Airbnb’s foray into offering hotels on its platform was the most significant news in the hotel industry in recent months. CEO, Brian Chesky, came out with all guns blazing against the OTAs during his interview with Phocuswire previous week, quoted saying “Our competition is two companies - Expedia and Booking.com - and I am extremely excited about what the next ten years have in store”.
Airbnb’s intentions are clear - they are stepping up to challenge, what is widely known as, the ‘OTA duopoly’. With Airbnb emerging as a challenger, what is the likely impact on hotel distribution online? Before we dive into that, it is worth noting a couple of things:
- Only hotels that meet specific Airbnb standards can participate, that is mainly boutique hotels, B&Bs and some unique properties.
- It is just the beginning. The Airbnb platform is still missing many of management functions for Hotels and B&Bs. They note that they will be launching a series of product improvements in 2018, so they won’t be standing still. They will continuously widen the scope of properties that can participate in their new offer.
We looked at how Airbnb entering this space will specifically impact the hotel distribution online, after all, they are a new distribution channel for hotels.
In the near term:
- No significant impact on supply and demand. Unlike the initial wave of Airbnb’s impact between 2005 - 2015 on the hotel industry, this change is not bringing new supply to the market. They are introducing a new channel for boutique hotels and B&Bs to sell existing rooms.
- Boutique hotels and B&Bs will benefit from increased market visibility. As noted earlier, not all hotels will qualify for this offer. And those that are eligible are the ones that feel powerless against large OTAs, who they rely on heavily for achieving their occupancy and revenue plans at significant cost. Moreover, they are competing against larger chains for visibility and traffic on the OTA sites. They will benefit from increased exposure on the Airbnb platform, which drew 106.9m visitors to its website alone in Q1 2017 - up 31% from 2016
- Rate Integrity for participating hotels will become more complicated. Airbnb promises lower fees for hotels, but also charges between 5 - 15% of the booking cost as a Service Fee to the guests. As a result, hotels will have very little visibility of the final price paid by their guests for their rooms, as Airbnb can vary this fee.
- No impact on Meta Search. Airbnb does not have any presence on Meta Search Engines, and it is unlikely this is going to change overnight. So for the time being, for hotels bidding on Meta Search Engines, Airbnb is one less bidder to worry about.
And some things to look out for longer term:
- Flexible contracting terms could disrupt the market. Airbnb is promoting ‘no contracts’ as one of their USPs to hotel owners. Hence, if a hotel finds that the Airbnb channel is not having an incremental effect as a distribution channel, they can close that channel. Same is not true with most traditional OTAs, where contracts are less flexible and will not allow hotels to open and close these channels during the contract period. Airbnb’s move may disrupt and cause some changes which may allow hotels to manage their online distribution channels more dynamically.
- Reduced commissions, increased value-add offers. Airbnb is offering to charge between 3 - 5% commission, compared to other OTAs who are known to charge as much as 30% in some cases. As a result, it is likely to create pressure on other OTAs to review their commissions. At the same time, OTAs have already been developing more value-add services, such as visibility boosters and promotions - we should also expect to see more such value-add services from OTAs.
- Traditional view of competition will evolve rapidly. Hotels are notorious for comparing themselves to other hotels, and it is important from a revenue perspective to ensure they are competitive and not leaving money on the table. But the traditional view of a static competition set is already being disrupted by the nature of online distribution, which is fundamentally dynamic in nature. Airbnb created further complexity when they brought new supply to the market, but this was still somewhat hidden as there was no direct comparison. With hotels being discovered on the same platform as other vacation rental properties, this will evolve further. Hotels will need to rethink their competition set for revenue and distribution planning, and start accounting for other types of accommodations which they may not have previously factored into their strategy, planning and execution.
- Will other OTAs change their approach to cancellations, as a result of Airbnb? It is a widely known that cancellations are extremely high on bookings made via OTAs. Airbnb is incentivising hotels by charging a lower commission (3%) on flexible cancellation terms vs. rooms with stricter cancellation terms (5% commission). The Airbnb community are also generally used to less flexible cancellation policies. It is a space worth watching to see if these trends will transfer to the Airbnb Plus hotels and whether it will impact other OTAs cancellation policies.
- How long can Airbnb not participate on Meta? Meta Search continues to grow year on year. As Airbnb bring onboard more hotels, they are adding more supply and will need to increase the demand side as well. One channel where they can quickly acquire more demand is the Meta Search Engines.
- Finally, can Airbnb persist with the low commission model? In an interview with Skift, Airbnb Hotels Program Manager, Cameron Houser did not provide a clear answer to a direct question about the future commision levels for hotels on Airbnb. If Airbnb finds the need to participate in Meta channels and other paid customer acquisition activities, that is likely to increase their service cost - how is that likely to impact their commission charge to hotels or service fee to guests? Hotels should keep an eye on how the effective commission plays out over time on Airbnb.
During their announcement last week, Airbnb lead with the message that the ‘Roadmap’ was designed to bring their annual guest count to more than One Billion by 2028. That is an ambitious figure, and going by Airbnb’s track record, they have the potential to succeed.
For hotels, this is only the beginning of a significant shift in the hotel online distribution space. We are excited to see some of the traditional models challenged, and pushing online distribution towards becoming even more dynamic through flexible contracts and different commission/value models.