With a $25 billion valuation and after only seven years in the market, Airbnb has surpassed the market cap of major hotel companies like Marriott that manages more than 4.000 hotels ($21bn) or Starwood with more than 1.200 properties ($14bn). In addition, it is taking a share of online travel agencies (OTAs) like Expedia and Priceline.
A decade ago, a guest would prefer to stay at a Sheraton instead of an independent hotel because the brand ensured a level of service that could not be guaranteed for an unknown hotel. On the supply side, a hotel owner would get value from stablished brands because of vast access to distribution channels as well as buyer power to negotiate with OTAs. Under the same logic, there was very little space for bed and breakfast or other alternative lodging establishments because of low access to distribution channels and little access to information for guests.
The use of technology has eroded the value of hotel brands. Reviews on websites like TripAdvisor and social media have made it easy to trust unknown brands. Airbnb was able to claim most of this new creation of value with its business model. By becoming one of the first entrants to market, the company consolidated its position in a two sided platform, making it really hard for new entrants to gain that much traction.
Airbnb currently offers more than 1.5 million properties in 190 countries creating a virtuous cycle that attracts more hosts and travelers. The company has almost 1 million unique visitors per day, more than three times Marriott’s online traffic, and has become a cheap distribution channel, charging between 6 to 12% to hosts compared with 25% in some OTAs.
As an asset light company, Airbnb does not have to worry about the real estate business in every country, and because in several cases this constitutes an additional income for owners with underutilized assets Airbnb can offer lower prices to travelers. By not managing any properties they avoid dealing with unions, and both Airbnb and owners have a lower cost structure. The company has strong economies of scale. To grow, they only need to increase the number of hosts and travelers and match them with each other, which can be done without significant capital investment. This fast growth is extremely hard to replicate for hotel chains, as they need to find real estate that fulfills their brand standards. In order to gain and maintain loyal customers a large foot print is required, and although large hotel chains stared creating soft brands like Tribute or Autograph to facilitate growth, it will never reach Airbnb growth speed.
In addition, Airbnb is leveraging big data and machine learning to increase revenue. For example, they developed a system for dynamically determining where a person is most likely to stay given their search string. They also use historical data points to recommend owners prices that will maximize revenue, and analyze usage information to try to convert travelers to hosts and vice ‘versa with personalized marketing initiatives.
Although initially the company was seen as a competitor for midscale hotels, they are competing in the luxury segment with exclusive and unique listings, as well as disrupting the business traveler segment by offering curated and special packages for companies. A project that is rapidly growing since last year.
Finally, Airbnb is facing and will continue to face legal challenges as most digital innovators, and might lose some value. Nevertheless, as it grows its distribution channel, more opportunities to claim value will arrive. They might soon start listing independent hotels and truly disrupt OTAs, as Airbnb fees are lower, but the website traffic is similar. I believe the constant use of big data will guide them to add products and services (e.g. customer loyalty programs and partnership with other companies like Uber or Favor) to continue to attract all range of customers.