Many of the stories about Airbnb in the press focus either on the guest from hell (think pop-up brothel) or on unlikely tales like the man that lived in his office for a year so that he could illegally Airbnb his place. As Airbnb is rumored to be about to go public, how does it compare against more traditional businesses in the travel space?
It is interesting to study the evolution of its strategy and compare it to another top company in the travel sector, Expedia, an Online Travel Agent (OTA). While they broadly operate in the same global travel market, they seemed so far to have mostly stayed out of each other’s way. Expedia allows customers to book airline tickets, rental cars, and hotel rooms. Airbnb is a marketplace through which customers can book alternative lodging–overnight stays outside the traditional hotel channel. However, given recent moves by each company, it is fair to ask if they are really that different and what they will look like in the future.
In this article I will attempt to answer the question of the potential evolution of the rivalry of Airbnb vs. Expedia through a deep-dive into the history, characteristics, recent strategic moves, and my experience as an investor in public and private companies.
History of Expedia and Airbnb
Expedia.com was launched in October 1996 (as part of Microsoft) as an online travel agency that allowed customers to make air, car and hotel reservations online. Expedia lodging offerings have long been a mainstay of traditional business travel.
Airbnb was founded in August 2008 as an online platform that offered short-term stays in people’s houses and apartments, operating in the private accommodation market. The site quickly expanded from air beds and shared spaces to include a variety of properties including entire homes and apartments, private rooms, and other unique properties such as tree houses and private islands. Airbnb has ushered in a new travel product–other people’s homes and apartments. Sure, the option to rent a home has always existed but it was a local business–if you wanted to rent a beach house in the Outer Banks of North Carolina, for example, you contacted a rental agency in the Outer Banks. Airbnb’s technology made the private accommodations market ubiquitous, particularly in urban areas.
Traditional Similarities Between Expedia and Airbnb
From the beginning, there have been some similarities between Expedia and Airbnb. Both companies are digital-first companies that make it easier for customers to identify, compare and book travel accommodations. Additionally, both companies serve as agents. Neither one actually provides a product–they don’t own or operate physical locations. Rather, they are market makers. Airbnb is connecting a very fragmented customer base and supply base so it could be argued it has created a more powerful closed-loop network.
Both Expedia and Airbnb Are Behemoths in the Travel Industry
Expedia generated $11 billion of revenue in 2018 on $100 billion of gross bookings. Expedia is an end-to-end online travel platform that offers multiple travel products (lodging, flights, rental cars, cruises, and destination services and activities) through multiple brands including Expedia, Hotels.com, HomeAway, and Orbitz. Lodging, which includes traditional hotel accommodations as well as alternative accommodations, accounts for 69% of their revenue.
Airbnb is now generating over $4 billion of run-rate annual revenue. It is still primarily an alternative accommodations or home rental company but it has moved closer to an online travel agency as it has steadily moved into new businesses outside of home-rental, whose growth is threatened by regulations that cap short-term rentals. New offerings include guided tours and activities, luxury homes and restaurant reservations.
At a Glance–Expedia vs. Airbnb
Expedia Plays Catch-Up
As the private accommodations market has grown faster than the hotel market and become a $34 billion market (thanks to Airbnb), Expedia has moved into the space.
The first major move came in August 2015, when Expedia purchased HomeAway (the parent company of VRBO) in order to establish a presence in the private accommodation market. Expedia’s then CEO Khosrowshahi (now the CEO of Uber) laid out their thesis for the deal, saying “With our expertise in powering global transactional platforms and our industry-leading technology capabilities, we look forward to partnering with them to accelerate the shift from a classified marketplace to an online, transactional model.”
In October 2016, Expedia concluded that the HomeAway vacation rental service was complementary to their hotel business. Consequently, they started integrating HomeAway listings into their Expedia hotel listings, depending on the type of trip someone was booking. It is worth noting that the process of acquiring rooms to list on the site is very different for hotel rooms or private properties. For hotels, hundreds of rooms can be acquired through one deal negotiated with a chain, while for private accommodations, individual owners must list their properties themselves with minimal effort to make it worthwhile. A good parallel can be enterprise vs. retail software sales.
Then in August 2018, Expedia CEO Mark Okerstrom, who replaced Dara Khosrowshahi when he departed for Uber, said that the company had spent three years upgrading the technology of its HomeAway unit. Having completed that technology investment, Expedia was ready to add more home listings to HomeAway in an attempt to catch up with competitors such as Airbnb.
Airbnb Bites Back
Airbnb has also moved onto Expedia’s turf. In March 2018, Airbnb announced that it was moving into the traditional hotel market. In an open letter to boutique hotel and bed-and-breakfast owners, Airbnb essentially said they wanted hoteliers to advertise their rooms on their platform. Airbnb argued that they were better for the hoteliers than the big online travel agencies like Booking and Expedia. Airbnb was correct as they were charging independent, non-branded hotels a 3% to 5% commission, which was considerably lower than the commissions charged by online travel agencies (OTAs) such as Expedia that could be as high as 25% to 30%.
By the end of 2018, Airbnb had more than doubled the number of available rooms in hotels, resorts, hostels, and similar venues on its platform. Consequently, Airbnb had three times the number of hotel room bookings in 2018 compared to 2017. This makes Airbnb an even bigger threat to the hospitality business: a recent academic study of the impact of Airbnb on a number of cities in the US has found that a 1% increase in Airbnb supply has a 0.02% negative impact on hotel revenues.
