Hospitality and Lodging is a traditionally physical industry that has seen plenty of digital disruption across the last decade with a list of winners and losers that is still being defined. In this post, I will review four players, home sharing platforms (Airbnb), online travel agents (Priceline) traditional hotels (Marriott), and traditional (offline) travel agents.
Winner – Home sharing platforms
Currently, it appears Airbnb and HomeAway will be two of the big winners of the digital disruption and transformation of the hospitality industry. For the purposes of this post, I’ll focus on Airbnb, but much of the value creation and capture could be applied to HomeAway as well. Airbnb is now in 191 countries, with 100 million guest arrivals per year, 3 million listings, and a $31 billion valuation (as of Sept 11, 2017) . The growth rate of arrivals has been incredible with a cumulative annual growth rate of more than 100% since 2011. While Airbnb has experimented with many offerings they are fundamentally a matching platform between travelers and lodging providers. It is instructive to evaluate the value creation and value capture of Airbnb’s platform.
- match users looking for a place to stay with the unused elastic inventory of lodging
- avoidance of hospitality taxes (in some regions)
- enabling more unique experiences for guests
- enabling hosts to rent out space without long term commitments (like yearlong leases)
As a platform, Airbnb has managed to build some great assets including a huge user base (they have more listings than Marriott has hotel rooms ) and a massive data set on travel characteristics that they have built over the past decade.
- predominantly a service fee per transaction charged to the guest
The logical tension between their value creation and value capture is the risk of disintermediation. Thus far Airbnb has largely been able to avoid large scale disintermediation for a couple of reasons: the trust they create by holding money in escrow, the value they add by providing guarantees to both parties (hosts are insured by Airbnb, guests are guaranteed that Airbnb will find them an alternative place to stay if the host does not maintain their end of the agreement). Airbnb is also continuing to deal with reactive legislation that can limit their ability to operate and create value in certain geographies. Some examples of this are an occupancy tax in San Francisco  and New York City imposing very strict rules limiting short term rentals .
Airbnb has thus far used the puppy dog ploy  very successfully by not making a huge push into business travelers, as 90% of Airbnb customers are still leisure travelers . However, as Airbnb looks to go public (possibly in 2019) expect them to push further into the business traveler market.
Winner – Online travel agents
Another area that has seen tremendous (and profitable) growth has been online travel agents (OTAs) like Priceline and Expedia (note Expedia also runs a large merchant business and owns HomeAway). Again to focus this discussion I’ll just discuss Priceline’s OTA business. In the last reported quarter, Priceline’s parent company (Booking Holdings Inc) brought in $4.9B in revenue  and currently has a market capitalization of just under $90B (as of Feb 27, 2019). The majority of these revenues come from Priceline’s agency business. The Priceline OTA business model is to list hotel rooms on its website and take a commission of any bookings that take place through the platform.
- reduces search costs for guests, instead of having to call many individual lodging options, or having to visit many different websites a user can open up Priceline and see a list of available hotels and their prices
- provide an easy comparison of hotels for guests (standard formatting, standard information)
- allow guests to review hotels, sharing info on quality
- possibly reduce customer acquisition costs for hotels (particularly small hotels) by:
- providing hotels with a large amount of potential traffic that may not have otherwise considered the hotel (perhaps a small independent hotel, or because the guest has a different brand loyalty)
- helping hotels solve the problem of perishable inventory (if a room is not rented out for a night the owner can never recover that lost revenue) by bringing a wide range of potential guests
- Priceline captures value by charging commissions of 10-30% on all bookings .
These commissions are variable based on a couple of factors including how high a hotel is ranked in search results. Unlike a merchant model (outside the scope of this post) the agency only transfers money when hotel rooms have been booked, so Priceline’s OTA does not need to hold any inventory. Depending on the hotel this 10-30% commission can represent a lower cost of customer acquisition than other methods .
OTAs like Priceline also fit the definition of a multi-sided platform because there are cross-side network effects between hotels and guests, but the platform has no limiting long-term commitments and does not own any of the hotel room inventory. However, this is not a winner take all market, mostly due to the low cost of multi-homing for both guests and hotels. Therefore, Priceline must continually invest in marketing ($1.4B last quarter) as well as developing its information technology to be best in class ($58M last quarter) .
Under attack – Traditional hotels
The traditional model of a hotel is under attack, but their fate is yet to be determined. A hotel traditionally requires a large capital outlay that is then paid back over time by maximizing the rent that can be extracted through their perishable inventory. Many people speculate that hotels are consistently being eroded by digital platforms much like how Netflix killed blockbuster. However, the data tells a different story, research from Harvard Business School professor Chiara Farronato and collaborator Andrey Fradkin found that Airbnb has very little impact on hotel occupancy rates but Airbnb is eroding the pricing power of hotels. This is Airbnb exploiting the fundamental weakness in the hotel business model, fixed investments costs. Hotels are unable to vary their number of rooms dynamically so they rely on maintaining a normal level of occupancy while extracting higher prices during peak times. Farronato’s research found that during peak times the number of Airbnb listings tend to swell limiting the ability of hotels to extract a higher price from guests as they used to do .
Given this change, hotels are seeking other ways to improve their value creation and value capture. Hotels have also gone through a wave of consolidation (Marriott buying SPG ) to enable them to expand on their ability to offer a brand promise, including comprehensive loyalty programs and brand expansions (Marriott now has more than 30 brands ) to meet the needs of many different customers, particularly the generally less price sensitive business travelers.
The major hotel chains have also made a big push into recapturing value by disintermediating the online travel agents. Marriott is now guaranteeing that their websites will have the lowest price available on the internet in order to entice customers to shop directly through their sites and avoid the high commission fees they pay online travel agents (discussed above) . They are even further backing up this brand promise by providing extras to members of their loyalty program that book on their sites (example free Wi-Fi) and a promise that if the same hotel is ever found cheaper on the web they will match the price plus an additional percentage (an offer I’ve been fortunate to take advantage of once) .
Hotels are still certainly not dead, in the last quarter Marriott announced an adjusted EBITDA of $900M, a 12% year over year increase . However digital disruption certainly has the ability to negatively impact their business and they will have to continue to adapt their business strategy to survive the wave of transformation.
Loser – Travel agents
One undisputed loser in the digital disruption of the hospitality industry has been the traditional travel agents. While estimates disagree, consensus is that the number of travel agents in the US has been falling steadily in the last two decades, with the bureau of labor statistics reporting that travel agents in the US have fallen from a peak of 124,000 in 2000 to 64,000 in 2012 . The ability of users to design their own itinerary, book instantly, and extract trust through communities of online reviews has largely replaced the traditional value creation offered by traditional travel agents.
Digital disruption has had a major impact on the hospitality and lodging sector. It has enabled the rise of home sharing platforms and online travel agencies. It has forced hotels to rework aspects of their business model, consolidate, and differentiate. The transformation has also led to the slow and continual decline of the traditional travel agent. The industry will continue to see change, the next two battles that I believe will be very interesting to watch will be if Airbnb makes a push into business travel (perhaps with a loyalty program) targeting hotels where they have been building differentiation, and how hotels will continue to push back on the value currently being captured by OTAs.
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