Terrie's Take 988 (Tourism Edition) - An Ugly Move by the FTC in the OTA Sector
terrie at mailman.japaninc.com
Mon Apr 15 08:59:31 JST 2019
* * * * * * * * 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. (
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
>From what I can see, this FTC action is not really legitimate and more like
bulling 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
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?
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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 handled 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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Written by: Terrie Lloyd (terrie.lloyd at japaninc.com)
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