Parity clauses in the online hotel booking sector

Parity clauses in the online hotel booking sector – what's going on? Paul Bridgeland Matthias Hunold European Commission, DG Competition antitrustitalia Brussels, 18 March 2015

Disclaimer All views expressed in this presentation are personal and do not represent the position of the European Commission. The online hotel booking cases are being handled by the National Competition Authorities. The Commission is coordinating their work, but does not have its own case. 2

Contents • The online hotel booking sector • Online travel agents ('OTAs') • The parity/MFN clause • The NCA cases • Booking. com’s commitments proposal 3

Hotels > 220, 000 hotels in EU - fragmented supply. Inter-brand competition appears generally healthy. Big chains in some Member States: IHG, Accor, Louvre, Hilton, Scandic … Chains: • have 'visible' websites, with full booking functionality; • negotiate bespoke contracts with OTAs. Independent hotels: • websites often lack visibility/full booking functionality; • contract on OTAs’ standard terms. 4

How do hotels sell their rooms? 5

Sales channels - breakdown 60 -70% of hotel bookings are made offline. (telephone, email, walk-in, offline travel agents, corporate contracts) 20 -30% of bookings are via OTAs. 10 -15% via hotel websites. Types of booking: room-only, package, opaque. Metasearch sites (Trip. Advisor, KAYAK …) direct consumers to OTAs and hotel websites. Payment per click/per acquisition. Bookings via smart phone apps growing. 6

What is an OTA? (1) Two-sided internet platform. Intermediary between hotel + consumer. Hotel loads up ‘rate plans’ and manages yield in real time. Consumer can search, compare and book hotels from worldwide portfolio, for free. Hotel sets retail price of room and pays the OTA commission (15 -25% of room price). N. B. Extras. Title and risk in room inventory stay with the hotel. OTA filters and ranks the hotels on its site – the criteria matter. OTA buys internet advertising (Google Ad. Words) to ensure visibility for its site (coming top in search results). OTA gives consumer a 'best' price guarantee. 7

What is an OTA? (2) For hotels, OTAs provide visibility and access to customers worldwide. For consumers, OTAs have contributed to increased transparency of hotel room markets. Strong OTA brands: trust - important for online payments consumer loyalty Indirect positive network effects, for consumers and hotels. 8

Major OTAs Booking. com: 40 -70% of total OTA bookings. * Contracts with >80% of hotels. Priceline group 2014 turnover: $8. 4 bn. Expedia (Hotels. com, venere. com): 10 -30% of OTA bookings. * Contracts with >50% of hotels. 2013 turnover: $4. 8 bn. HRS: 20 -35% of OTA bookings* in DE, AT, Switzerland. Most hotels contract with more than one OTA sector is concentrating and consolidating. Big OTAs have recently bought big metasearch sites: Priceline-KAYAK, Expedia-trivago. * Estimates - shares vary by Member State. 9

What is an OTA in law? Law of contract: OTAs are generally agents. Article 101(1): obligations imposed on a genuine agent re. its negotiating/contracting activity on behalf of principal fall outside Art. 101(1). * Genuine agent = bears no significant financial or commercial risks. * Even for genuine agents, clauses governing agent-principal relationship may still infringe Art. 101(1). * ‘Non-genuine’ sales agents are treated as resellers. * * (Vertical Restraints Guidelines §§ 13 -21) 10

The parity/MFN clause Hotel must give the OTA: • room prices • room availability, and • booking + cancellation conditions no less favourable than those it puts on any other sales channel (online, offline, direct, indirect). Price parity refers to the retail price of the room. Retail price parity depends on the hotel setting the retail price. Carve-outs: hotel + OTA loyalty scheme discounts (hidden), corporates, offline travel agent rates. Enforcement, circumvention, cheating! 11

Parity/MFN clause – the result 12

Parity/MFN clause – the result 13

The NCA cases - UK 01/2014: OFT commitments decision against Booking. com, Expedia, IHG, IHL. Focused on vertical distribution chain (hotel OTA consumer). Found restrictions ‘by object’ on OTA’s ability to discount the room price. Likely to restrict retail price competition for hotel room bookings: OTA-OTA and OTA-hotel. (Intra-brand competition) Also likely to foreclose new entrant OTAs. Commitments allow hotels + OTAs to offer discounted room prices to loyalty scheme members. Level of discounts may not be published outside scheme. No assessment of parity clause. 09/2014: Decision annulled on appeal (procedural grounds). 14

The NCA cases - DE 12/2013: BKart. A prohibits HRS's parity clause (price, availability & booking conditions). Clause infringes Article 101(1) 'by effect’. HRS falls outside VBER 30% safe harbour. Clause does not satisfy the first 3 conditions of Article 101(3): • • HRS’s advertising investments largely not hotel-specific; hotels’ conversion rates (‘look-to-book’) influenced more by other factors than by inter-OTA price deviations; other OTA payment models exist: consumer booking fees/hotel listing fees/pay-per-click; fair share for consumers: hotel prices not lower; market transparency is illusory; low-cost searching is also provided by metasearch. 01/2015: HRS decision upheld on appeal. BKart. A cases against Booking. com and Expedia ongoing. 15

The NCA cases - FR, IT, SE & others 12/2014: FR, IT, SE NCAs jointly market test commitments proposed by Booking. com. 'Close coordination' by the Commission. These NCAs’ cases against Booking. com and Expedia are continuing. * Expedia has begun settlement discussions. Several other NCAs have opened investigations or informal market or sector enquiries in the OTA sector. *FR NCA also has a case against HRS. 16

