As I said before, rooms and flights don�t just come out of the air and Expedia doesn�t manufacture them either. They come from airlines and hotel chains in which terms are negotiated, suppliers are no longer allowing EXPE to dictate terms. It appears that there will be a substantial change in how Expedia obtains room from the below large chain of hotels. Expedia will have to deal with the hotels central reservation system, no longer with the individual hotels. This will cut in sales and profits of EXPE, as they will not simply buy rooms at deeply discounted fixed price and resell to consumers with a high markup.
March 13, 2003
Six Continents Tries to Regain
Pricing Power in Expedia Pact
By MOTOKO RICH - THE WALL STREET JOURNAL
Savvy online consumers know the best way to find a good hotel rate is to shop around. But some of the disparities that travelers have found could start to disappear under a deal signed by Six Continents PLC, the London-based owner of the Holiday Inn and InterContinental brands, and Web-based travel agent Expedia Inc.
The pact marks a further effort by Six Continents, which also owns the Crowne Plaza and Holiday Inn Express brands, to retake control of Internet sales of its hotel rooms. It follows a similar deal Six Continents signed last month with Sabre Holdings Corp.'s Travelocity.com.
With the explosive growth of online brokers such as USA Interactive's Expedia and Hotels.com and Travelocity, lodging chains increasingly have grown frustrated these Internet middlemen have begun to dictate hotel pricing and are making handsome profits by marking up deeply discounted rooms the hotels give them.
The Web sites usually negotiate deals with individual hotel properties, which pay franchising fees to the chains for use of brand names, rather than directly dealing with the hotel companies' central reservation systems. Consumers often benefit from these one-on-one deals because local hotel owners sharply cut their prices.
Six Continents plans to give Expedia access to its central reservation system. The hotel company will encourage local hotel owners to allot rooms and rates to Expedia through this centralized system, which automatically will raise rates or shut off allotments if a hotel is close to selling out. Under the old system, an individual hotel might leave deeply discounted rooms with the Web site even if it could sell rooms directly to consumers on one of the branded Web sites like Holiday-Inn.com at a higher rate.
Six Continents says Expedia also has agreed not to buy so-called predatory advertising on the Web -- ads designed to lure customers away from the hotels' own Web sites. "They will not target our brand-loyal customers," said Andrew Rubinacci, director of distribution planning for Six Continents. Expedia wouldn't comment on this aspect of the agreement.
Michael Reichartz, Expedia's vice president of lodging, said the site would get more rooms from Six Continents-branded hotels. Hotel managers and owners "are looking to the chain for guidance on who to work with" on the Web, Mr. Reichartz said.�
Write to Motoko Rich at firstname.lastname@example.org
This will cut into EXPE's profit, and you do not get Hilton Honor Points if you book thru Expedia, and Expedia cannot sell for less than Hilton-So why go thru Expedia?
Title-Hilton Signs Deal With ExpediaIn Bid to Reduce Web Discounting
By CHRISTINA BINKLEY
Staff Reporter of THE WALL STREET JOURNAL
Hilton Hotels Corp. is striking back at discount hotel Web sites with what the lodging company is calling its "Internet battle plan."
The strategy, which includes a two-year partnership with Expedia Inc., is aimed at eliminating deeply discounted Hilton hotel rooms on the Web. In return for being named a preferred vendor, Expedia has pledged not to undercut Hilton's own prices and agreed to significantly cut its commissions to the hotelier.
Loyal Hilton guests also will be steered away from all outside Web sites, including Expedia. Hilton plans to stop awarding points in its loyalty program to guests who don't book directly with Hilton, or its chains, such as Doubletree, Embassy Suites and Hampton Inn. Soon, 13 million HiltonHonors members will begin getting as many as two warnings when they book with an outside site before points will be curtailed.
Hilton's plans are cinched by a promise that its Web sites, 800 numbers and properties will offer the same prices for a hotel room on any given day -- and that those prices will be the lowest available on any Web retail site. The company is quietly launching improvements to its own Web sites, such as better search functions. The Beverly Hills, Calif., hotelier is set to announce the details of its plan Monday.
The tough economy has many hotels dumping discounted inventory on the Internet. The less-expensive rooms, though, aren't persuading enough people to travel more, according to a recent report from the Cornell Center for Hospitality Research in Ithaca, N.Y.
While the whole industry is worried about this phenomenon, Hilton's new war on discounters is a radical step. The Hilton deal signals a gradual waning of the market power of these retail Web sites, said Lee Pillsbury, chairman and chief executive of Thayer Lodging Group Inc., which owns a number of hotels that are operated by Hilton.....///
>> Scale? Has nothing to do with USAI buying out ROOM.
