TT-988 (Tourism Edition) -- An Ugly Move by the FTC in the OTA Sector

* * * * * * * * TERRIE'S (TOURISM) TAKE - BY TERRIE LLOYD * * * * * *
A bi-weekly focused look at the tourism sector in Japan, by Terrie
Lloyd, a long-term technology and media entrepreneur living in Japan.
(http://www.terrielloyd.com)

Tourism Sector Edition Monday, Apr 14, 2019, Issue No. 988

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+++ An Ugly Move by the FTC in the OTA Sector

It was rather shocking to read in the news last week that the Fair
Trade Commission (FTC) has raided the offices of Booking.com, Expedia,
and Rakuten, on the back of charges by hotel operators that the 3
companies are taking advantage of their market dominance to arm-twist
hotels into unfair contracts.

From what I can see, this FTC action is not really legitimate and more
like bullying by the state. Yes, hotels may not like the OTA's
commission rates and terms and conditions, but given that there are
three targets for this raid, we can easily surmise from simple math
that none of these firms is individually a monopoly on its own.
Although I'm not aware of how "monopoly" is measured in Japan, in the
EU, a comparable market and often a reference for the FTC, the rule is
that the company must have more than 50% market share to be considered
a monopoly, with some borderline cases lowering that market share to
40%. But unless the FTC considers the Inbound traveler segment a
standalone market, in fact the dominant player in the market by far is
JTB (with about half the hotel rooms market). Even in the online hotel
sales channel, the three companies are unlikely to be doing more than
90% of internet bookings - and so if you divide that 90% by 3, you
don't get a monopoly.

Instead, at the heart of the probe, according to the Nikkei, is the
Most Favored Nation (MFN) clause of most online travel sites (not just
Booking.com and Expedia), which says that if you list with Booking.com
then you can't give a cheaper room price to another site. Some how the
FTC interprets this as hurting consumers because hotels are scared to
offer lower prices on a third site as that would mean they would have
to offer the same lower price on Booking.com (and anyone else it has
signed MFN contracts with). I don't understand this logic. Firstly, if
a hotel is prepared to give a discount on one site, why would it not
be prepared to give consumers the same pricing on other sites?
Wouldn't that be BETTER for consumers?

OK, maybe if the hotel commissions at Booking.com et al were higher
than the third sites, which they used to be, then that would be one
reason. But then that would mean this situation is no longer about
fairness to consumers but rather the minimum profits enjoyed by the
hotels. Why should the FTC be protecting hotel profits?

[Article continues below...]

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[...Article continues]

The answer appears to be two-fold. Firstly the foreign OTAs are
killing JTB in the online marketplace, and my guess is that "someone"
in the sector has asked the government to reel the foreigners back in.
This all smells remarkably similar to the way the hotel lobby was able
to kill off the Airbnb threat last year. Secondly, the FTC
conveniently has a foreign precedent to follow (although 4 years late)
in the EU, where the German antitrust authority in 2015 found that
Booking.com's MFN clause was inhibiting price competition by hotels
and thus was hurting the consumer. However, in Germany at that time
Booking.com probably was (in the legal definition) the dominant player
in hotel bookings, and so there would have been a basis for this
action. The same situation doesn't exist here.

I also find it strange that Booking.com and Expedia have been singled
out, when you have Ctrip (almost all Chinese use this firm) and of
course JTB (monopolistic positions in rugby and the Olympics anyone?)
are engaging in similar or worse practices in their own segments.

My take on the supposed dominance of Booking.com, Expedia, and for
that matter CTrip and many others, is that these companies don't just
have a gigantic market share because they are engaging in unfair
monopolistic practices, but rather because their Japanese competitors
are so terrible at marketing to foreigners. The Japanese incumbents
have been sitting on their laurels for decades, not investing in their
systems, and not thinking twice about how to screw the consumer.

I remember very clearly visiting the country manager of Booking.com
Japan back in 2014 and being amazed that the company was spending
millions of dollars to manually "acquire" Japanese hotel partners
across the country, rather than simply buying the data from an
incumbent. They did this because they wanted to significantly improve
the hotel booking experience for the customer - and have since taken
consumer convenience to a whole new level. Painstakingly, they picked
up about 1,500 new hotels a year while there wasn't a single new
Japanese competitor trying to do anything remotely similar. And each
hotel they did acquire suddenly enjoyed a huge increase in foreign
guests - who stayed longer and stayed during normally vacant week
days. No one was complaining about Booking.com contracts back then,
AND that's when they were charging 25% commission. Now competition
(yes, they really are competing) with Expedia, Rakuten, and others has
kicked in, Booking.com's commissions are down to a much more
reasonable 12%. I think the FTC should be happy about this.

Instead, in the "happy old days" hoteliers dealt with an even more
monopolistic trader, named JTB. I have had personal experience dealing
with both JTB's hotel reselling arm and Booking.com, and hands down
the consumer wins with Booking.com, while with the JTB channels they
get higher pricing, antiquated services, and punitive terms and
conditions. Yes, Booking.com is pressing hotels to change in ways they
don't like, for example allowing customers to cancel their bookings at
any time, which is fantastic for the consumer but bothersome for the
hotel if they don't have automated systems to handle the
ever-changing data flows. I thought the FTC was established to protect
the consumer?

I personally find it very suspicious that the FTC had to wait until
the foreigners were well ahead in the market before launching their
probe of these two foreign companies. BTW, Japanese big business
doesn't like Rakuten, so they are happy to give that company a black
eye as well. Notably, Recruit's Jalan wasn't caught up in this net,
even though they impose restrictive terms and conditions on their
online resellers.

If I was the US trade representative, on the behalf of Expedia, I
would reveal the hypocrisy at work here by asking the Japanese FTC to
launch a probe into the pricing practices of Japan Rail (JR), which
sets a uniform price on its tourist passes for all ticket resellers,
under pain of cutting supply if any reseller tries to discount those
tickets. I'm not saying JR isn't a well run company nor that its
services are not reasonably priced - but rather what's good for the
goose is good for the gander as well. In fact, the JR argument should
have more force because the company has taken advantage of state
assets that it inherited when it privatized - assets that were paid
for by the tax payer. Much like NTT, JR should be forced to allow
access to its infrastructure and its products by competitors.

Anyway, as for the FTC action, unless they do something outrageous
like suspend the operating licenses of Booking.com and Expedia, it's
likely that the outcome will be similar to that in the EU, where both
these and other OTA companies will be forced to dispense with their
MFN clauses. Will that make a difference to anyone? Probably not at
all. Because without the protection of being undercut by hotel dealing
with other sites, they will simply find another way of rewarding good
behavior. This is the way of natural market forces and if the FTC
really wants to curb such behavior, it should start with a review of
the entire market and a look at ALL the consumer benefits enjoyed over
the last 5 years. In that lens, the raided companies may actually be
seen to be benefiting the market, not hurting it.

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