.g., search by interest or activity such as beach, ski, etc.). Yet we see this on travel search sites, such as Mobissimo and Kayak. NWA.com offers this as well, though it's buried. Travelocity's Experience Finder and the visually-based booking engine on Hotels.com UK's site are two more examples of effective innovation.

Travel is an industry with thousands of Web sites that sell travel services and products, and yet innovation is as rare as a free package of pretzels in Economy Class. Most of the innovation we see comes from start-ups like TravelMuse, InsideTrip.com, Ruba, and others. In a way, that's good -- they're part of the continuum of change. Look at how Preview Travel, ITN.net, Travelocity, and Expedia revolutionized the travel agency business more than a decade ago. It would be encouraging to see established travel sellers, both suppliers and intermediaries, be more willing to innovate. I suspect the firms that pushed the innovation envelope would benefit from, higher traffic, improved conversion rates, more loyal customers and increased revenue.
May 2, 2009 1:58 AM

Dennis Schaal said...

Kevin and Henry: A few thoughts...Why do you see theme-based travel search as so important? Are there huge numbers of arm-chair travelers who are remaining home because the travel-research process hasn't met their needs?

Also, the OTAs seem to be in a box. Expedia's TripAdvisor came out with its Fees Estimator, a nifty, yet still-rudimentary tool. How long do you think it will be before the other OTAs copy it? A couple of months?

As you both note, the ability of smaller companies to give the established players a run for their money always has driven innovation. That's why I hate to see a huge company like Sabre use its market dominance to try to stamp out the innovative moves of Farelogix.
May 2, 2009 7:53 AM

Gregg Brockway said...

Having been in both the OTA and the start-up seats, I’m a little more sympathetic as to why the OTAs are all so similar. (disclaimer: I'm president of www.tripit.com) I think it has more to do with their singular focus on the same core problem than an inability to innovate. We start-ups will do well to beware the elephants. Here a long-ish elaboration...

The typical trip life cycle goes something like this: inspiration > planning > booking > pre-trip > trip > post-trip. The OTAs (and suppliers) own the booking phase, which not surprisingly is where the most money has been historically. The problem in this phase might be summed up “I know where I’m going, how can I find the lowest price?” Given that price is by far the dominant criteria in the travel purchase decision, it's understandable why the OTAs have stayed focused on it. I’m not saying the OTA experience can’t be improved, but the OTAs are not dummies. They have optimized the bajeezus out of the low price search purchase path.

Fortunately, as we all agree there are lots of other problems to solve in travel beyond price and this leaves the door open for new solutions. While it’s not yet proven is that these are hugely PROFITABLE, I believe some will be truly disruptive and change the landscape.

Many of the new travel entrants are focused on doing a better job of solving the “inspiration” problem at the beginning of the trip lifecycle. This problem is basically “I’m looking for a [insert family friendly, romantic, golf, etc.] experience, where should I go?” While this is not nearly as big a problem as “low price” (most trips are not discretionary), it is an opportunity to create differentiation. The hope is that doing a good job answering this problem when you need it will create loyalty and provide a platform for extending into other phases of travel. It may well work.

TripIt’s approach was to start by focusing on the “pre-trip” and “trip” phases of travel. At TripIt, we don’t care where you choose to book your travel. We want to help you organize and share your travel plans so that everyone gets the right information at the right time. We think this is a really big problem and relevant to all travelers and all trip occasions. Further, by giving people a booking solution agnostic “home base” for their travel information, we’re well positioned to develop unique answers to a whole range of travel problems.

To me, the most interesting question will be whether the incumbents decide that the problems we new entrants are trying to solve are relevant to them. How will the OTAs respond if the new services start to encroach on their core business or make a lot of money? While the OTAs have been slow to innovate, it’s a whole lot easier to “emulate” success, particularly for companies like Expedia and Priceline that have hundreds of millions of dollars cash to play with.

