Sunday, 7 December 2003
Focus on competition at PhoCusWright conference
As in years past, the 10th PhoCusWright Executive Conference in Orlando, Florida, 17-18 November 2003, brought together the CEO's of the most influential companies at the intersection of travel, technology, and the Internet, providing those of us who observe those industries with one of our most important annual opportunities for stock-taking.
The buzz phrases du jour seemed to be online corporate travel, the maturation of dynamic travel packaging technology, the perceived unprofitability for agencies or intermediaries of travel service with a fixed commission and selling price set by the supplier, and the first serious interest by USA companies and investors in travel markets outside the USA.
The real story of the conference however, was open and cutthroat competition within the Internet and travel industries.
In its early years, even before the dot-com bubble, PhoCusWright was a place of boundless optimism. Conference chairman Philip C. Wolf has retained that optimism even through the dot-bomb and the travel downturn of the last two years. Not without justification: I share Philip's view (and that of most of the participants in the conference) that usage of the Internet for travel is far from "saturated", for all but a few companies.
(The exceptions are mainly those airlines who already get the vast majority of their reservations through their Web sites, including Southwest Airlines -- by far the most significant Internet success story in the travel industry in the USA, although not perceived as a technology leader and never yet a focus of attention at PhoCusWright -- as well as jetBlue and easyJet.)
According to PhoCusWright's latest research, approximately 30 percent of the dollar value of travel reservations in the USA in 2003 were made on the Internet. The percentage could actually be much higher, depending on how you define "made on the Internet", since most people who make reservations over the phone or face-to-face with a travel agent have done at least some of their research first on the Internet. But that still leaves room for substantial growth in the share of reservations made online.
Certainly that remained the party line at PhoCusWright 2003, repeated explicitly by several speakers: "There's still plenty of room for growth, and for us all to get rich as long as we make the right decisions and read the tea leaves right." The shift in market share from offline to online bookings will allow the Internet sector of the travel industry to continue to grow, even if total travel spending continues to decline, as it has for the last two years.
But far too many of the CEOs on the platform came out swinging at each other for, "There's room for us all," to be their real belief. The fear -- even in the executive offices -- that there isn't room in the industry for all the present players to survive was palpable and only barely below the surface throughout the event.
The hostility was most apparent between suppliers of travel services (especially hotel companies) and distributors (especially IAC/InterActiveCorp ; see also my comments before the conference in Business Week in Marriott vs. Diller: It's a Brawl), between IAC's Expedia.com and other Internet travel agencies, and between Priceline.com and IAC's Hotwire.com (as I'll discuss in a separate posting in this blog).
Customers don't care what fraction of their travel dollar goes to intermediaries and what fraction to service providers (airlines, hotels, etc.). Consumers just care about the (total) price and the quality of service. But there was little if any discussion at PhoCusWright about offering lower prices, making them easier to find, or improving customer service. Tant pis pour les voyageurs!
PhoCusWright has always been notable as much for what isn't talked about as for what is on the agenda. The unspoken cause of the CEO's fear, of course, is the aforementioned continued decline in travel. Travel industry decision-making for the last two years has been dominated by the management of a succession of crises: the events of 11 September 2001 and their aftermath, the downturn in the economy and the collapse of the dot-com bubble, the drastic reductions in business travel budgets, the wars in Afghanistan and Iraq, continued fears of terrorism, SARS.
Yet, astonishingly, no one at PhoCusWright mentioned crisis management, disaster planning, or market contraction in their discussion of the issues facing managers of travel companies. Sabre's Sam Gilliland, for example, boasted of how quickly his company had recovered from war, SARS. etc., this year, but there was no acknowledgment of any recognition that any such things could ever happen again. The closest anyone came to this issue was when Erik Blachford explained how US$900M in planned marketing spending in 2004 by InterActiveCorp's "IAC Travel" division (which includes Expedia.com, Hotels.com, and Hotwire.com, among other brands) would benefit the entire industry by encouraging people to travel more. Until the emergence of Internet travel companies, he pointed out, there were few national retail travel brands (AmEx being the obvious exception), and none that were, "Spending a billion dollars a year to tell people, 'Travel is fun, and it's not as expensive as you think.'"
For the first time, the PhoCusWright conference included panels on both the European and the Asia/Pacific online travel marketplaces. Even more significantly, many of the participants in the conference -- traditionally the most USA-centric of the major Internet travel industry events -- actually seemed interested in what's happening in the rest of the world. To some degree, that's a sign of real recovery: companies that last year were focused on surviving the crises and the travel downturn in their original core USA market can now think about expansion abroad. But the fact that most of the potential for expansion (and likely an increasing share of PhoCusWright Inc.'s consulting revenues) is now oversees is symptomatic of the fact that the decline in travel has been much more severe, and more sustained, in the USA than elsewhere (on top of the fact that people in the USA get so much less vacation time and travel so much less than people in any other comparably wealthy country).
