Where in the World is the Orbitz Hotel Business Model?

Orbitz Worldwide is about to change its hotel business model and go-to branding in Asia-Pacific.

It's an evolution of OWW's global, multi-brand strategy, where its core hotel business model varies from region to region.

In North America, where full-service online travel companies Orbitz.com and CheapTickets.com prevail and vacation packages are vital, and in Europe on ebookers' turf, OWW sees the merchant model remaining its dominant practice.

But, in parts of Asia-Pacific, Orbitz will tweak the RatesTogo.com modified retail model by expanding the booking window from 28 to 365 days, and in many markets OWW will designate HotelClub as the lead brand.

RatesToGo is a unit of OWW's HotelClub, a hotel-only site that is strong in Asia-Pacific and Europe. Today, HotelClub uses the merchant model for gateway and other major destination cities, and RatesToGo uses the modified retail model, where consumers prepay the RatesToGo commission and booking fee in the form of a deposit and pay the balance to the hotel upon checkout.

The commission generally is 10 percent to 15 percent.

Mike Nelson, president of the Orbitz Worldwide Partner Services Group, said the strategy soon will change so that HotelClub will be the lead brand in emerging markets and in "secondary cities" in Asia-Pacific, and HotelClub will offer both the merchant and modified retail model with the longer 365-day booking window.

However, the strategy will vary market to market, Nelson said, with RatesToGo and HotelClub coexisting in the current status quo in Australia, for instance, where RatesToGo is strong.

OWW's initial focus for expanding the modified retail model from last-minute inventory to bookings 365 days' out, and pairing it with merchant model rooms on HotelClub is in Asia-Pacific, Nelson said, but he doesn't rule out a broader rollout.

Asia-Pacific is fertile ground for the modified retail model because, among other advantages, it eliminates the need for the hotel to set up a commission-payment system, Nelson said.

And, that makes it easier for HotelClub to sign new hotel partners, especially among smaller or independent hotels.

And, in focusing on a niche of emerging markets and secondary cities, OWW may be able to avoid head-to-head competition with some of the region's strongest hotel players like Ctrip in China and Rakuten in Japan.

At least, that's the hope.

Oh, by the way, HotelClub's new modified retail model will have it's own catchy branding.

At least, that's the hope, too.

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As the Online Travel Companies Turn

Does Orbitz Ratestogo.com Mean Merchant Model To Go.com?

Orbitz Worldwide CEO Barney Harford is bullish on subsidiary ratestogo.com, the Sydney, Australia, hotel business primarily selling last-minute rooms in Europe and Asia.

Harford said during the OWW Q2 conference call yesterday that he "loves" the ratestogo.com business model, which offers a twist on the traditional agency model.

Harford, who pledges to go gang-busters in building the Orbitz hotel business, said ratestogo.com's "modified retail model" is much simpler than the merchant model, which requires tons of nurturing and work.

And, besides, ratestogo.com immediately receives its pre-paid commissions, ranging from 10 percent to 15 percent, in the form of deposits as soon as consumers book the rooms.

Some 15,000 properties have signed up for the ratestogo.com approach, Harford said.

Here's how the ratestogo.com model works.

To book the Palms Hotel and Spa Miami, the consumer pays ratestogo.com up-front a $47.40 "deposit," including a $3 nonrefundable booking fee.

So, ratestogo.com collects its compensation immediately and doesn't have to wait weeks or months for finicky hotel chains and independent properties to send commissions.

And, from a consumer perspective -- and here's a HEADLINE -- the booking fee is transparent -- $3.

After the room is booked, ratestogo.com e-mails the customer a voucher, which states that consumer must pay the $251.60 balance, plus applicable city, state and other taxes, to the hotel upon checkout.

In this way, the hotel gets its money immediately upon the completion of the stay.

In turn, with online travel companies being tracked by tax-deprived cities, counties and states across the country, ratestogo.com bows out of the whole tax mess, and pays diminished credit card fees because it is merely processing the deposit and not the full retail rate for the room.

Tom Botts, a partner in Hudson Crossing, notes that collecting commissions from hotels can be "a horror show" so speedier payments are advantageous to the intermediaries.

However, a downside for the OTCs is that they wouldn't get to hang onto the hotels' money for as long as they do now under the current merchant model.

Harford said the ratestogo.com business faced challenges in the second quarter, largely because it does a lot of business in Europe, where the downturn is acute.

He offered some tantalizing hints about the future utility of the ratestogo.com model as he praised its advantages over the merchant model.