Net, online travel may be over a dozen years old, but it’s not a “mature category” by a long shot. It’s going to stay a very interesting place.
May 2, 2009 7:54 PM

Henry Harteveldt said...

Dennis, our research shows that roughly 18% of travelers do not have a destination in mind when they start to plan their trip. Our research also shows that 46% of travelers allow their budgets to dictate the destination -- in other words, if they have $500 pp to spend, and destination A is too expensive, they'll search for an alternate. So I'd say that there's a sizeable market out there of travelers who are either indecisive or budget-focused -- and I'm sure there are some travelers who are both.

Travel sellers -- again, intermediaries and suppliers alike -- can profitably capitalize on this. Theme-based search -- beach, ski, etc. -- is one solution (UpTake offers this). Budget-based search is another. The greater the utility of a company and its eBusiness offerings, the more likely it will be able to earn customer loyalty and generate the kind of revenues - and profits - it seeks.

It won't be easy, it won't be quick, and it won't be cheap, but we'll see innovative companies continue to enter the market with new, relevant, and disruptive ideas. These ideas will benefit the consumer. As Gregg said, the incumbent companies that choose to respond can then decide whether they should emulate or buy the new entrants. We've seen this happen before, we'll see it happen again.
May 3, 2009 11:08 AM

Joe Buhler said...

I totally agree with Gregg's excellent observations and the valid reasons he gives for the position the OTAs are in today. They have for quite some time been able to pick the low hanging fruit and make a success of it by offering the best deals to online travelers who consistently have given the lowest price the highest priority. For the past few years now those travelers also started expecting more in terms of overall trip planning experience and feeling increasingly frustrated at not being better served by the established players.

Having worked for two decades in the "pre-trip" sequence of the travel process of Dream - Learn - Plan - Go - and now with social media Share I have since my first involvement with online travel a dozen years ago paid more attention to that 95% of activity preceding the 5% of the actual booking.

This is the world where DMOs have traditionally been active and have tried to influence destination choice. Like TripIt, they don't care how a visitor gets to their destination, as long as he visits them and not a competitor.

The recent shift in focus on that part of the travel process has opened new opportunities for DMOs but as it isn't in their DNA to be pioneers and innovators, new start-up players have appeared on the scene to take advantage. It remains to be seen how the incumbents will react to these new entrants and whether DMOs themselves will wake up and start working together with the new innovators and offer travelers an integrated and improved trip planning experience.

It would certainly be a development benefiting travelers in their quest for a better way to find the ideal trip that best matches their personal preferences.
May 3, 2009 5:17 PM

Lorraine said...

Yes, OTAs are not nearly as innovative as they should be because of their prioritization and focus on air/car/hotel transactions and yes - DMOs are popular in the "dream" phase. But PhoCusWright's research shows that OTAs are actually MOST popular in the dream phase despite their lamer efforts. And while there are terrific innovative niche sites for trip itinerary building and personalized recommendations - the traveler seems to prefer the "all you can eat - and we'll feed you too" methods of the OTAs. So again, PhoCusWright's research points to OTAs building through acquisition rather than being taken over. We'll see.
May 3, 2009 7:35 PM

Dennis Schaal said...

Gregg: I wonder what signs you see that the new services have any potential to encroach on the OTAs' business. I guess we'd at least be a couple of years away from seeing anything like that, no?

And, Lorraine: I guess your research shows that consumers want simplicity -- a one-stop shop -- even though the OTAs are doing a lame job on the inspiration front. I guess the likely scenario is that the OTAs will acquire some of the start-ups if the OTAs see the money in it. I wonder how you view Travelocity's ExperienceFinder in terms of its contributions on the pre-trip inspiration front.
May 3, 2009 8:08 PM

Valyn Perini said...