Thus the (belated) interest being shown by USA travel companies in capturing some of the money spent on travel by people outside the USA also reflects, I think, the same sub rosa fear of market shrinkage and approaching Internet saturation in the USA. That was perhaps clearest in the panel of investment analysts, who pointed out that the greater penetration of the Internet in the USA means that the return on earlier-stage investment in Internet travel companies elsewhere in the world is now likely to be higher. The largest venture capital investment discussed at PhoCusWright, for example, was approximately US$15M recently received by eLong , a Chinese-language Internet travel service that makes most of its money on hotel bookings by domestic travellers within China.
The closest these issues came to the surface was the appearance (a first for PhoCusWright) by Jean-Claude Baumgarten, former Air France executive and current president of the World Travel & Tourism Council (WTTC). Baumgarten's pitch focused on WTTC's role as the global travel industry's collective voice to governments. Interestingly, however, he made no mention of the proposal for a .travel top-level Internet domain -- even though less than a month earlier he had signed a letter to ICANN in his other role as chairman of the Travel Partnership Corporation in which he claimed that, "travel industry constituents ... have embraced the concept of .travel ... We have gathered the travel and tourism constituency together behind our application" for Tralliance Corp. to "sponsor" a .travel domain.
Tralliance Corp. and IATA have relied heavily on Baumgarten and the Travel Partnership Corporation to create a veneer of nonprofit legitimacy and broad industry support for reconsideration by ICANN of their .travel sponsorship application. But if anyone in the travel industry (other than IATA) actually was interested in or supportive of .travel, it would have been exactly the people gathered at the PhoCusWright conference. In fact, none of them care at all -- except for IATA and Tralliance Corp., who would stand to profit from their role as gatekeeepers to .travel as a credentialling scheme. Baumgarten didn't think it worth mentioning in his talk, and none of the Internet travel CEO's in the audience thought it worth asking about.
When I talked about this with Baumgarten, following his presentation, he seemed surprised that anyone would ask about .travel, or think it important -- much less relevant to an audience of leaders of the Internet travel industry. So far as he knew, .travel was "something IATA was doing", not something of general industry concern, and he had lent his (nominal) participation to the "Travel Partnership Corp." and signed the letter to ICANN (drafted by Tralliance Corp.) merely as a "favor" to his friends at IATA. I wasn't surprised at any of this, in light of my past reporting on .travel , but I was a little surprised that he didn't realize that it was being portrayed very differently to ICANN. Let's hope that the next time IATA and Tralliance Corp. trot out the TPC as evidence of "travel industry consensus" in support of .travel, ICANN asks enough questions to see through the sham.
How to manage customer relations to wring more money out of each traveller was a major theme throughout the conference. (In a growth industry, you might expect more attention to customer acquisition. A focus on maximizing profits from existing customers seems to me more typical of a flat or shrinking market.) The best-received of the keynote presentations was a lecture by Gary Loveman of Harrah's on the integration of customer data and pricing systems in the casino gambling industry. ("Of course, I represent an industry that's illegal here in Florida," he began. "How come we can go down the street and buy semi-automatic weapons, but if I said, 'Lets go gambling', we'd have to go at least as far as Cherokee, North Carolina [or leave the country]?")
What disappoints me, however, is how little of the attention being paid to "understanding the customer" for profit maximization is being applied to product or service improvements. There was virtually nothing at PhoCusWright, aside from Priceline.com's new named-price airfares (see my separate posting on that topic), that offered any real improvement for consumers.
User interfaces, for example, are being modified to increase up-sell and cross-sell revenues. ("Would you like fries with that hamburger? A hotel reservation with that airplane ticket?") And increasingly sophisticated customer preference dossiers are being compiled for that purpose. But the most elementary sorts of customer preference mapping aren't being implemented if they won't lead to buying a more expensive product. No airline ticket Web site, for example, yet allows you to assign a cents-per-mile value to frequent flyer credits on particular airlines, and have that valuation incorporated in the effective price in determining which flights are displayed. That's one of my pet peeves, but I mention it only as an example of what could be done if more online travel intermediaries saw themselves as agents of travel consumers, not as agents of suppliers of travel services.
On that point, at least, we've finally gotten some clarity: travel intermediaries that until recently were boasting of how they advanced the interests of consumers are now falling over themselves to proclaim their real allegiance to the interests of travel suppliers. Both Karl Peterson of Hotwire.com and Erik Blachford of Expedia.com, now under the common ownership of IAC, ruled out any integration of Hotwire.com's "opaque" consolidator prices with Expedia's published-fare displays. Why? Blachford: "It doesn't work well for suppliers." Peterson: "It's bad for price discrimination" [i.e. getting each traveller to pay as much as possible]. Whether an integrated fare display would be good for consumers (which it would -- if there's one thing consumers want, and expect from the Internet, it's a single integrated display of prices of all types from all sources) wasn't even deemed worthy of mention as a factor in their decisions.