In March 2019, Airbnb announced it was buying HotelTonight, a San Francisco based company that uses an app to sell last-minute, unused inventory at boutiques and independent hotels. Airbnb CEO Brian Chesky called the acquisition a “big part of building an end-to-end travel platform.”
Consumer Spending on Airbnb vs. Hotels
After this strategic back and forth, how do Expedia and Airbnb compare today?
Expedia and Airbnb Are the Leaders in the Private Accommodations Market
Alternative accommodations, through VRBO and their HomeAway group, has become a sizeable platform for Expedia, accounting for $11 billion gross bookings on 1.8+ million online bookable listings. Airbnb meanwhile has 6+ million listings worldwide.
According to a July 2017 Wall Street Journal article, Susquehanna International Group reported that Airbnb accounted for 15% of global room nights in private accommodations, compared with 125 for Expedia.
In this article, we are focusing on Airbnb and Expedia. It is, however, worth noting that there are other very large companies in the online travel space, most notably Booking.com, which also offers both hotel and private accommodations, TripAdvisor, that has a private rental feature, and Momondo, which offers cheap flights. All of these companies will surely be under a lot of scrutiny in the near future and could become M&A targets.
More traditional hospitality companies, like Marriott, are following in the footsteps of Expedia, with Marriott recently announcing a new business, Homes & Villas, offering highly curated vacation homes in many countries–a slightly different segment that the main one pursued by Airbnb, namely affordable accommodation in urban centers.
What Will the Companies Look Like in 5–10 Years?
It seems the companies will continue to converge, for a few reasons. First, Airbnb appears intent on becoming an end-to-end travel platform, with their recent acquisition of HotelTonight serving as Exhibit A. In advance of their planned IPO, it makes sense for Airbnb to diversify into other segments of travel in order to satisfy public investors’ desire for multiple avenues of growth. The regulatory risk of the home-rental market also makes it increasingly prudent for Airbnb to grow its presence in the hotel market, where its advantageous commissions can undercut the legacy OTAs.
In their bids to win the travel customer, offering the most lodging inventory is an important feature for both Expedia and Airbnb. One travel expert has said, “we expect the lines to blur over the long term, as consumers are likely to favor the websites that offer the most inventory and selection across hotels and alternative accommodations.” In order to bolster their respective lodging inventories, Airbnb needs to increase their hotel offering while Expedia needs to increase their private/alternative accommodations inventory. Thus, they will increasingly compete against each other and become more similar.
Both Expedia and Airbnb have strong valuations: Expedia has a market cap of $18 billion. Airbnb was valued at $31 billion after closing the second round of its $1 billion Series B in May 2017. It has received an even higher implied valuation from both its acquisition of HotelTonight, in which it priced its common stock at ~$35 billion and its 409a valuation, which valued the company at $38 billion.
Also, because the private accommodation market is more fragmented than the traditional hotel market, it could be argued that digital brokers such as Airbnb and Expedia can add more value to private accommodations. Expedia’s former CEO Dara Khosrowshahi said it best, saying “We think vacation rentals are at the very early stages of being wired up on a global basis. To the extent that you as an e-commerce player can wire up these fragmented marketplaces, you can add significant value to both the supplier and also to consumers.” Therefore, as the private accommodation market continues its trajectory (the market is expected to grow at 6% per year through 2023), Expedia and Airbnb will continue to compete for a share of this private accommodation market.
Who Is Going to Win the War for the Customer?
Airbnb and Expedia will become more and more similar as they continue to increase their inventory of travel products. The global travel market is a huge addressable market. Per Expedia, the global travel market represents $1.7 trillion in bookings. There should be more than enough room for a few companies to separate themselves. Are the OTAs (such as Expedia and Airbnb) in the best position to control this industry?
Marriott CEO Arne Sorenson has said there is a war between the traditional travel and hospitality companies and tech giants. Hotel reservations and airplane tickets can very easily be purchased online which favors the tech companies but at the same time, traditional hotel companies control the actual product–the actual physical location where you stay, that can’t be shipped to someone.
As Airbnb prepares for its public markets debut, it will face increasing scrutiny. Since it appears to be close to reaching saturation in the US, it is expanding beyond its traditional offering of lower priced, at times shared accommodation towards hotels, and luxury experiences and lodging. As its main competitors gain ground in their home turf, investors will increasingly demand a greater focus on strategy and product offerings.
Who wins this war for the customer? Airbnb vs. Expedia? Both seem to think they can win. It will be interesting to watch.
Understanding the basics
Expedia and Airbnb are competitors. While they broadly operate in the same global travel market, they seemed so far to have mostly stayed out of each other’s way. However, given recent moves by each company, it is fair to ask if they are really that different and what they will look like in the future.
Airbnb and Expedia are competitors. There are other very large companies in the online travel space, most notably Booking.com and TripAdvisor, that have a private rental feature. More traditional hospitality companies, like Marriott, are following in their footsteps.
VRBO (HomeAway) was acquired by Expedia to compete with Airbnb. Expedia concluded that the HomeAway vacation rental service was complementary to their hotel business. They started integrating HomeAway listings into their Expedia hotel listings, depending on the type of trip someone was booking.