Texas Cities vs. PCLN, EXPE, OWW et al: A Draw At Best

Late last week, a jury in San Antonio delivered a verdict on a class-action suit against the major OTAs that was brought by around 170 cities in Texas. The verdict against Expedia, Orbitz, Travelocity and Orbitz is for $20M plus court imposed penalties and interest.

While this sounds dire, (and if you read the lawyers press release you would think this was a slam-dunk) a detailed analysis beyond the headlines should give the edge to the OTAs. Why?

First of all, the jury rejected the municipalities' claims that the OTAs willfully pocketed tax dollars that were collected (as taxes) from consumers. This precedent setting verdict finally makes it clear, once and for all, that the OTAs are not collecting taxes and pocketing it - a position that many of the other lawsuits have taken and one that was sure to ring true with juries, particularly in this day and age. The "tax and pocket" position was a highly emotional stance that anyone who truly understand the true economics of the merchant model would obviously reject. Yes, taxes and fees have long been bundled together but the spirit and goal was clearly not to defraud consumers or rob cities and towns of tax dollars - the intent was to protect the underlying contractual agreements around margins.

Secondly, the jury rejected punitive damages against the OTAs because they agreed that the OTAs were not, in fact, pocketing tax revenues. Obviously, this is a no-brainer.

Interestingly, the jury did find that the OTAs "control hotels" and therefore are required to remit the occupancy taxes required by hotel operators. Knowing more than a few hotel General Managers, I can't imagine a statement that would boil their blood faster (except, maybe to say that "corporate" controlled their house!) than to say an OTA controlled the hotel. By now, everyone knows that hotels set pricing, inventory, discounts and room allocations either on the fly or during negotiations with the OTAs. The OTAs then re-market those rooms that have been offered to them to sell. This is hardly control. Furthermore, the hotel is clearly in control of the guest experience - after all, it is the hotel that decides which rooms to allocate to specific guests and who to "walk" when things go wrong.

Lastly, we believe the jury's definition of "control" may expand well beyond the OTAs. Put in the context of the ruling, traditional tour operators control rooms as well. Traditional tour operators (which pump a lot of rooms into Texas resort cities) have always paid the occupancy taxes based on the net rate of the room, not the gross selling rate. This has been going on long before the Internet and the OTAs came along.

Bottom line: if Expedia and the like are hiring, firing, allocating capital, negotiating with unions, customers, franchisers and managing to get the beds made and the bacon crisp, we'd agree that they control the hotel. Last I checked, these functions were not part of the OTA business model.

These insights are excerpted with permission from Tom Botts' Hudson Crossing blog.