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Are All Online Travel Sites Good for the Consumer: An Examination of Supplier-Owned Online Travel Sites
Subcommittee on Commerce, Trade, and Consumer Protection
Mr. Bruce Wolff
Mr. Chairman and members of the Subcommittee, thank you for holding this hearing and for giving me the opportunity to testify on supplier-owned travel websites. My name is Bruce Wolff, and I am Chairman of the Board of TravelWeb LLC ("TravelWeb"), a joint venture of six companies in the hotel industry, which distributes hotel room reservations online. I am also Senior Vice President of Marriott International and a Director of Pegasus Solutions, which are both founding members of TravelWeb. Today, I am testifying in my capacity as Chairman of TravelWeb. There is no doubt that travel websites can provide enormous benefits for American consumers. However, these websites should be viewed as one option among many for consumers. Some consumers will find them absolutely right for their needs; others will not. But the fact that they have this choice is certainly a benefit. Travel websites offer incredible convenience by allowing consumers to obtain a wealth of travel-related information in minutes. They can see photos, learn about the nearby attractions, and compare prices from the comfort of their homes in minutes, often saving hours of effort. In addition, by achieving efficiencies in distribution, websites reduce costs and allow consumers to benefit from some of the most competitive rates available. The increasing use of travel websites and general customer satisfaction are evidence of the benefits that websites provide to some of America's busy, and discerning, consumers. New, efficient methods of doing business sometimes mean that companies using traditional methods lose customers. That is a painful process, but it is the hallmark of a free enterprise system. The issue is not the effect of travel websites on other businesses that compete in distributing hotel rooms, however. It is the effect on consumers. Thus, it is perfectly appropriate for this Subcommittee to examine whether supplier ownership of TravelWebsites is good for consumers. In a few minutes, I want to address the specific concerns that might be raised by the fact that TravelWeb is owned by hotel companies. For the moment, let me just say that the owners of TravelWeb go toe to toe in the market every day, trying to outmarket and outsell each other. We compete on price, location, service, frequent stay programs, travel agent programs and many other factors. TravelWeb will not change that powerful dynamic. However, TravelWeb allows us to achieve some operational efficiencies for consumers, without undermining in any way the vigorous competition among the owners, which helps to drive down prices. For that reason, we feel very confident that TravelWeb is good for consumers. TravelWeb
TravelWeb is an independent company created in February 2002 to provide online marketing of hotel rooms and is only now ramping up operations. The initial owners of TravelWeb include five hotel chains -- Hilton Hotels, Hyatt Corporation, Marriott International, Six Continents Hotels, and Starwood Hotels and Resorts -- and Pegasus Solutions, a leading technology provider to the hotel industry. In the aggregate these chains own only a small portion of the hotel properties that carry their brand name, and they are affiliated with many more properties that are independently owned. Pegasus provides central reservation system and other services to many hotels in the U.S., and its Utell subsidiary provides marketing and reservation services to a network of hotel properties. I should note that, although these hotel chains and Pegasus are owners, TravelWeb is an entirely separate company, with its own board of directors and employees. While the board members set general policy, the management of TravelWeb makes independent business decisions focused on achieving success for TravelWeb. Under the agreement governing TravelWeb, the hotel company owners of TravelWeb, including myself, do not have access to certain information and cannot participate in certain decisions. Hotel properties other than those of the founding members are invited to participate in TravelWeb by supplying room inventory for distribution. Many properties of other chains already participate in TravelWeb, and we expect increased participation by additional chains and independent properties as we become more established. In the long run, our customers will primarily be other travel website companies, not consumers themselves. We will specialize in the online distribution of discounted hotel rooms, that is hotel rooms that are sold through what the industry calls the "merchant channel." These are rooms that tend to be sold at prices below regular rates primarily because of excess capacity in the market. TravelWeb will compensate participating hotels for inventory in an amount that is based on market conditions and negotiations between TravelWeb and the hotel property. TravelWeb in turn will add a markup to that base rate when it makes inventory available to other travel websites. The room will be offered to consumers at a rate determined by TravelWeb, and the travel website who "sells" the room will receive a commission. We also operate a travel website for consumers called TravelWeb.com, which is accessible to the public. That site has been in operation for some time and provides another choice for consumers alongside many other travel websites. Through that website, TravelWeb operates as a retailer and deals directly with consumers. We view that as an important part of our business, but our primary effort is offering discounted rooms through other travel website companies. Potential
Concerns Let me turn now to some of the potential concerns about supplier owned travel websites. I cannot address these concerns for all websites, but I can discuss them in connection with TravelWeb.
As with
any website, consumers are legitimately concerned about privacy.
TravelWeb is strongly committed to protecting the private personal data
collected in processing a transaction, which may include a consumer's name,
address, credit card information, and other important information.
TravelWeb acts as both a "wholesaler," by selling through other
travel websites and as a "retailer." Whenever
TravelWeb is furnished personal information by consumers, it transmits only the
information necessary to complete a transaction.
In addition, TravelWeb may use other information voluntarily submitted by
the consumer in order to evaluate his or her travel preferences and to make
better recommendations. TravelWeb
may also aggregate certain information, e.g., zip code data, for its own market
research or for advertisers. Other
than these uses, TravelWeb does not sell, lease, or share personal financial
information with other parties and is fully committed to adhering to all
applicable federal and state laws protecting the privacy of consumers. We are also sensitive to international privacy laws
requirements.