For example, Harford said it is easier to acquire hotel partners using the ratestogo.com model relative to the merchant model, which requires a protracted effort.

So, could the modified agency model be rolled out on a broader basis internationally and in the U.S?

I don't believe that Orbitz is about to chuck the merchant model -- although it has less at stake than Priceline and Expedia. For example, Harford said Orbitz estimates it only has about a $1 million annual tax exposure for its merchant model hotel business in New York City.

And, whether the ratestogo.com model would win broad consumer acceptance, given its complexity, is another issue, Botts pointed out.

Ratestogo.com currently offers "last-minute" inventory for bookings up to 28 days' out.

In response to an analyst's question about whether OWW was considering expanding ratestogo.com's 4-week window, Harford coyly replied: "Stay tuned."

If the OTCs are forced to abandon more U.S. cities because of adverse rulings on the merchant model tax question, perhaps the ratestogo.com model could get some increasing attention.

We're "staying tuned."

Travelocity Pays $2.7 Million Hotel Tax to San Francisco

Travelocity paid $2.7 million to the City of San Francisco on July 23 as part of its obligation to "pay first" before being able to appeal the city's hotel tax assessment.

The payment covers what the city argues was Travelocity's outstanding hotel-tax obligation on the retail rate -- as opposed to the tax recovery charges Travelocity previously remitted to hotels on its net rate under the merchant model. The payment covers the period from the beginning of 2000 to the third quarter of 2008, including taxes, penalties and interest.

As I wrote, Expedia and its Hotwire unit already paid the city $35.6 million and Priceline wired over $3.4 million. Orbitz is believed to be in the assessment process.

The payments -- some $42.7 million -- do not "prove" that the three online travel companies ultimately will owe the city the tax. Instead, a Superior Court in Los Angeles ruled that San Francisco's pay-first ordinance was proper, and thus it did not decide the merits of the tax issue.

So, the utlimate outcome of the case is undecided. It would be premature to count out the OTCs because they've recorded their share of victories around the country.

Still, this has not been a great few months for the OTCs.

As I reported , Expedia reached a proposed settlement with Washington State consumers in a class-action suit that revolved around the way the OTC presented its "taxes and fees" in merchant model hotel sales.

The judge in the case earlier found that $184.5 million in damages would be "warranted" in the case. The actual amount of the settlement has not been disclosed.

And, in another downer for the OTCs, New York City recently adopted a law that taxes the service fees of hotel "remarketers" -- a provision that not only targets the OTCs, but traditional travel agents and wholesalers, as well.









(industry associatons

Priceline Paid San Francisco, Industry Associations Irate about NYC Law

Priceline is set to pay $3.3 million in disputed hotel tax to San Francisco because of the city's pay-first requirement even as Priceline disputes the notion that online travel companies are responsible for hotel tax on the retail rate.

UPDATE: An attorney for San Francisco just told me that Priceline's attorney informed him that the online travel company wired tax money to the city today. Priceline paid, and the city received $3,409,844, including tax, penalties and interest through today.

Expedia and Hotwire this week wired $35.5 million to the city's tax office, and Travelocity is expected to ante up some $2.5 million, as well. For details, read here.

These developments occur as an industry source tells me that various industry associations, including ASTA, ITSA, NBTA and USTOA, may be researching legal options in order to challenge a new New York City law that may require agencies, tour operators and meetings planners to pay the city tax on their service fees and possibly commissions.

Update: In fact, Paul Ruden, ASTA's senior vice president of legal and industry affairs, just told me: "We will be working with other groups such as ITSA to try to get this [the New York City law] undone or overturned."

And, the NBTA stated: "NBTA is always concerned about new taxes that may affect business travelers. We are currently researching this law for further analysis."

But first, the following is a statement from Priceline on the San Francisco situation:

"In Priceline.com’s most recent 10-Q, the company noted that it expected to be assessed approximately $3.3 million by the City of San Francisco. The Company has recently received an assessment and expects to pay the assessment shortly. Payment of the assessment was explicitly required in order for the Company to be able to appeal the City Tax Administrator’s decision. The Company expects to promptly appeal the Tax Administrator’s decision to the courts.

"The Administrator’s decision is wrong and contrary to San Francisco’s own interpretation of its ordinance. In 2003, San Francisco proposed a new regulation to extend hotel occupancy taxes to cover amounts retained by the OTCs. The regulation failed. The Administrator’s decision is also contrary to decisions by the U.S. Court of Appeals for the Fourth Circuit and four federal district courts that have entered judgments in the OTCs favor that they are not liable for hotel occupancy taxes."