The discussion about ‘legacy OTAs’ (I love that term!) gives me flashbacks to the days when OTAs and GNEs were ascendant and the GDS’ were smeared with the ‘legacy’ and ‘non-innovative’ descriptions (I remember panels at industry events with the term ‘smackdown’ in the titles). The argument then was that the GDS’ had lots of content but no good way to present it, much less shop for comparison pricing. The OTAs stepped into the breach, offering content and a way to much more easily shop for pricing, and to buy.

It seems to me we’ve just moved into the next stage, and not because we can now apply the non-innovative and legacy terms to a new group of companies, but because the OTAs have shown the consumer what’s possible, and the natives have become restless.

At OpenTravel, we recently published schema in a series of projects led by companies in the adventure travel space, and that segment is a microcosm of this discussion. Buyers of adventure travel tend to be sophisticated internet users and are well-traveled, so they are used to buying travel online for their non-adventure trips. They are no longer content to look at a brochure with a photo of someone kayaking down the Colorado River; they want to see a video, they want to see the kayak’s specifications, see which operators are offering what kind of trip, see if there was any availability over spring break, and possibly actually book the trip.

The OTAs have not so far presented this type of complex product so several small start-up companies stepped into this new breach to offer consumers a full range of shopping, comparison and buying. In that space, some M&A is now going on amongst these segment-specific companies, but none of it involves the OTAs because they either think the market is too small, or it’s too much work to re-tool their technology, or it’s not within their scope.

These small companies in this niche market are doing what the OTAs can’t or won’t do. Gregg might be right; perhaps the OTAs are just waiting for the dust to settle in this market then they’ll scoop up the winning company, but that’s not a particularly innovative response to an obvious consumer need.
May 4, 2009 8:23 AM

Dennis Schaal said...

Valyn: I agree with you that some OTAs "either think the market is too small, or it's too much work to re-tool their technology, or it's not within their scope."

In fact, one OTA CEO told me the other day that pre-trip inspiration is not his priority right now because the "inspiration" issue doesn't impact enough customers. Understandably, the OTAs have bigger fish to fry at times, but it will be their loss if others move in.
May 4, 2009 9:02 AM

Scott said...

Let's not forget that technology limitations are still very real in our industry, particularly around air search. When I was at Hotwire, we were very well aware of the stats Henry mentioned above -- travelers, especially price-sensitive ones, are often flexible with regard to their destination. So we wanted to show them alternative destinations that had lower pricing, but the costs of doing air searches for many different O&D pairs was prohibitive given low conversion rates.

Take the simple example of Hawaii. I bet most Americans (especially those in states that don't border the Pacific) think of Hawaii as just a single place -- they aren't really aware of Oahu versus Kauai, and so on. And they certainly don't have a clue what the airports are on each island. Yet you go to Expedia and you can't just search for air to "Hawaii" and you can't even search for hotel that way. Why do we make it so hard for the consumer? I don't really care if it's the big island, Oaho, Maui... I just want warm and tropical with pineapple drinks and ocean waves.

Until we can solve even those simple problems, I think it's premature to talk about offering *real* travel advisory and planning tools that offer an array of alternatives and appeal to the inherent flexibility in many travelers. And to get there, I think we need to figure out a way to make air search just like a Google search: fast and free.
May 4, 2009 1:51 PM

Elliott Ng said...

I wanted to give some thought to this post and the questions that both Dennis and the commenters have raised. The core question is: why aren't the OTAs innovating as rapidly as they could? It seems like a more difficult question to answer than "they just don't get it"--people are rational and these companies are smart. I want to understand the underlying causes to see how the "mice" like UpTake can survive in an industry filled with "elephants" like the OTAs.

Henry's been issuing the call for greater innovation in travel and that "innovation is as rare as a free package of pretzels in Economy Class." But what are reasons why this is the case?

1. Difficulty of segmentation on the Web.
What have the "legacy OTAs" built? They have built a highly-efficient site experience to monetize the richest, most ready-to-convert traffic available on the Web. Everything they have done is optimized on the customer that is furthest through the purchase decision funnel and closest to buying.

