Sep. 3, 2003 - Hotels.com announced Tuesday that it would provide its lodging discounts exclusively to sister company Expedia Inc., the world's largest online travel agency, and drop its agreement with Travelocity two years early.

The change is not unexpected. Dallas-based Hotels.com and Expedia are both divisions of New York-based InterActiveCorp, which has built an online empire in the last two years by buying those companies plus Ticketmaster and Match.com.

"The industry is getting more concentrated, and the competition lines are being drawn more distinctly," said Safa Rashtchy, a senior Internet analyst with U.S. Bancorp Piper Jaffray in California.

The Hotels.com deal will increase Expedia's dominance over Fort Worth-based Travelocity, the No. 2 online travel agency, Mr. Rashtchy said: "It will be tough competition for Travelocity."

Travelocity had exclusive rights to Hotels.com's listings until July 2005.

But Hotels.com said it was ending that agreement early because Travelocity has begun making its own arrangements with lodging providers. Travelocity noted that Friday in a Securities and Exchange Commission filing.

Hotels.com officials said Travelocity's decision breached the two companies' contract.

"This wasn't the first time they breached the contract, it's just the latest," said Bob Diener, Hotels.com's president and co-founder. "It was just time to end the contract and move on."

Travelocity denied breaching the contract, saying the agreement allows it to work with other hotel reservation systems.

"Certainly we are surprised that they would comment on prior breach; we're certainly not in breach," said Sam Gilliland, Travelocity's president and chief executive.

Mr. Gilliland would not say how Travelocity would respond to Hotels.com's announcement. "We're hopeful that any such concerns can be resolved in a confidential manner, consistent with our agreement," he said.

Mr. Rashtchy said "it did appear that Travelocity could do what they did" under its contract with Hotels.com.

He added that Travelocity should still be able to compete aggressively in the online travel market.

Travelocity said it does not expect to lose customers from the Hotels.com decision.

Even without Hotels.com's listings, the company has 7,000 available hotel rooms, Mr. Gilliland said. "Customers are still going to get the great rates they did before," he said.

Hotels.com's Mr. Diener said the Expedia deal "is a big win for us," adding that the two companies will team up to offer consumers more travel choices and bigger discounts.

Expedia, based in the Seattle suburb of Bellevue, Wash., last year was the fourth-largest travel agency of any kind, according to Travel Weekly. In 2001, it ranked eighth.

Travelocity, owned by Southlake-based Sabre Holdings Corp., was No. 7 in Travel Weekly's 2002 rankings.

Mr. Diener said the Travelocity contract's financial benefits had diminished in recent years. Travelocity bookings accounted for about 3 percent of InterActive revenue in the second quarter of 2003, compared with about 4 percent the year before.

Hotels.com and Expedia expect their partnership to drive traffic to both companies' Web sites, Mr. Diener added.

"Today is the start of the busiest traveling season for hotels," Mr. Diener said Tuesday. "We expect hotel demand to go up."

Hotels.com said it would honor all hotel reservations booked through Travelocity before Tuesday's announcement.

The news, announced early Tuesday, didn't have much impact on either parent company's stock. InterActiveCorp closed at $36.58, down 41 cents, and Sabre Holdings' shares gained 75 cents, closing at $23.37.

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