Huh? Now, one single corporate entity accounts for 60% of all online hotel bookings. That was not the case before the buyout.
Scale matters a great deal in the merchant travel business.
>> You said it helps USAI get lowest cost
>> of goods sold? Come on. The contracts
>> are being writen that up the costs
>> by cutting commissions and changes
>> made that ROOM and EXPE cannot quote
>> lower rates.
The problem with your analysis here is multi-fold:
1) EXPE and ROOM don't need, or probably even want, every single hotel in a given destination to participate in its merchant program. They only need enough in each location/price-range/star-rating to create great deals for travelers.
In any given destination that matters, there are literally dozens of hotels competing with each other. Hotels are generally independently run. (Even Hilton had to characterize their guidelines as just that -- a guideline.)
If you think scale doesn't matter, then:
a) Why don't you create your own online travel site, and go to the airlines and hotels to try to get the lowest cost of goods sold? They will laugh your 2-sales-per-day right out of the office.
b) Did you know that it takes a lot of work by each supplier to manage a merchant arrangement? They need to check how its being marketed, check the prices, allocate room blocks, price them, etc. All of this takes work. Now, how many merchants would you like to cut a deal with? Would you care if one player sells 60% of all the rooms on the Internet? You probably would. Would you give them a good deal to feature your property more prominently than your competition? You probably would.
c) The gross operating margins at EXPE have held steady at 68% year over year.
d) If you set the price, you need the best possible information on supply and demand.
You tell me: If site A sells, say, 10 times the travel that site B sells, which site do you think is going to be able to set the price better to maximize its own profits?
You got it: Site B. Simple economics.
What a baseless post.
Scale? Has nothing to do with USAI buying out ROOM.
The whole competition scene is changings. Several Hotels about to release their own website called Travelweb.
You said it helps USAI get lowest cost of goods sold? Come on. The contracts are being writen that up the costs by cutting commissions and changes made that ROOM and EXPE cannot quote lower rates.
What ROOM & EXPE did in the past is going to change going forward with new competition and cuts in commission.
>> What was the point of USAI buying ROOM?
1) Scale matters a great deal in the merchant business.
In fact, in the merchant model, scale eventually creates its own barriers, because it helps USAI get the lowest cost of goods sold from suppliers, and new entrants cannot secure low cost supply without major scale, and new entrants cannot promise the level of marketing exposure that #1 has.
2) A lock on major channels of distribution. With Hotels.com's affiliate program, USAI powers the hotel bookings for many, many destination websites. E.g., go to a search engine and search for a hotel in Atlanta or Orlando or Boston or Vegas, and are pretty likely to hit a site that is powered by Hotels.com. It's not 100% of the time and you'll probably find several counterexamples, but it might surprise you how many websites use Hotels.com to power their hotel bookings. That number is over 8,000 today, according to the latest information from ROOM.
3) Together, EXPE and ROOM sell about 60% of all the hotel rooms sold on the Internet. (Source: recent business week article, citing PhocusWright data.) That level of scale matters.
In fact, in the world where USAI can set the price of what it sells, it means that NO online sales entity has a clearer picture of what is selling and what is not, at what pricepoint, in the marketplace. I challenge you to find any other entity that can not only set prices of what it sells, but has a clearer overall picture of the weekly/monthly/hourly price elasticity across travel markets.
With one player accounting for more than half of the online bookings, USAI has the clearest information on market pricing, and others have to guess at it... and in a world where it is filling up hotels at the rate of over 40,000 hotel rooms every single day [source, latest ROOM and EXPE earnings release], every cent they can squeeze out by more intelligent pricing flows directly to the bottom line. Again, the Wal-Mart analogies come into play here, whether you'd like to admit it or not. Scale matters.
not to mention the fact that anything ROOM does, EXPE does twice as well. What was the point of USAI buying ROOM, they can't even compete on prices or bookings. EXPE is hugely overvalued, but ROOM has hardly any value at all.
Listen, Dillar has an excellent track record. You can speculate that he will make mistakes and mismanage in the future, but overall, he has an excellent history of creating wealth for himself and for those who follow his lead. Furthermore, Diller is recognized on Wall Street for being extremely adept at creating wealth for his companies. It is not just me saying this, it is the consensus.
This article in Forbes rates Diller with the second highest approval rating for major media CEO's
So, go ahead and 'call me out on it'... I choose to follow Diller's lead rather than yours. Sorry dude, just my opinion.