CUC International Inc.; HFS Incorporated; Analysis To Aid Public Comment

FEDERAL TRADE COMMISSION

[File No. 971-0087]

CUC International Inc.; HFS Incorporated; Analysis To Aid Public

Comment

AGENCY: Federal Trade Commission.

ACTION: Proposed consent agreement.

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SUMMARY: The consent agreement in this matter settles alleged

violations of federal law prohibiting unfair or deceptive acts or

practices or unfair methods of competition. The attached Analysis to

Aid Public Comment describes both the allegations in the draft

complaint that accompanies the consent agreement and the terms of the

consent order--embodied in the consent agreement--that would settle

these allegations.

DATES: Comments must be received on or before February 23, 1998.

ADDRESSES: Comments should be directed to: FTC/Office of the Secretary,

Room 159, 6th St. and Pa. Ave., N.W., Washington, D.C. 20580.

FOR FURTHER INFORMATION CONTACT:

William Baer, Federal Trade Commission, 6th & Pennsylvania Ave., NW, H-

374, Washington, DC 20580. (202) 326-2932. Jacqueline K. Mendel,

Federal Trade Commission, 6th & Pennsylvania Ave., NW, S-2308,

Washington, DC 20580. (202) 326-2603.

SUPPLEMENTARY INFORMATION: Pursuant to Section 6(f) of the Federal

Trade Commission Act, 38 Stat. 721, 15 U.S.C. 46, and Section 2.34 of

the Commission's Rules of Practice (16 CFR 2.34), notice is hereby

given that the about-captioned consent agreement containing a consent

order to cease and desist, having been filed with and accepted, subject

to final approval, by the Commission, has been placed on the public

record for a period of sixty (60) days. The following Analysis to Aid

Public Comment describes the terms of the consent agreement, and the

allegations in the accompanying complaint. An electronic copy of the

full text of the consent agreement package can be obtained from the

Commission Actions section of the FTC Home Page (for December 17,

1997), on the World Wide Web, at ``http://www.ftc.gov/os/

actions97.htm.'' A paper copy can be obtained from the FTC Public

Reference Room, Room H-130, Sixth Street and Pennsylvania Avenue, N.W.,

Washington, D.C. 20580, either in person or by calling (202) 326-3627.

Public comment is invited. Such comments or views will be considered by

the Commission and will be available for inspection and copying at its

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principal office in accordance with Section 4.9(b)(6)(ii) of the

Commission's Rules of Practice (16 CFR 4.9(b)(6)(ii)).

Analysis of Proposed Consent Order to Aid Public Comment

The Federal Trade Commission (``Commission'') has accepted, subject

to final approval, an agreement containing a proposed Consent Order

from CUC International Inc. (``CUC'') and HFS Incorporated (``HFS'')

(collectively, ``the Parties'') under which the Parties would be

required to divest Interval International Inc. (``Interval''), one of

two worldwide full-service timeshare exchange service companies, to

Interval Acquisition Corporation (``IAC''). IAC is controlled by a

venture capital firm, Willis Stein & Partners, L.P., and includes

Interval's current management. The buying group also includes Marriott

Ownership Resorts, Inc., a subsidiary of Marriott International, Inc.,

Hyatt Vacation Ownership Resorts, Inc., and Carlson Companies, Inc. If

the sale of Interval is not made to the Willis Stein buying group, the

Parties are required to divest Resort Condominiums International, Inc.

(``RCI''), the other worldwide full-service timeshare exchange service

company, currently owned by HFS. The agreement is designed to remedy

the anticompetitive efforts resulting from CUC's acquisition of HFS.

The proposed Consent Order has been placed on the public record for

sixty (60) days for reception of comments by interested persons. Public

comment is invited regarding all aspects of the agreement including the

proposed divestiture of Interval to IAC. Comments received during this

period will become part of the public record. After sixty (60) days,

the Commission will again review the agreement and the comments

received and will decide whether it should withdraw from the agreement

or make final the agreement's proposed Order. If the Commission decides

after the public comment period that IAC is not an acceptable acquirer,

the Parties have 120 days to divest either Interval or RCI to another

Commission-approved buyer.

The proposed complaint alleges that the proposed acquisition, if

consummated, would constitute a violation of Section 7 of the Clayton

Act, as amended, 15 U.S.C. Sec. 18, and Section 5 of the FTC Act, as

amended, 15 U.S.C. Sec. 45, in the market for the worldwide sale of

timeshare exchanges services.

