Need for battling regulatory hurdles faced by digital market, an unfamiliar terrain !

It is the hoteliers lobby this time which has got upset with the price war on the online platform. The Hoteliers have been reported to allege that indiscriminate discounting offered by online portals have adversely impacted their business. Moreover, on the discounted rates, a 35% commission is being charged from the hotel owners by OTAs like Makemytrip (‘MMT’) and Goibibo. The hoteliers are losing on revenues and finding the business model unsustainable. Therefore, they would not honour the bookings made through MMT-ibibo. After initiating action against online travel aggregators (MMT and GoIbibo) in November, FHRAI had warned OYO of nationwide protests if it did not negotiate with the hotel owners body.

The Online Travel Agents (‘OTAs’) market space is very dynamic, expanding through strategic alliances and investments into the online travel domain, particularly for bookings of flights and hotels. A Deutsche Bank report states that almost two-thirds of India’s rooms supply in 2020-21 will comprise of budget hotels which is about 70% of the hospitality market in India. Today, online platforms dealing in hotels are delivering a variety of options of superior quality to their consumers at their choicest prices and location by investing in resources and technology.

The entry of OYO as hotel’s aggregator suddenly organized the Budget hotels market to target the people who needed basic facilities. In 2015, a dozen odd Players like Treebo, Zo Rooms, Wudstay, FabHotels, Hotelbids in the Budget Hotel segment entered the Online Platform,forcing the hotels to rethink their growth models. OTAs like MMT – GoIbibo, Yatra are booking platforms used to book independent hotels, OYO and other budget hotels. Some budget hotel aggregators had issues with quality control, so they re-structured their business to a franchise model where the aggregator is the franchisor allowing its brand name to be used by independent hotel owners for a commission.

The online data-driven competition and it’s appealing economic features have made price / facilities comparison easier and efficient. An online travel aggregator (like Trivago or Tripadvisor) can tell you the price of a Taj hotel in Goa offered on different OTAs (Intra-brand competition) and also other hotels / budget accommodations with customer reviews that match your specifications (Inter-brand competition).

This situation has led to a spurt of Intra-brand and Inter-brand competition and cut throat pricing and the customers are happily cashing on the extra price cut they are getting.

On the allegations of predatory pricing made against OYO by the Federation of Hotel and Restaurant Associations of India (FHRAI), OYO spokesperson is reported to have said that the hotel lobby’s stand of boycotting depicts cartelization by small groups of people (who may not necessarily be franchisees and lessors associated with OYO Hotels) with vested interests, which is not in the best interest of the consumers.

The principle of predatory pricing is a mixed question of facts and law, requires economic and cost analysis to establish sacrificial pricing for foregoing profits in short term so as to foreclose actual or potential competitors with a view to maintaining / strengthening market power that ultimately harms consumers.

The potency of barriers to entry is crucial to a debate on market power that can cause competition concerns for market regulators to take cognizance. Whether there are some strategic entry barriers caused by Online platforms or whether the hotel’s lobby is using collective boycotting tactics to threaten the OTAs / OYO and others, would be a matter to be examined  based on the ground realities and the business arrangements between the hotel owners and OYO and OTAs / booking platforms.

Since the entry of the B2B E-commerce platforms, deep discounts have pinched the traditional businesses or the retailers (against Flipkart and other online marketplaces), the taxi operators (against OLA & UBER), chemist (against e-pharmacies). However, the debate of \’Digital versus Brick-and-Mortar\’ is not yet settled by the government, legislature, judiciary or regulatory authorities.

The market regulator – Competition Commission of India (‘CCI’) – has dealt with several complaints by retailers association (CAIT / All India Online Vendors Association) against online market platforms like Flipkart & Others on predatory pricing and has summarily closed them without ruling on the market practices of the online / offline business models. In the absence of reasoned and consistent findings by CCI on legitimacy of these online players, they are at risk of facing adverse findings before CCI and Courts.  

The digital market, being an unfamiliar terrain to the regulatory authorities or the courts, are being treated with skepticism. As a result, they are constantly facing litigation before the courts asking for banning them, battling with regulatory hurdles and prejudices despite the growing customer base that has opted to switch their choices in favour of the online market.

The e-commerce companies have two options. The first option is to face many years of litigation and regulatory risks, until they are able to operate legally. The second, preferable option, is to proactively plan how to deal with the regulatory risk areas – starting by making this an important agenda in boardroom discussions as well as an important point of diligence when scouting for investment opportunities in India.

The stakeholders also need to sensitize concerned authorities like CCI, Department of Industrial Policy and Promotion (‘DIPP’), other government departments to urgently address these issues due to the huge investments involved. In some cases, particularly the online hotel bookings, they may be losing cash every day.

The environment today, calls for sustainable policies and regulatory regime that foresee market changes in the future and can work with minimal regulatory risks.

In April 2017, The European Commission (“The Commission”) published a report on “online hotel booking sector” (“Report”). For the preparation of the Report, the Commission has sent an electronic survey in July and August of 2016 to 1,61,000 hotels in 10 Member States, 20 online travel agents, 11 metasearch websites and 19 large hotel chains and reviewed the room price lists of hotels.

With travel bookings, pharmacies, cabs, retail and other traditional businesses now on the online platform, it is imperative that the CCI studies each of these digital markets and makes a report available for the stakeholders as a blueprint to get clarity on the practices that are considered anti-competitive and/or abusive. Since dominance is achieved rapidly on the online platform disrupting old businesses, the report would work as a guideline for all stakeholders, help then focus on business instead of rushing to courts for every business solution. The report would certainly help the online players to refer to it as a compliance tool so that their emerging businesses do not face sudden intervention. The report containing such market analysis could also be relied upon by courts for a deeper look into this new economic environment.