Lorraine's point about the OTA's being heavily utilized by people in the inspiration phase just show how locked in they are. If they cater to their "inspiration" customers, isn't it quite possible that their more motivated "price-shopping" customers would leak away and reduce the overall conversion rate on their site?

This highlights what is very counter-intuitive - that customer segmentation is much harder on the Web than in other channels: whether that be direct mail, email, contact center, or at any other customer touchpoint. The Web must handle *all* user segments and the needs of these segments are much broader than what you find in other touchpoints (e.g. at the front desk, via call center).

2. resultant "channel" mentality vs. a "content" mentality.
This difficulty of Web segmentation is then further reinforced by OTAs embracing a "channel" or "distribution" mentality. Developed in part through being successful and selling seats and rooms to people that most want them, it becomes extremely difficult to think more broadly about providing "content" to people who are not decided on their destination, for example. Take Expedia or Travelocity. I would contend that the skills sets (and technology platforms) at TripAdvisor or IgoUgo are very different from those at the OTAs themselves.

Separating the "content" businesses from the "distribution" businesses seem like one way to create space for innovation that serves customers that are earlier in the purchase decision cycle and not currently being helped by the dominant OTA booking model.

3. inspiration and the early stages of travel planning are harder to monetize

Finally, I think the dirty little secret is that inspiration (and content) is just much more difficult to monetize. Part of that is the need to retain visitors through a longer decision making period, and part of it is that people have different preferences for ways to be inspired...hence the long tail of travel sites that receive a massive 10 billion search queries/year in Google and Yahoo!

Where is the future going?
Not mentioned by anyone is the extreme power of the search engines, both as a source of paid leads and also of organic search traffic. At UpTake, we've been extremely sensitive to the fact that we expect a large majority of our traffic to come through hundreds of thousands of "side doors"--pages that are optimized for a specific set of what the customer is looking for as expressed through their search intent at Google or Yahoo! In this way, we are accepting Google and Yahoo!s role in segmenting customers by need, theme, destination, and intent.

We also think content businesses (including DMO sites) will continue to be rewarded by the increasing power of search.

UpTake's point of view is to be a channel to hard-to-discover content and aggregate information in one place so people can move through the decision process faster. If we do a good job, we can take difficult-to-monetize inspiration traffic and turn it into monetizable leads that get sent to OTAs. While OTAs have this challenge of web segmentation, "channel mentality", and fear of losing good traffic chasing after "bad" traffic, this opens opportunities for all players in the marketplace without these constraints (including UpTake, other travel planning startups like TravelMuse, DMOs) to be complementary to the core OTA offering.

If I were an OTA, I would try to imitate Expedia's strategy -- buy up a bunch of content businesses, run them separately, and use them as a strategic asset to drive traffic to my booking businesses.
May 4, 2009 5:13 PM

Joe Buhler said...

Interesting thread here with good insights into what will be major shifts in the industry. What's pretty clear to me is how early we still are in the process of offering travelers a seamless experience to complete the various task related to how travel is researched, planned and bought using the web. Despite the seemingly dominant position of the major OTAs due to their high brand recognition, bought at great expense over the past ten years or so, it's not a given that they will be the ultimate winners.

They will need to move fast to capture that still undecided traveler or risk being left out of the loop as non-brand keyword search directs those people to different sites that in future might not longer just pass them on to a third party site for the actual booking but decide to get involved in the transaction themselves. Sure, some might be acquired but others will survive and develop supplier relationships of their own to satisfy the demand they create.

Exciting times ahead, it seems.
May 4, 2009 8:28 PM

RobertKCole said...

I agree with many of the previous comments, but there are some additional forces at play.

First, the size and investment profile of the OTA's applies pressure on the organizations to chase quarterly profits and defer innovative projects that require greater development effort or longer time horizons. As a result, product and development teams are driven to find the proverbial "low hanging fruit" and progress becomes evolutionary instead of revolutionary.