Regarding San Francisco, it is important to note that no court has ruled on whether the OTCs are responsible for the tax. Instead, a court has ruled that San Francisco's pay-first ordinance is legal and proper. Thus, the OTCs have to pay the tax in order to begin an appeals process.

Incidentally, only two other California municipalities -- Fresno and Long Beach -- have local pay-first ordinances. Some other cities outside of California, require tax-payers to secure bonds for their tax liabilities as a precursor to an appeal.

So what happened in San Francisco "is not the start of an avalanche," said one industry source, who's sympathetic to the OTCs.

This same industry source said several industry associations are very concerned and are looking into legal options related to a new New York City law that would appear to tax the service fees of OTCs, tour operators, traditional travel agents and meetings planners.

Until now, in the cross-country litigation about hotel taxes, tour operators, who use a merchant model to sell vacation packages, have not been targeted. In fact, the OTCs' vacation-package business likewise has not been zeroed-in on.

Update: Woops, the vacation-package business indeed has been targeted.

But, the New York City law has the potential to change this.

The NYC law says "room remarketers" are responsible for the full rent, meaning they would remit tax on the net rate to the hotels, and pay tax on the remaining rent, including service fees, directly to the tax commissioner.

Ruden of ASTA said the NYC law "plainly" targets agents' service fees "despite claims that the traditional agency model is not the target. Tax laws are usually interpreted 'as written' when the language is not ambiguous. The drafters went out of their way to avoid ambiguity with phrases such as '... through an internet transaction or any other means whatsoever, to offer, reserve, book, arrange for, remarket, distribute, broker, resell, or facilitate the transfer of rooms ....'"

Ruden said ASTA opposed the law before its enactment and "tried to get Mayor Bloomberg not to sign it. It results in double taxation of travel agent/distributor/'remarketer' income."

And the law defines rent thusly: "The consideration received for occupancy valued in money, whether received in money or otherwise, including all receipts, cash, credits, and property or services of any kind or nature, including any service and/or booking fees that are a condition of occupancy, and also any amount for which credit is allowed by the operator or room remarketer to the occupant, without any deduction therefrom whatsoever."

The industry source said some travel industry associations [and now ASTA has confirmed this] are in contact with Mayor Mike Bloomberg's office, are expressing their concerns and mulling legal recourse.

The OTCs ceased selling hotel rooms in Columbus, Ga., on a merchant-model basis after an adverse tax ruling in the Georgia Supreme Court. And Travelocity, dropped out of the Baltimore market, as well.

New York City's new tax ordinance is much broader than Columbus, Ga.'s and, well, the Big Apple attracts a few more tourists than does Columbus, Ga.

The stakes in NYC thus are a tad greater than in Columbus, Ga.

The industry source labeled the New York City law, adopted by the City Council and signed by the mayor, "a significant move and one that could be extraordinarily damaging to tourism in the city."

The New York City law certainly is a big deal -- one that could suddenly find the OTCs not wanting for industry friends.

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

I confirmed that Expedia and Hotwire indeed paid some $35 million in hotel taxes to the City of San Francisco on Monday, a necessary step if they want to further challenge the assessment administratively and eventually in court.

I wrote about this yesterday, but now have more details.

Jim Emery, San Francisco's chief of complex litigation, told me that Expedia and Hotwire had filed a notice of appeal July 1, a step in challenging an earlier ruling that the city's pay-first rule is valid. But a judge in Los Angeles Superior Court, which is handling the San Francisco case, dismissed Expedia and Hotwire's petition July 9, Emery said.

So, no court has determined whether Expedia and Hotwire actually owe the tax. But, to challenge that assessment and to seek an $8 million refund (which no one is talking about publicly but I believe is related to an admininistrative assessment against hotels.com), Expedia and Hotwire had to pay first.

Only after taking these administrative steps can they challenge the assessment in court.

Emery said the city is having discussions with Priceline ($3.5 million) and Travelocity ($2.5 million) about their tax tabs and "I expect they will be paying within a week, although we haven't closed the loop."

He said that Priceline and Travelocity previously agreed that they would go along with the Los Angeles Superior Court findings regarding San Francisco's pay-first rules.

Meanwhile, Orbitz spokesman Brian Hoyt confirmed that his company is engaged in administrative proceedings with the city over any potential tax liability.

Hoyt said Orbitz continues to be "concerned" about what he characterized as anti-tourism, anti-consumer and "discriminatory attacks through the court system."

