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The fate of the Expedia-Orbitz merger could hinge on whether the U.S. Department of Justice, which is investigating the marriage out of antitrust concerns, determines that TripAdvisor Instant Booking will emerge as a significant enough hotel-booking competitor in the next couple of years.
Karina Lubell, a former associate in the antitrust group of Shearman & Sterling and currently a senior correspondent at The Capitol Forum, writes that the Justice Department has been interviewing hoteliers in recent weeks and focusing on the competitive relevance of TripAdvisor as a new entrant in the hotel-booking arena.
Lubell, who has done some of the best reporting on the Justice Department probe of Expedia’s pending acquisition of Orbitz, reports that the DOJ does not regard Google and Amazon as viable hotel-booking counterweights to Expedia-Orbitz in the near future.
With a Justice Department decision expected in “weeks, not months,” according to The Capitol Forum, Lubell views it as somewhat of a negative in terms of the deal’s likely coming to fruition that the probe is focusing so heavily on the TripAdvisor equation.
That’s because the focus on the TripAdvisor factor means the Justice Department could be evaluating the Expedia-Orbitz merger in terms of its competitive impact on the U.S. online travel agency market and not the broader U.S. travel market — both online and offline — where Expedia-Orbitz-Travelocity (acquired earlier this year) has less of a commanding position.
“Stakeholders should consider both the timeliness and sufficiency of TripAdvisor’s competitive significance in the online travel agency market in addition to TripAdvisor’s ability to counteract alleged harms of a combination of Expedia/Orbitz as key factors in DOJ’s willingness to litigate,” Lubell writes.
TripAdvisor is Rapidly Accelerating Its Hotel Bookings
I view the Justice Department’s focus on TripAdvisor in a somewhat more positive light. That’s because TripAdvisor Instant Booking, while generating a relatively small amount of revenue for TripAdvisor at this juncture, has been ramping up rapidly and is likely to emerge as a viable competitor, charging commissions much lower than Expedia Inc. and the Priceline Group, in the next couple of years.
Just this week TripAdvisor announced that La Quinta Inns & Suites has been added to TripAdvisor’s roster of partners that enable customers to book their properties on TripAdvisor without having to navigate to the hotels’ own websites or online travel agency sties. Six of the top global chains, including the likes of Marriott, Hyatt, Choice Hotels, Accor, and Best Western International, are now partners in TripAdvisor Instant Booking, which has so far been rolled out in the U.S. and the UK on desktop and mobile.
As one official from a major chain puts it: “TripAdvisor’s investor pages now claim 375 million monthly unique visitors to their sites. Any small percentage of that traffic looking to book will be meaningful. Of course, Instant Booking will have a meaningful impact on OTA bookings, which is why so many hotel chains have embraced it.”
Ramping up rapidly, TripAdvisor reported in July that one-third of the hotels displayed on its sites, or some 235,000 properties, could be booked without users having to navigate to third-party online travel agency and hotel websites.
You only need to look at the positions of Expedia Inc. and the Priceline Group, which are the largest participants in marketing through TripAdvisor’s classic metasearch but steadfastly refuse to join TripAdvisor Instant Booking, as evidence that Expedia and Priceline view TripAdvisor Instant Booking as a competitive threat.
In a sign that the Justice Department likely won’t file a lawsuit against the Expedia-Orbitz merger despite the opposition of much of the U.S. hotel industry, The Capitol Forum cites a source as saying that the Justice Department has not been questioning hoteliers about potential remedies.
Another source tells Skift that in discussions with hoteliers he’s found no evidence that the Justice Department has issued subpoenas, which would be a precursor to potential litigation.
Will Expedia Raise Commissions Post-Merger?
One of the key issues for the Justice Department is whether Expedia-Orbitz-Travelocity would have the competitive power to raise hotel commissions if the merger goes through — as Expedia did for hotel partners of Wotif in Australia just months after Expedia acquired the online travel agency in 2014.
That’s the fear of hoteliers.
Skift contacted four hoteliers — two from global chains and two independents — who stated this pattern did not hold in the U.S. after Expedia acquired Travelocity early in 2015.
Expedia’s agreements with hotels basically superseded their agreements with Travelocity once the deal went through, the hoteliers stated, and nevertheless these contracts were covered by “most-favored nation” clauses, which assure the online travel agency will get the hotel’s lowest rates and its share of available rooms.
“It’s more than likely that the agreements of the major chains are structured to survive change of control events, so that change of control isn’t used to nullify more favorable business terms,” an official of one of the major global chains told Skift. “Also, assume the major chains would have the right to terminate on change of control if the transaction resulted in less-favorable terms being offered.”
The average online travel agency commission in North America for the major chains is 14-16 percent while smaller chains and independent hotels generally pay in the 18-22 percent range. Independent hoteliers feel particularly threatened by an Expedia-Orbitz marriage because they have little power to negotiate better terms.
But the fact that Expedia didn’t raise Travelocity’s commissions post-merger doesn’t mean that Expedia wouldn’t have the clout to raise commissions as contracts expire after its acquisition of Orbitz Worldwide.
Expedia argues, on the other hand, that commissions have been trending downward in recent years.
In Expedia Inc.’s first quarter of 2015 earnings call on April 30, 2015, CFO Mark Okerstrom said: “Revenue per room night was down 13.6 percent this quarter, while average daily rates were down 2.5%. Roughly half of the decline in revenue per room night this quarter was driven by the negative impact of foreign currency. The other half included the impacts of the deliberate reductions in hotel margins to accelerate our global build-out of hotel room inventory and availability, as well as efforts to drive consumer engagement and repeat business through our loyalty programs and other incentives. These are very consistent with the factors we have discussed in the past.”
So Expedia has been taking less commission as it competes with Booking.com in the U.S. and hotel websites, among other players, in a bid to gain more share.
But Justice Department investigators know that the trend doesn’t preclude Expedia from reversing course and raising commissions if it feels less constrained by the competition. That’s why the emergence of TripAdvisor as a hotel booking site is such a key factor in the investigation.
The probers shouldn’t count out Google, which is developing a form of Instant Booking.
Toni Portmann, the CEO of DHISCO, formerly Pegasus Solutions, says she will soon meet with Google (and, separately, TripAdvisor) about giving the search engine access to its more than 100,000 hotel partners. That’s an indication that Google could be planning to ramp up its instant booking soon.
But wouldn’t Expedia just be handing new business to the Priceline Group’s Booking.com if Expedia hiked commissions?
“I wish that were true,” one independent hotelier says, “but it isn’t because the selling price to the customer would be the same as Booking.com as per the contract demand for parity. They would just keep more money and pay us less for the same product, same service.
“The only way to get more to Booking.com or direct is to not provide inventory to Expedia, but here’s the rub. When people will search for your hotel on Expedia, when you don’t give them inventory they will tell them there is no availability, and here are all the other hotels you can choose from, even though they know perfectly well you have availability and they can access the rates from the global distribution system at 10 percent. That is how we used to work with them before. Implying we are sold out is a practice that is absolutely designed to be misleading to the consumer. Once again, that should be illegal.”
These are the questions Justice Department investigators are mulling as their probe of the Expedia-Orbitz merger apparently winds down.
The Capitol Forum states that the consensus is 74 percent that the Expedia-Orbitz merger will close but believes that number is “slightly too bullish.”
We should find out the deal’s fate sooner rather than later.