NCA approaches to market definition Product market UK: commitments case - no conclusion on relevant market. Focused on vertical distribution chain for room-only hotel accommodation (hotel OTA consumer). DE: supply of online intermediary services by OTAs to hotels. Hotel is a buyer of services. Hotel's direct sales channels excluded. FR, IT, SE: currently commitments cases - no conclusion on relevant market. Generally focusing on supply of marketing + booking services (OTA hotel). Geographic market UK: no conclusion. DE: national market. FR, IT, SE: no conclusion; general approach: national. 17

Parity clause – Article 101(1) General approach* of FR, IT, SE NCAs: Parity clause restricts inter-OTA competition, by eliminating room price + room availability as parameters of competition. Disincentivises OTAs from competing on the price they charge to hotels: commission. (Cf. economic theory of harm below. ) Foreclosure: new OTAs cannot attract consumers using lower room prices. No consumer base = unattractive to hotels. Appreciability: major OTAs appear to have market power. All major OTAs use parity clauses. * Commitments cases – no conclusions on substance. 18

Parity clause – theory of harm (1) • A) MFN restricts inter-OTA competition on commission rates: • Hotel cannot reduce its room price only on the OTA which reduces its commission – obliged to give same reduced room price to all OTAs. • Two restrictive effects: 1. Reduced pass-through: commission reduction (increase) by one OTA leads to relatively small reduction (increase) in room price on that OTA. 2. No competitive advantage for OTA: because hotel has to reduce room price equally on all sales channels, low-commission OTA does not become room price leader. Consequence: very limited incentives for OTAs to compete on commission. 19

Parity clause – theory of harm (2) B) MFN forecloses market to new OTAs: • New entrants cannot attract customers with lower room prices (in return for charging low commissions to hotels), as hotels are bound by MFN clause of incumbents. • A significant number of customers can be esssential to grow and attract more hotels (indirect network effects). • Consequence: entry more difficult. OTA sector already concentrated. • 20

Parity clause – OTA efficiency claims OTAs claim they create efficiencies for: Consumers: 'one-stop' search, compare and book function; access to worldwide hotel portfolio; user-friendly, multilingual websites; after-sales service. Hotels: visibility and access to consumers worldwide, through pooled advertising expenditure. OTAs claim parity clause is indispensable to protect OTA investments underlying the efficiencies. Without parity clause, OTAs say consumers will use OTAs to search and compare, then will book more cheaply on hotel's direct channels (website, phone, email) = free-riding by hotels. 21

Booking. com's commitments proposal: 'narrow MFN' 'Narrow MFN’ = price parity will still apply OTA-hotel, but no longer OTA-OTA (hotel can price its rooms differently on different OTAs). Intended to promote inter-OTA competition on commission rates, while protecting OTA against free-riding by hotels. Enables hotels to reward low-commission OTAs with low room prices increased consumer demand. ‘Narrow MFN’ applies to prices displayed on metasearch sites, if the booking link is to the hotel’s direct channel. 22

'Narrow MFN' – de facto wide MFN? Due to hotel incentives problem: If OTA lowers commission, will hotels reward it with lower room prices? Room price on hotel’s own direct sales channels must always be equal to or higher than hotel’s most expensive OTA. Consumers switching to low-cost OTA may cannibalize sales from hotel’s direct channels (where hotel’s margins are highest) disincentivises hotel to price differentiate. Also, reputational damage to hotel? 23

Commitments proposal – other questions Market test respondents also raised concerns on: Room availability parity Conditions for membership of hotel loyalty schemes Restrictions on publication of hotel loyalty scheme discounts Measures which may have equivalent effects: • conditioning hotel rankings/commission rates on best room price • consumer best price guarantee 24

Background references Merger decisions: UK: ME/5882 -12 Priceline/Kayak UK: ME/6062/13 Web Reservations International/Hostelbookers. com UK: ME/2894/13 Expedia/Trivago COMP/M. 1596 – Accor/Blackstone/Colony/Vivendi COMP/M. 6163 – Axa/Permira/Opodo/Go Voyages/Edreams 25

Background references NCA antitrust cases: BKart. A decision of 20. 12. 13 in case B 9 -66/10 HRS Bestpreisklausel: http: //www. bundeskartellamt. de/Shared. Docs/Entscheidung/DE/Entscheidungen/Kartellverbot/2013/B 966 -10. html Judgment of the OLG Düsseldorf of 09. 01. 2015 in the HRS appeal (in German only) (not yet published) UK commitments decision of 31. 01. 2014 addressed to Booking. com, Priceline, Expedia, IHG and IHL: http: //webarchive. nationalarchives. gov. uk/20140402142426/http: // www. oft. gov. uk/shared_oft/ca-andcartels/oft 1514 dec. pdf OFT press release relating to the UK commitments decision: http: //webarchive. nationalarchives. gov. uk/20140402142426/http: //www. oft. gov. uk/news-andupdates/press/2014/06 -14 UK CAT Skyscanner judgment of 26. 09. 14: http: //www. catribunal. org. uk/files/1226_Skyscanner_Judgment_CAT_16_260914. pdf CMA Private Motor Insurance investigation: https: //www. gov. uk/cma-cases/private-motor-insurancemarket-investigation European Commission press release of 15. 12. 14 on joint market test by FR, IT, SE NCAs, with links to the NCA web pages: http: //europa. eu/rapid/press-release_IP-14 -2661_en. htm 26