Airbnb, Uber, and Lyft have quickly risen to prominence as the face of the new “sharing economy.” For evidence of their influence, look no further than the taxicab industry, which has been swiftly decimated by the ride-hailing services.
But the rise of this new sharing economy begs another question: Does Airbnb threaten the hotel industry?
Given its early success, it’s a valid query. Revenue has soared since Airbnb’s humble beginnings in 2008, and by 2013 it was clocking in around $250 million. Some estimates put the company on track for at least $1.6 billion in revenue this year, up over 70 percent from its roughly $900 million run rate in 2015.
And valuation-wise, Airbnb has already exceeded the biggest hoteliers on the planet. Its most recent funding round scored a $850 million investment from Google Capital, Alphabet’s (ticker: GOOG, GOOGL) investment arm, giving it a valuation of $30 billion.
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That’s more than every one of the industry’s biggest names: Marriott International ( MAR), Hilton Worldwide Holdings ( HLT), InterContinental Hotels Group ( IHG), Wyndham Worldwide Corp. ( WYN) and Hyatt Hotels Corp. ( H).
But is Airbnb taking business away from these lodging bigwigs — can it disrupt the hotel industry as we know it — or does it, as some suggest, cater to an entirely different market?
Why it could pose a real threat. While Marriott, Hilton, and Hyatt may all have global brand recognition, Airbnb has some very important cost advantages that those companies can never have.
New hotel inventory can’t just spring magically from the ether — it has to be built or bought. Marriott, for example, just bought Starwood, creating the largest hotel company in the world.
And it paid a pretty penny for it: Marriott paid $13 billion for Starwood, which owns, operates or franchises hotels with 375,000 rooms. The combined entity will have over 1.1 million rooms to its name.
What does it cost Airbnb to add a room to its inventory? A whopping $0. Hosts simply go on Airbnb, offer their room for listing, and voila — Airbnb just gained some inventory. A New York Times story in 2015 claimed Airbnb had also surpassed the million-room mark. The ability to scale rapidly is the sharing economy’s most rewarding quality.
But the cost advantages don’t end there.
“Traditional providers see the rise of Airbnb as an attack,” says Jeffrey Margolis, a partner at the Berger Singerman law firm in Florida who deals extensively in real estate law. They are lobbying short-term rental owners to “collect and pay all applicable taxes, obtain all necessary permits and licenses, and comply with all life safety requirements” to put them on an equal playing field.
At the end of the day, Airbnb is largely self-regulated, and the taxes or licenses required vary widely depending on local law. Hosts are expected to follow some generic, easy-to-meet safety standards like supplying emergency contact numbers, first aid kits and smoke alarms.
As Airbnb says on its site: “Trust is what makes it work.” It’s perhaps not a shocking principle from a company prominently funded by the libertarian billionaire Peter Thiel.
By dramatically lowering the barriers to entry to the hotel industry — now all one needs is a spare room and a few basic household safety items — Airbnb has brought millions of new rooms to the market.
The hotel industry isn’t just going to take this lying down, though. Three of Airbnb’s largest markets, New York, San Francisco, and Miami, are cracking down.
What’s the big deal? Ironically, the very fact that Airbnb is big enough to be noticed as somewhat of a threat has weakened it as a competitor.
New York Gov. Andrew Cuomo, signed a bill on Oct. 21 that imposes steep fines — $1,000 for the first offense, $5,000 for the second, and $7,500 for the third and subsequent offenses — on people who merely advertise whole units for less than 30 days at a time.
By some estimates, the new law could apply to more than 50 percent of listings in the Big Apple.
You don’t go after someone’s throat if they’re not a competitor, but it’s still worth mentioning a few reasons home-rental sites like Airbnb aren’t existential threats to hotels.
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Airbnb, for example, doesn’t have a loyalty program, which hotels use extensively and effectively to woo travelers, especially the highly valued business traveler.
More than that, the numbers show that hotels (unlike the taxi industry) aren’t being annihilated by the sharing economy. Revenue per available room (or RevPAR) — the holy grail of hotel financial metrics — grew by about 5 percent at both Marriott and Hilton in 2015, and revenues at the five largest domestic hotel companies are expected to rise next year.
This is a healthy industry.
One reason is that for now, business travel appears to be relatively safe from the grips of Airbnb. Families and small groups of people, those are demographics that Airbnb tends to win from the likes of Marriott and Hilton.
That said, there’s a valid debate about whether those customers should be seen as lost business for hoteliers — or lost opportunities.
“We don’t see people saying, ‘I would have stayed for business at the Marriott, but instead I chose a vacation rental,'” says John Banczak, co-founder of TurnKey Vacation Rentals.
“Travelers with families used to skip going to cities like New York, Los Angeles, San Francisco or Chicago because of the high cost of one or more hotel room. Now, they will because they can find a vacation rental home with enough space and home amenities at affordable prices,” Banczak says.
Time to adapt. The idea that Airbnb is creating new areas of demand isn’t so far-fetched. Sure, RevPAR is increasing modestly and so are hotel revenues, but generally by low-to-mid single digits.
Hyatt can’t hold a candle to Airbnb’s 70 percent growth rates.
But it doesn’t mean traditional hotels can’t capture some of that growth, and take advantage of the massive new market Airbnb has shown them. Whenever you can, learn from your competitors.
“The industry needs to start infusing every individual hotel with unique guest experiences that can’t be delivered anywhere else — a collection of boutique hotels, instead of a chain,” says Ryan McBride, creative director at The McBride Company, a creative concept and design firm in Vermont.
So, is Airbnb a threat to the hotel industry? Not really, today. But Airbnb has started to go after business travel, which will be a problem if left unchecked. If hotels don’t act soon, they’ll cede further ground to a fast-growing, ambitious and capable young company.
Could hotels actually partner with Airbnb to increase their own distribution? Should they look to acquire smaller upstart room-booking sites? Should they start their own? Accommodate new builds for this more personal, homey vibe? Lower costs?
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There are many ways to navigate this. But being proactive is a better philosophy than being reactive — especially given the sloth-like reaction time of hotels to Airbnb’s presence.
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Is Airbnb a Threat to the Hotel Industry? originally appeared on usnews.com