A dozen years ago, when running the hotel line of business at Sabre, I had the pleasure of working closely with a Terry Jones funded team headed by Bob Offutt called Sabre Labs. The group did exceptional work, developed a number of great prototypes and secured several patents.

Despite what I recall as ongoing calls by Sabre's development establishment to kill the unit, significant consumer facing solutions like parallel search, drive pathing, dynamic packaging, budget based flexible date search, collaborative filtering, mobile apps and destination resolution were researched and prototyped.

There was true innovation taking place - I recall the CEO of MapQuest (pre-merger w/AOL) enviously asking "How did you do that?" after a demo of a mapping application.

Much of the innovative work was well ahead of its time, and as a result, was eventually shelved due to extended payback periods or development resource prioritization. Some products, like the flexible air search and Dream Maps were ultimately released, but what I see on Travelocity today still looks a lot like the proofs of concept a decade ago.

These days, it looks like Sabre Innovation Labs has been focusing on internal expense reduction initiatives as opposed to customer facing revenue generating applications.

One should remember these firms often look at cutting $1.00 in expense as adding $1.00 to the bottom line, where adding $1.00 of revenue drops only $0.15 (if they are lucky) to the bottom line.

The squeeze on development resources has also made build v. buy decisions more straightforward. Building from scratch presents business risk and resource scheduling challenges, where buying an existing technology limits risk to the cost of integration - normally a lower risk scenario if the purchase price works.

In short, the OTA's have been "innovating" through acquisition for over a decade and list is impressive (and I am sure I missed a few…)

For Travelocity (Sabre), the list includes: Preview Travel, GetThere, site59, IgoUgo, lastminute.com, World Choice Travel, SynXis, nexion, Virtually There and moneydirect. On the back-end Sabre has also acquired , TRAMS, Gradient, Flight Explorer, E-site Marketing.

Orbitz,itself an acquisition and subsequent spinoff from Travelport (the successor of Cendant Travel Distribution Services), has an acquisition portfolio that includes CheapTickets, Neat Group, Lodging.com, travelwire, , Flairview Travel (HotelClub and RatestoGo), asia-hotels, ebookers, away.com, GORP, OutsideOnline and Trip.com. On the Travelport side, Wizcom, THOR, Shepherd Systems, Galileo, Worldspan, Gullivers Travel (gta), Octopus Travel, needahotel.com, and Travelbound were also acquired. This list excludes assets that were acquired and later divested by Travelport such as Travel 2/Travel 4, TRUST, Wizcom, and Travelbag. It should also be noted that the Orbitz fare matrix is based on technology externally developed and licensed from ITA Software.

Expedia, since being spun off from Microsoft has acquired Hotel Reservations Network (now Hotels.com), Travelscape, Hotwire, TripAdvisor, Classic Vacations, TravelNow, VacationSpot, Metropolitan Travel, Newtrade, CruiseCritic, SeatGuru, IndependentTraveler, smartertravel, bookingbuddy, Travel-Library, CarRentals.com, VirtualTourist, Venere, and eLong (investment).

priceline.com’s pace of acquisitions has been slower than the others, perhaps because all other travel transaction models were not wiped out by the reverse auction method as originally predicted by founder Jay Walker. Once they diversified into mainstream booking processes, priceline also acquired other travel assets – lowestfare.com, TravelWeb, Bookings.com, BreezeNet, and RentalCars.com.

There are a lot of innovative companies and technologies covered in the list above. It seems the majority of the companies were purchased post-launch after establishing some degree of market awareness and/or commercial success. It appears OTA investment activity has been predominantly M&A based and it does not seem that there has been any material degree of angel, early or late stage venture capital participation by the OTA's.

Based on the large number of acquisitions, a considerable amount of development effort would be required to integrate the technologies and business processes from these operating businesses into the parent. One could also conclude that these integration efforts, with pressure to quickly gain synergies and eliminate operational redundancy, would gain access to resources that might have otherwise been dedicated to organic development projects.

