Background

The "merchant model" is a simple wholesale arrangement that involves net rates and room allotments with cut-off dates. The concept is nothing new and existed long before Hotels.com and Expedia, in the form of the FIT wholesale model fashioned with tour operators. Companies like Gulliver's have operated in this space for decades. The only difference is that in the past hoteliers did not allow wholesalers and tour operators to publish discounted/wholesale hotel rates (net + markup) if not bundled with other travel services.

Due to a lack of understanding of how online distribution worked, exacerbated by the industry-wide desperation after 9/11, hoteliers did not impose the same restriction on the online merchants. As a result hoteliers saw their discounted rates posted all over the Internet -on merchant sites and thousands of affiliates--and suffered severe consequence to rate and brand integrity.

While hoteliers gave up rooms at steep discount, online merchants became darlings on Wall Street. Hotels.com had a market capitalization of over $3 billion at one point. This unhealthy industry practice was best illustrated by one industry executive who described the state of confusion as "Selling Waldorf-Astoria on Hotels.com is like buying Armani in Wal-Mart." Since those days, hoteliers have sobered up, ...