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| | The Street.com
Travel-site operator faces hotel mutiny
By Peter Eavis 5/6/2004
Judging by one chain's actions, hotel operators are getting sick of interacting with InterActive.
The New York company, led by former media mogul Barry Diller, operates Web sites such as Hotels.com and Expedia.com that act as online distributors for hotel rooms. This arrangement has raked in big profits for InterActive (IACI, news, msgs) and gotten investors all fired up over the future of its travel businesses, which account for about 65% of the company's operating income.
However, there are strong indications that hotels, benefiting from the recovering economy, aren't feeling so attached to InterActive. Some would much prefer to build their own online distribution and are having success doing so. Even worse, there are signs that some hotels simply don't want to do business with InterActive sites because of differences over tax payments and because sites like Hotels.com are confusing and upsetting guests.
In late April, InterContinental Hotels (IHG, news, msgs) -- which runs the Holiday Inn, Crowne Plaza and InterContinental brands -- came out with a set of tough new guidelines for online travel companies supplying rooms in its hotels.
InterActive's sites currently do at least one of the things that InterContinental says it will not tolerate: They fail to break out separate amounts for taxes and fees for the customer. InterActive defended its decision not to make its fees disclosure clearer to the customer and gave no indication that it would change its practice when asked.
As a result, InterActive could lose access to InterContinental's hotels soon after the new rules are due to take effect, on May 20. And other hotel chains could adopt similar guidelines that could end up clashing with InterActive's business practices.
"No one is that important that we have to be on their shelf," says Tom Seddon, who oversees brand strategy for InterContinental in the Americas. Asked if InterContinental could do without big distributors like Expedia and Hotels.com, Seddon replied: "Sure."
InterActive spokeswoman Andrea Riggs responded in an e-mail: "Expedia and Hotels.com have mutually beneficial partnerships with more than 17,000 hotels, including all the major chains, over a hundred other chains and thousands of independent hotels. These merchant hotel partners choose to work with us because they see tremendous value in the marketing and distribution that we are doing for them."
Choosing sides
Clearly, with a nasty battle heating up, investors have to decide whether this tougher stance in the hotel industry is mainly a bluff. If not, they then have to gauge whether losing a large amount of rooms at a big chain would be a big blow for InterActive's bottom line.
Here are some of the things that InterContinental will no longer tolerate at sites that distribute its rooms:- Unclear presentation of taxes and fees: InterContinental says that it "will only work with distributors that commit to clearly showing all guest charges and to helping hotels directly address the question of the appropriate taxation basis."
- Inefficient booking processes: Even though rooms may be sold through the Internet, some online distributors still use antiquated means to relay bookings to the hotels, leading to lost reservations.
- Misinformation: That is, telling site visitors that rooms are sold out at a particular hotel when they are not.
- Bait-and-switch: Luring customers with huge discounts that may not exist in any meaningful amount.
As noted above, a look at InterActive's sites shows that it doesn't comply with the request that taxes and fees be split out separately. Instead, customers just see one sum for both, and they don't know how much they are paying in taxes and how much is going to InterActive.
The sums involved aren't small. For a $260, two-night stay, taxes and fees can easily come to $40, or 15% of the total. The last thing distributors want is to show how much they're taking in fees because doing so could push customers to lower-fee sites. Also, if fees and taxes were broken out, rival distributors could just look up the occupancy tax rate for the state and city concerned and then calculate how much InterActive is paying the hotel for the room.
Schools of thought
The tax issue is also nettlesome because it could mean either the hotel chain or the distributor has paid too little tax and may be sitting on a large tax liability. There is a dispute over whether taxes should be paid on the sum a distributor pays to the hotel for a room, or on the amount paid by the guest.
InterActive believes taxes should be paid on the wholesale price. Expedia's Riggs comments: "Consistent with longstanding industry practice, hotel occupancy taxes do not apply to intermediaries and their services. We and our state and local tax advisers and experts have spent considerable time and resources over the past year analyzing the occupancy tax issue."
InterContinental's Seddon, however, is not so sure about how much tax should be paid. His company currently just pays the taxes passed onto it by the distributors, even if that is on the wholesale price of the room. He says the issue of what amount to pay tax on is "murky." He adds that the retail rate "would seem to be the reasonable basis on which to charge tax."
Local tax authorities are looking into this question. What if they start to demand back taxes from InterActive? The company doesn't believe that would hurt it financially. "We do not believe it will have a material impact on our past or future financial results," says Riggs.
But the tax-and-fee issue could eat into margins. An estimated 30% of operating income per room at InterActive comes from fees and the tax savings achieved by calculating the tax rate off the wholesale room price, not the retail one.
It sure looks like InterActive and InterContinental have a lot to fall out over, but both sides say they can do without the other. Seddon says that only 2% of revenue on the InterContinental system comes from bookings through third-party online travel sites. A much larger 5% comes from the company's own Web sites. That suggests that it's not hard for the hotel chains to replicate what InterActive does on the Web.
For its part, InterActive says that the top five chains make up 20% of hotel revenue at Expedia and Hotels.com, including franchisees, and only 10% of the travel segment's net revenue.
Seddon says InterContinental won't be imposing its new standards in a confrontational fashion, and expects to cooperate with distributors to get the guidelines in place. That means it could be a few months before InterContinental makes a final decision on whether to keep using InterActive. But don't be surprised if you can't get into a Holiday Inn this summer by going to Expedia.
In keeping with The Street.com's editorial policy, Peter Eavis doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships. He welcomes your feedback and invites you to send any to peter.eavis@thestreet.com.
© 2004 TheStreet.com, All Rights Reserved.
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