With recent competitive fee cuts designed to gain share from competitors and supplier sites putting pressure on OTA earnings, the environment for allocating R&D funding to organic development or seed investment are likely to remain constrained. Strategic acquisitions able of drive increased traffic, retain existing customers, reduce costs or eliminate competition will inevitably be continued by the OTA’s.

The more interesting question is if the challenges presented by the global financial crisis will constrain access to sufficient capital for small, innovative travel technology companies to launch and gain enough attention or volume to attract the attention of the OTA’s.

Private capital will determine if innovation continues in the travel industry. Based on the global nature and fragmentation of the travel business, I bet it does.

As a matter of fact, if any angels out there have $3-$5 Million in seed money available, I would be happy to discuss a couple ideas I have...
May 5, 2009 2:50 AM

The Travel Blogosphere: Give Us Bonus Points

I love the travel blogosphere because collectively we have so much to offer, given the number of brainiacs, analysts and muckrakers out there who are contributing to our travel industry knowledge base.

In perusing some recent posts and tweets, I see that Tom Botts of the Hudson Crossing Travel Industry Insight blog points out that Delta and Northwest brought back 500 bonus miles for online bookings, and Botts puts the move in the context of these airlines trying to restore some juice now that the online travel agencies have eliminated booking fees on flights.

Then there is the Susan Black Associates blog, which yesterday graded a few major travel players on their social-media responses to the swine flu. While Black handed out an A+ to Funjet Vacations, Travelocity and Expedia may have to stay after school because these two OTAs brought home grades of C.

And, Forrester Research travel analyst Henry Harteveldt added to the mix when he compared airlines' online efforts regarding the swine flu. Harteveldt tweeted yesterday: "Continental.com home page lacks specific info re:airline's response to #swineflu. AA, Delta, JetBlue, US Airways do better."

All of these travel industry veterans/bloggers and microbloggers have something to add. Let 100 flowers bloom.

And, hopefully I contributed a bit to the conversation through my posts on the Dennis Schaal Blog about Priceline's hotel-coupon promotions on Twitter, a bid to ramp up its followers.

Or, at the least, hopefully I elicited from you a LOL with my post, Expedia, Priceline in Twitter Trash-Talk.

Meanwhile, totally off-topic because that's the kind of guy I am:), a shout-out to Echo Cleaners, my dry-cleaner in Springfield, N.J., for going organic. Woohoo.

I would give them the shirt off my back.

Over and out.

Expedia, Priceline in Twitter Trash-Talk

No, Expedia didn't name any names.

But, Expedia clearly took a swipe at Priceline and TheNegotiator on Twitter this afternoon with the tweet:

"Happy Friday to our 7,000+ followers! We are honored that you follow us, bribe-free :)"

Expedia's jab clearly was in reaction to Priceline's series of hotel-coupon promotions in the past week. TheNegotiator's following has gone through the roof in the past week. When I just looked it was at 8,420.

Expedia obviously has a problem with Priceline's success.

And Expedia's we're-on-high-ground and you're-not tweet assuredly could not have been tweeted without the explicit authority of Chairman Barry Diller or CEO Dara Khosrowshahi. (OK, I'm kidding on that, but I loved writing it.)

TheNegotiator indeed had an answer when Susan Black pointed to Expedia's diss.

TheNegotiator tweeted: "@Susantravels I don't know why they are jealous. They already received their $50 Hotel Coupon, oops ... I mean bribe. :)"

Meanwhile, some in the travel business, including myself, are enjoying the sparring.

As Douglas Quinby opined on Twitter: "Love competitors going at it on Twitter. EXPE vs. PCLN. TVLY, OWW, why so quiet...?"

Orbitz and Travelocity, among the other major online travel agencies, what is your strategy for getting up to the JetBlue level on Twitter?

And, we're wondering just how jealous Expedia might be about Priceline's rapid Twitter ascent.

Could this be a case of Coupon Envy?