Five years ago at PhoCusWright 1998, when I asked Blachford's predecessor Rich Barton whether Expedia.com saw itself as a sellers' or buyers' agent, he disengenuously claimed that they could be both without conflict of interest. Right: just like one real estate agent can protect the interests of both the buyer and seller in the same transaction. This year, on the same question, Blachford left no question where Expedia.com stands:
We don't think of ourselves as a travel agency... We think of our sites as marketing vehicles to bring new customers to travel suppliers. Don't think of us as a distributor: Think of us as a customer acquisition channel bringing you new business.
That's the sort of gem that makes PhoCusWright worthwhile for me. I doubt he'd say the same thing about his goals if he were speaking to an audience of consumers, or in a one-on-one interview with a consumer travel journalist like myself.
Orbitz.com's Jeff Katz can't admit to being purely a suppliers' agent because of the anti-trust investigations his company has undergone as a result of being supplier-owned. But even he admitted that, "Balancing customer and supplier needs [is] is getting, duly, quite a lot of attention" and getting harder. He tried to justify Orbitz.com's not siding with consumers by saying that, "taking sides to break the suppliers isn't in consumers' overall interest", but gave no explanation of why he thinks that is so. And he still fell back in Orbitz.com's defense on, "our unbiased nature", ignoring the bias inherent in displaying only the minority of published and Web airfares, excluding the majority of airline ticket prices that are set by consolidators.
Orbitz.com has also changed its pricing system for international flights, replacing pricing provided by the Worldspan computerized reservation system with a new international flight pricing module from ITA Software .
But Orbitz.com has crippled the pricing software by setting it to display only through fares, even when ITA Software is able to find lower prices by breaking the itinerary into separate tickets at an intermediate connection or fare construction point.
ITA Software went to considerable expense and difficulty to include the capability to calculate and compare prices for combinations of separate tickets. When CEO and co-founder Jeremy Wertheimer demonstrated it to me, turning on this module (with a simple command-line toggle in the debugging mode of the user interface) reduced the price of the identical flights by as much as US$1000 per person.
It's hard to avoid the inference that -- on top of its exclusion of consolidator prices -- Orbitz.com doesn't even want to show the lowest available published fares. And whatever Orbitz.com's motives, their deliberate suppression of the display of the lowest available published fares, when they involve multiple tickets (as is typical for international itineraries), makes a mockery of their "lowest fare" claims.
Wertheimer says it's up to ITA Software licensees such as Orbitz.com to decide whether or not to use the software's capability to price combinations of separate tickets. But ITA Software has inhibited the pricing displays on its own Web site in the same way. I don't know if they did so at Orbitz.com's request, or in a deliberate attempt to reduce the likelihood that Orbitz.com's decision not to show separate-ticket prices would be exposed. But it's rare for a software company to remove from its demonstrations a feature available in the production version of the software that could save consumers thousands of dollars.
I've been wanting to write a comparative review of airline ticket price "search" software, including Sidestep and Travelogia. But my attempts to test these services still lead me to recommend against installing either of these programs, regardless of what fares they might find.
When I installed Travelogia Boarding Pass , I entered a unique e-mail address, so I could track how my personal information was used. It turned out that Travelogia automatically signed that address up to receive airline spam, and a year after I alerted Travelogia to the problem they still haven't figured out to unregister me with the airline to stop the spam. If that's how they deal with privacy complaints from journalists, I can scarely imagine how ordinary users are treated.
Sidestep's service is available only for MS Internet Explorer users, and only through an ActiveX plug-in. In typical Microsoft fashion, ActiveX was designed with no concern for security: once you enable ActiveX, you can't prevent it from reformatting your hard disk or sending any or all of your files and data over the Internet. I've discussed the problem repeatedly with Sidestep CEO Brian Barth, who insists his ActiveX controls do nothing malign. But the license one must accept to install Sidestep forbids monitoring of what the software actually does. And depite my repeated requests, Sidestep still hasn't been willing to waive those standard terms for me as a journalist to permit me to test their claims about their software.
Notably absent from the conference program was any substantive discussion of technology or technological innovation. As the Internet has moved from the margins the center of the travel industry, and travel has become the center of e-commerce, PhoCusWright has completed the transition from technical conference for geeks to, as it now styles itself, an "executive" conference.
There are some other lingering issues I'll report on separately , such as the travel industry's attitudes toward CAPPS-II and privacy regulations. But for now, that's all my PhoCusWright news for this year, from Disney World. See you again next November, in Hollywood.