Expedia, Hotels.com lead OTAs in producing revenue for IHG By Dennis Schaal / March 18, 2009 Share 1 -- For InterContinental Hotels, Expedia has gone from zero to hero. In fact, in the few months since InterContinental Hotels properties became available again on Expedia Inc. points of sale around the globe, after a four-year absence, Expedia.com and sister firm Hotels.com have become the top revenue producers among online agencies for InterContinental's hotel owners, an official said. Eric Pearson, InterContinental's senior vice president of distribution marketing, said Expedia is "doing a full-court press" for the chain since the two connected more than 4,000 properties from the chain's central reservations system to Expedia in November and began using what they describe as a hybrid business model that blends transaction and advertising elements. "We're very pleased," Pearson said, noting that IHG was "off the shelf" at Expedia for four years. InterContinental's dealings with Expedia reflect a new business model that the online agency has adopted over the last two years in its dealings with major chains, including Carlson Hotels Worldwide and Marriott. Expedia and its partners won't go into the details of their agreements, which are believed to vary from chain to chain, but it's clear that the arrangements have gone beyond compensation based on transactions and the merchant model and have added advertising and performance elements, as well. The InterContinental agreement is the only pact that Expedia would confirm uses the hybrid model. But Katie Deines, an Expedia spokeswoman, said a "common thread" in Expedia agreements with InterContinental, Carlson and Marriott in the last two years "is the ability to deliver offers targeted at specific geographies, or participating in dynamic promotions that help properties get exposure in accordance with where they need demand the most at any given time." Pearson of IHG describes the arrangement thusly: "The model recognizes and rewards the immediate transactions delivered by Expedia as well as the benefits of exposure to our brands and hotels, making it a mutually beneficial relationship for IHG and Expedia that serves to drive incremental revenue for our owners." Here's how it works: IHG and Expedia determine in what position a particular property will appear in Expedia's search results and how much the property has to pay for that placement. When a consumer books the property, IHG compensates Expedia based on a sliding scale that takes into consideration the rate at which the room was booked and the advertising fee that was paid for the property's display position. In 2004, before IHG's inventory was removed from Expedia and Hotels.com in a dispute over economics and distribution strategies, about 600 IHG properties were selling merchant inventory through the two outlets, and Expedia was fourth or fifth among top OTA revenue producers for IHG, Pearson said. Expedia's new status as the top OTA revenue producer for IHG results from a combination of tying the 4,000 properties into Expedia and use of the hybrid model, Pearson said. Putting it in context, Pearson said InterContinental earns less than 3% of its revenue from OTAs, but the channel "is important to us." Carlson Hotels Worldwide also has a new relationship with Expedia. Carlson is in the midst of a four-month experiment with Expedia Inc. that supplements the traditional merchant model with an advertising and marketing component. Under the merchant model, online travel agencies negotiate net rates from hotels, and then add their own markups, usually ranging from 18% to 28%, depending on the chain and the circumstance. But in this evolving new model and its variants, the size of the OTA's markup for rooms at any given hotel may be tied to the level of advertising, or the display position, that the OTA commits to that hotel. This arrangement gives the chains the flexibility -- and gives the OTAs the incentive -- to push certain locations harder than others and thus compensate for fluctuations in local market conditions. Christine Brosnahan, Carlson's vice president of distribution and reservation services, described this model, which Expedia Inc. and Carlson are testing in a four-month pilot, as "targeted flexibility." Brosnahan said the model enables Carlson to offer a higher markup for certain properties at specific times in exchange for more prominent placement and increased marketing or advertising on Expedia's hotel pages. "With Expedia and major OTAs, it becomes mostly about placements," she said, noting that Carlson is moving in the same direction with other OTAs in taking flexible approaches, varying by property, and "trying different things to play differently together." Brosnahan said the U.S. trial with Expedia, launched in November, has been "positive" and "effective," but inconclusive so far because it was "rolled out in a downturn." The pilot is part of a larger, three-year agreement between Carlson and Expedia that began in November. But one shouldn't lump together all of Expedia's recent hotel deals. Without divulging the specifics, Brosnahan said that Carlson's arrangement was "completely different" than the much-ballyhooed agreement between Expedia and IHG. Jake Fuller, formerly the managing director of equity research for Thomas Weisel Partners, said that Expedia's "recent chain deals feature reduced markups and some ad-related payments tied to exposure on the site, which is more amenable to the chains." Expedia is the leader among OTAs in online hotel sales. In 2008, it booked 56.6 million room nights on a merchant basis, a 13% increase over the previous year. As for the future, Deines said, "Media value could increasingly play into Expedia's agreements with some chains." IHG and Carlson seem open to these new types of agreements with other OTAs. Brosnahan said Carlson was considering these types of deals with other OTAs in certain markets. And Pearson said the chain was poised to reward partners that can move market share and think creatively. As for other OTAs, none has yet announced a similar model, but it is clear that the Expedia deals are being watched carefully. Travelocity, part of privately owned Sabre, declined to discuss its hotel agreements. But a Travelocity spokesman, Joel Frey, acknowledged that "the marketplace is changing, and therefore we are working closely with all of our supplier partners to improve our relationships with them and to determine the best ways to deliver value for them and our mutual customers."