He said cities would be "far better off" working with the online travel agencies instead of against them.

Although the OTAs dropped out of selling merchant-model hotel inventory in Columbus, Ga., and Travelocity exited the Baltimore market, Emery said he has "every expectation" that the online travel companies will continue to conduct their merchant-model hotel business in San Francisco.

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.

Update: Hotels.com Founders Introduce 'Reverse Opaque Rates' and Point to hotels.com Shortcomings

I wrote a post the other day about how Bob Diener and Dave Litman, the founders of HRN (a.k.a. hotels.com), have launched getaroom.com, and indeed they intend to shake things up.

Diener, who owns getaroom.com 50-50 with Litman, described the site's introduction of "reverse opaque rates" for hotel sales.

getaroom focuses on top destinations so if you enter your travel dates and click on Orlando, for instance, you'll see the Sheraton Vistana Resort at a published rate of $125.38 per night.

However, the reverse opaque model comes into play when you register on the website and phone getaroom's call center, staffed by a third-party company, in Dallas.

Diener said that over the phone you'll be able get an unpublished rate for that hotel and others for 10 percent to 50 percent less than the online published rate.

"Our goal is to bring a lot of vitality back and make booking hotels exciting again," Diener said.

The opaque-over-the-phone channel enables hoteliers to market their inventory at rates that they would rather not disclose online, enabling a four-star hotel, for instance, to compete against a three-star property if it so chooses, Diener said.

And, consumers get the advantage of finding a great deal and knowing up-front which hotel they are booking, unlike with Priceline, where you bid on a particular star category in a certain section of a city but learn the hotel's identity only after booking it.

Diener points out that most companies are trying to push consumers online, whereas getaroom.com is incenting consumers to dial for the best deals and values.

Diener and Litman obviously believe in doing things differently and are employing a strategy similar to one they pushed with HRN back in the day.

This is how one hotel consultant described getaroom.com's strategy.

"The strategy is EXACTLY the same strategy they used to launch HRN way back in the early 1990s," the hotel consultant said. "They focused on a few specific high-demand cities, got a handle on the revenue management/yield opportunities and managed the hell out of the pricing to optimize sales and margin."

"They wound up with a low-tech setup that had better demand/price point info than the hotel chains and leveraged it," the consultant added. "Also, speed is king to Litman -- note the results' screen populates within a second."

Diener did not have much to quibble with when I read him that analysis. He said getaroom.com is focusing on key destinations and offers a limited number of hotels with the best values in each of these markets, and "yes, speed is key," he said.

Commenting on the position of hotels.com under Expedia Inc. today, Deiner said hotels.com is a major player "and still has a great brand name, adding that he and Litman were "much more focused on value" when they ran the show.

hotels.com wants to be "everything to everybody," Diener said. "They have lots of hotels even if some are of low value. Their philosophy is to put on everything everywhere."

Diener said he and Litman decided to jump back into the fray after their five-year noncompete agreements expired because "we love the industry, it's in our DNA."

He said the duo saw a great opportunity because "the economy fell off a cliff last September" and the lodging industry needed a new channel to market its inventory.

"The industry really hasn't moved [in the last five years]," Diener said. "It really has stayed the same."

It is fitting then that getaroom.com has "several million dollars" for marketing and is launching spots on satellite radio and soon it will unveil TV ads, too, all to the tune of the William Tell Overture. getaroom, getaroom, getaroom.com.....

As you may recall, the William Tell Overture was also used as the theme music for the classic Lone Ranger television show.

However, there are no Lone Rangers in this story. Diener and Litman are back at it together -- and they may be driving their new model at a very ambitious pace.

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?

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...

Priceline's Hotel Pressures: Commission Model Problematic as Travelers Show Commitment Phobia

Priceline outperformed its online travel agency competitors in the first quarter, but the pressures it is feeling in its hotel business reflect how competitive and dicey the hotel sector is becoming in the current market environment.

Consider that in the first quarter of 2008, 56 percent of Priceline's gross profit came from its international operations, primarily its European-based hotel business, which uses a commission model.

As I wrote in a Travel Weekly article, Expedia, which bought Venere.com last year, is targeting Priceline and its Booking.com hotel business with a commission-based program of its own in Europe, the Middle East and Africa.

That commission model, which both Priceline and Expedia are pursuing at breakneck pace in Europe, has some problems that are absent from the merchant model, which is dominant in the U.S.

The problem?

Consumers easily can cancel the reservations.