Now I want to turn to competition issues. Let me say at the outset that TravelWeb provided background material to both the Department of Justice and the Federal Trade Commission prior to our formation in February. We have offered to meet with and brief appropriate officials in both agencies regarding our structure and operations. We have not been contacted by either agency but we stand ready to cooperate with them. Possibility
of Collusion One question is whether the competitors who own TravelWeb could collude to raise prices. As I will discuss, the market makes it almost impossible to collude, and TravelWeb is carefully structured to prevent even that unlikely possibility. First, it is important to realize that only about 4% of hotel rooms are sold online. In distributing rooms online, we compete with all other ways of distributing hotel rooms - directly from the hotel, through 800 numbers, through travel agents, and so on. Although we don't have hard numbers, we believe about 5% of rooms sold online are sold through the merchant channel. Companies that sell through this channel are also in competition with rooms sold through traditional channels. Online sales of rooms through the merchant channel represent less than 1% of all rooms sold. TravelWeb's share of online merchant channel sales is tiny. We certainly hope it grows over time, but TravelWeb is really a "late-comer" to a market segment that is dominated by other, large companies. A recent industry analysis stated: "The hotel industry is too complex and unwieldy for [TravelWeb] to wrestle away the top spot" from our competitors.[1] But, even if we were to achieve 10% of this category, that would mean that we will sell less than .1% of the approximately $108 billion in annual hotel bookings in the U.S. -- hardly a prescription for market domination. In addition, it is also important to focus on the structure of the hotel industry. Individual hotel properties are overwhelmingly independently-owned. The combined share of all hotel rooms in the U.S. which carry the brand names of one of our owners is 29%. However, about 80% of the properties that carry a national brand name are owned by franchisees that make their own, independent business decisions and establishes its own prices. Neither TravelWeb nor our individual owners compel these properties to participate in TravelWeb or to comply with any centralized price-setting system. In other words, the hotel industry is highly fragmented, with literally thousands of independent actors. Even at the local level, there are usually hundreds of independent hotel properties in any large metropolitan area and dozens in small areas. Finally, hotel rooms are not homogeneous. Hotel rooms vary greatly in size, quality, amenities, and location. Consumers shop around for the combination of room rate, location, and amenities they want. The combination of the highly unconcentrated industry structure, the large number of independent actors, and the lack of homogeneity make collusion extremely unlikely. In order to guard against even a remote possibility of collusion, TravelWeb was advised by antitrust counsel throughout the formation process and continues to be advised on an ongoing basis. TravelWeb has adopted a number of restrictions on our own operations to ensure its continuing compliance with the antitrust laws. The management of TravelWeb does not share pricing information with any participating hotel or chain, including the owner chains. For example, even though I am Chairman of the Board, TravelWeb does not provide me with the base rates charged to TravelWeb by any individual property. We do not discuss rooms rates or any other sensitive competitive terms offered by individual properties at any of our meetings or in any documents. In short, TravelWeb believes that collusion in this industry is exceedingly unlikely, and we have taken steps to ensure that it is impossible within the TravelWeb structure. Exclusivity
Questions have been raised about the possibility that TravelWeb could have exclusive access to discounts offered by participating properties. That is not the case. Each participating property is free to offer discounted rooms through other websites or through any other channels. In fact, it is typically the case that the same room is made available simultaneously through multiple websites and is removed from the inventory only after it is sold. No independent property of a participating chain is required to participate with TravelWeb, and participating properties are not required to offer any particular portion of their inventory - either rooms offered at regular rates or "discount" rooms - through TravelWeb. "Most Favored Nations" Clause Another question concerns TravelWeb's "most favored nations" (MFN) clause. We have included a narrow MFN in our contracts with participating properties. Our MFN provides that, if hotel properties offer inventory to be sold through TravelWeb, they agree that they will make available to TravelWeb the lowest price that they make available to any other independent travel website for comparable inventory. However, hotel properties are free to offer even lower rates directly, through travel agents, through their own websites, or through any another outlet. There are no incentives to properties to induce them to offer discounted rooms only through TravelWeb or necessarily to offer their lowest rates through TravelWeb. Thus, the MFN gives us some assurance that we are competitive with other independent travel websites, but it does not mean that we have any "corner" on the lowest rates offered by hotel properties. Conclusion TravelWeb is a new entrant in a market with vigorous competition. The hotel industry is composed of thousands of participants that compete every day for consumers. TravelWeb is a very small participant in that large market. We believe that the merchant channel is a valuable part of this market because it adds yet another way that rooms are sold. Frankly, we felt that the merchant segment of the market was not as competitive as it could be, and that is the reason we, that is, the hotel companies that own TravelWeb, decided to enter. We don't have all the answers, and no doubt we will learn better how to serve consumers over time. However, we are confident that TravelWeb will be a valuable addition to the market, one which promotes competition, rather than limits it. Thank you again for the opportunity to testify and I would be pleased to answer any questions.
[1] Henry Harteveldt, New Portal Leader Won't Dislodge Current Leaders, Forrester Consumer Technographics North America Brief, Feb. 20, 2002.
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