The relevant market in which to analyze the effects of the proposed

transaction is the sale of timeshare exchange services on a worldwide

basis. An important benefit of timeshare ownership (also known as

vacation ownership) is the right to exchange the use of that unit for

another comparable unit at a different resort property (or at the same

resort for another time period). The owner of a particular resort unit

relies on the timeshare exchange company to provide the exchange

properties and to process the exchange. Exchange companies grade and

rate time periods as well as property quality.

CUC's acquisition of HFS will result in a virtual monopoly in the

market for full-service timeshare exchanges. As a result, timeshare

resort developers and owners would not have the same exchange

opportunities if they did not use the services of the merged company.

Therefore, after the acquisition, CUC would have the ability to

increase prices for the sale of timeshare exchange services to both

groups of customers, as well as decrease the level of services

provided.

Further, timely entry in the market for the sale of timeshare

exchange services on the scale necessary to offset the competitive harm

resulting from the combination of CUC and HFS is highly unlikely

because there are significant network externalities that lead to high

entry barriers. Like telephones, fax machines and automated teller

machines, membership in a timeshare exchange requires other people with

whom to interact. The owner of an interest in a timeshare resort would

have no reason to join a timeshare exchange that had no other members.

And the more members (i.e., potential exchange partners) that belong to

an exchange, the more attractive the exchange becomes to other

potential market participants. Attaining the critical mass required to

be a viable competitor would take many years because timeshare

developers consider joining a timeshare exchange only if it includes

other quality resorts. Timeshare owners, in turn, want to affiliate

with exchanges that give them the broadest timeshare vacation choices.

Thus, a new timeshare exchange would not enter effectively unless it

could provide consumers a level of timeshare vacation choices

comparable to those offered by RCI or Interval.

Developing a timeshare exchange comparable to RCI and Interval

would be a difficult endeavor. First, most resorts sign exclusive,

multi-year contracts with one timeshare exchange. The lengthy terms of

these contracts effectively prevent new entrants from securing a

sufficient base of resorts to become competitive. Second, individual

resorts would be reluctant to leave the established exchanges and

affiliate with a new exchange that did not offer a catalog of

opportunities comparable to that of the existing exchanges. Timeshare

exchange affiliation is an important sales tool for timeshare resort

developers, who must offer an array of exchange opportunities that is

competitive with those offered by other developers. Finally, there are

significant supply side economies of scale associated with the

sophisticated computer systems necessary to operate the exchanges.

No significant efficiencies would result from the merger of RCI and

Interval. Although consumers might receive some marginal benefit from

dealing with an exchange with additional properties listed, that

benefit does not outweigh the substantial loss of competition between

the two exchanges. Customers did not perceive any additional benefit

from the merger of the two exchanges. Moreover, the fact that Interval

is a strong competitor even though it is smaller than RCI suggests that

both firms have already achieved the requisite network externalities

and that a merger would not provide any significant incremental

benefit.

The proposed Consent Order would remedy the alleged violations by

replacing the lost competition that would result from the acquisition.

Under the proposed Consent Order, the Parties are required to divest

Interval to IAC within ten days CUC's acquisition of HFS. In the event

that the Parties do not satisfy that requirement, they must divest RCI,

the larger timeshare exchange service, within six months of signing the

consent agreement. The Commission may appoint a trustee to divest RCI

if the Parties do not do so. In the event that the Commission decides

to reject IAC as the acquirer of Interval when making the order final

after the public comment period, the Parties must rescind the

divestiture to IAC, and would have 120 days to divest either Interval

or RCI to a Commission-approved acquirer.

The Commission has not required a hold separate agreement in this

case because: (1) The proposed Order contemplates a short divestiture

time period and (2) the Order contains crown jewel provisions that

would substitute a larger asset package if the Parties fail to

accomplish the divestiture required under the Order.

Under the provisions of the proposed Order, the Parties are

required to provide the Commission with a report of compliance with the

divestiture provisions of the Order within thirty (30) days following

the date this Order becomes final, and every thirty (30) days

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thereafter until the required divestiture is completed.

The purpose of this analysis is to facilitate public comment on the

proposed Order, and it is not intended to constitute interpretation of

the agreement and proposed Order or to modify in any way their terms.

Donald S. Clark,

Secretary.

[FR Doc. 97-33439 Filed 12-22-97; 8:45 am]

BILLING CODE 6750-01-M