In a 10-Q report filed with the SEC May 11, Priceline stated: "As ADRs [Average Daily Rates] decline, customers who have existing reservations may cancel those reservations and rebook at a lower rate, and in times of economic stress, travelers are more likely to cancel their vacation plans outright. While decreasing ADRs and a worldwide recession make it relatively more attractive for consumers to make a cancellable agency reservation than a pre-paid reservation, our agency business will likely have higher cancellation rates compared to companies who offer predominantly merchant model hotel rooms."

If those increased cancellations weren't enough to keep Priceline executives awake at night, then consider the pressures that the merchant model faces in the U.S. over the hotel tax issue.

In the same SEC filing, Priceline detailed the heat it feels from municipal and state auditors around the country.

Priceline stated: "Among others, the City of Philadelphia, Pennsylvania; Miami-Dade County, Florida; the City of Anaheim, California; the City of Phoenix, Arizona; the City of San Francisco, California; the City of Chicago, Illinois; Broward County, Florida and state tax officials from Wisconsin, Pennsylvania, and Texas, have begun formal or informal administrative procedures or stated that they may assert claims against the Company relating to allegedly unpaid state or local hotel occupancy or related taxes. In addition, during the three months ended March 31, 2009, the Company received audit notices from 28 other cities in the state of California. The Company is engaged in audit proceedings in each of those cities."

Priceline added that it expected to be assessed $3.3 million, including penalties and interest, from the City of San Francisco, and may have to pay the assessment in order to appeal it.

And, that sort of "pay to play" policy is not a very appealing prospect for the OTAs.

The expenses, including legal fees, that the OTAs must be shelling out as they battle lawsuits and audits related to merchant-model-hotel taxes must be off the charts.

As I wrote several weeks ago, the OTAs have adopted what I characterized as a Google Earth strategy: They are placing pins on a map, leaving town and opting-out of selling merchant-hotel rooms in cities where they experienced adverse tax rulings.

One industry insider speculated to me that perhaps Expedia's initiative to expand its hotel-commission model in EMEA may be an experiment about or precursor to an abandonment or downplaying of the merchant model, given the tremendous pressures.

At any rate, or model, that is, the hotel business, traditionally an OTA sweet spot, is getting very spicy.

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.

Priceline Is At It Again on Twitter

Fresh after ramping up its Twitter followers by 400 percent in six days with a hotel-promotion that ended April 28, Priceline is at it again with a fresh $50 marketing play with the same bulking-up-on-Twitter goals.

TheNegotiator just tweeted: "Cinco De Mayo Promo! May 5th - 500 random followers will get a $50 HOTEL COUPON! More followers = better chances!!! - pls RT!"

Actually, Priceline's strategy is ratcheted up a bit with this second promotion because it is trying to strike up relationships with influential Twitterati.

The way the Cinco De Mayo promotion is structured is that a Priceline follower who might have 1,000 followers would get 1,000 chances to win one of the 500 hotel coupons. A Priceline follower with only 10 followers would only get 10 chances to get a coupon.

Playing these odds, the most influential among Priceline's followers would take home the bulk of the 500 coupons.

It's hard to believe that an influential Twitter participant would warm up to Priceline and become a substantially more loyal customer because of a $50 coupon, but this seems to be Priceline's thinking on the issue.

Then again, perhaps this Priceline promotion is only the beginning of its efforts on Twitter to build customer loyalty.

These Priceline promotions put a punctuation mark on the question of whether offering $50 per follower might be an expensive proposition.

Alas, it must be very cost-effective and, well, cheap.

Consider that:

1. To redeem the $50 hotel coupons, followers must book a minimum 3-night stay on a relatively pricey 3-star hotel or higher.

2. And, they must do so through Priceline.com's high-margin Name-Your-Own Price merchant-model-hotel business.

3. So, assuming that some of those people booking rooms using the coupon aren't regular Priceline customers, the online travel agency is chalking up incremental bookings.

4. And, as is par for the course with coupon promotions, a lot of people won't use them. And, that means Priceline enticed a bunch of people to follow TheNegotiator on Twitter without spending a penny.

5. Also, think of the buzz that this promotion is creating as followers re-tweet the tweet and good-for-nothing journalists like myself write about it.

And, apparently, I was the first muckraker to write about Priceline's marketing play when I broke the story in Travel Weekly.

Incidentally, Priceline, I'm told, has worked out the coupon delivery issues and now can DM (Direct Message) thousands of hotel coupons per day through Twitter.

As of this writing, @denschaal, has 426 Twitter followers.

So, the Priceline promotion makes me wish I had a few hotels to leverage.