Airbnb’s Potential to Become a Distribution Partner

By David Kong

Friday July 15, 2016
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Airbnb’s growth has truly been explosive. According to a recent article in the Wall Street Journal, Airbnb generated $340 million of revenue in the third quarter of 2015, with bookings totaling $2.2 billion. The number of nights booked has doubled from 11.3 million in the third quarter of 2014 to 23.8 million in 2015.

Since Airbnb has become a dominating presence in the sharing economy, many in the hotel industry have wrestled with whether to fight it or join it.

As an industry, it’s difficult to forget what happened after 9/11. This was a time when we were fighting for survival and began bastardizing ourselves, giving more and more inventory to OTAs and agreeing to higher and higher commissions. By “feeding the beast,” we created a huge problem for the industry.

Incremental demand driven by OTAs has always been small; and, OTAs spend the bulk of their money on marketing. The net effect is that we do about the same amount of business, but our commission costs continue to increase dramatically. And with their additional revenues, the OTAs can invest in even more marketing and enhanced technology. Now they are in a position to take, and they are taking, an even bigger share of our revenue, driving our commission costs up even higher.

Our industry is celebrating the best year ever in regards to occupancy and average rate. Imagine, if we didn’t have to pay the OTAs, how much more profitable we would be. It’s no wonder at industry conferences we hear hoteliers lament and angrily point out that if the industry didn’t give any inventory to the OTAs, they would be out of business.

And, while many big brand CEOs have discounted the impact of Airbnb, I believe we should consider why Airbnb is valued by sophisticated private equity investors as worth more than Choice Hotels, Wyndham, or Hyatt. In fact, in the last round of funding, Airbnb was valued to be equivalent to Hilton. What revenue stream are these sophisticated investors counting on for Airbnb?

With Airbnb’s incredible inventory and site traffic rivaling the biggest OTAs, some argue that partnering with the company would provide hotel companies with an alternative to some of the major OTAs. Indeed, Airbnb is increasingly targeting independent and branded hotels to list with them.

I have heard some in the industry say this a case where if you can’t beat them, you join them. If we are already working with OTAs, why not Airbnb? Is there a first-mover advantage to joining Airbnb?
While the OTAs produce business, the industry cannot underestimate the cannibalization effect.

Certainly, every hotel should note that the more bookings we receive from OTAs, the more customers that used to book with us directly are booking through the OTAs. Is there an end to this cannibalization? According to Phocuswright, the OTA share of business increased from 1.7 percent in 2000 to a projected 17.7 percent in 2015. We need to ponder what their share will be in five years. At that rate of growth, will we still be profitable?

As we consider whether to work with Airbnb, we should be mindful—history usually repeats itself.