Airbnb’s Distribution Strength Could Pressure Online Travel Giants and Woo Hotels

Airbnb’s stock market prospectus has offered a window into its distribution power. But the company may have to act strategically to avoid having its distribution power watered down over time.

“Airbnb is more than just a distribution channel,” said the San Francisco-based startup in the paperwork it filed on Monday for a planned initial public offering. But Airbnb’s numbers highlighted that its key profit generating power is as a distribution platform for property rentals, its main inventory.

Airbnb has a global reach as a distributor. In 2019, 63 percent of its revenue came from listings outside of the U.S. That made it more global as a share of revenue than Expedia Group, which only generated 43 percent of its $12 billion in revenue last year from outside the U.S.

Airbnb has so far avoided outsourcing most of its work as a middleman, keeping its costs down. But the company is expanding from serving leisure and self-managed business travelers to serving the luxury and corporate travel sectors. Along the way, it may have to work closely with other distributors. That may drive up its costs.

On the demand side, Airbnb has impressive brand recognition, which drives a lot of low-cost direct bookings.

When it has to spend money on paid performance ads on Google and other brand promotion, it gets a better-than-average return on its investment. As Skift noted, “In 2019, every dollar Airbnb spent on brand and performance marketing yielded $33 in gross bookings; At Expedia Group that figure was $21, for Booking Holdings $19.” In 2019, only 23 percent of Airbnb’s traffic came from paid performance marketing channels, mainly Google. Booking Holdings has said about half its customers come direct, suggesting it may compete at a disadvantage.

Airbnb also keeps customers better than its peers.

“We believe the guest revenue retention of our community is higher than the customer retention of OTA distribution platforms in the United States, based on available third-party credit card data,” the company said.

Airbnb’s customer base skews young.

“The majority of our guests who have ever made a booking on Airbnb were between the ages of 18 and 34,” the company said.

On the plus side, a youthful following could give Airbnb customers for life. Yet if history is a guide, these customers will tend to grow into wanting more premium and professionalized offerings. That is inventory that may be more expensive for the company to add, either through acquiring supply run by management companies or acquiring business travel demand via the tech companies and travel management companies that source travel for corporations.

Airbnb retains guests without yet offering a loyalty program and without related loyalty program costs. It said stays from repeat guests generated 69 percent of its revenue in 2019. Compare that to Marriott International, where only 52 percent of its rooms were booked by its loyalty members in 2019.

On the supply side, it uses its brand appeal, front-line staff in countries and resort destinations it needs to expand into, and distribution partnerships to bring supply on-board.

Brand appeal helps keep down the cost of on-boarding supply. In 2019, 23 percent of its first-time “hosts” began as guests on Airbnb. One can infer from that statistic that Airbnb’s brand prowess has helped bring it new supply.

Distributing Professionally-Managed Rentals

Yet one can also assume that most individuals would want to try Airbnb before listing their property online. So most of the remaining 77 percent of new property listings in 2019 probably came from professional managers.

The professionalization of rental management, which Airbnb dislikes talking about, may put to the test a crucial part of its business model.

When Airbnb sourced most of its inventory from individual hosts, listings would expand when rates were high and contract when rates drop. That helps Airbnb be more adaptable to recessions and booms than hoteliers, who face fixed costs. Byrne Hobart, an investment analyst, made the following point about this dynamic on Tuesday in his newsletter The Diff.

“The supply of Airbnb-able property should be countercyclical, while demand will be cyclical; since both sides of the network effect are established, this means that in more normal times Airbnb can calibrate its marketing to emphasize whichever side of the service needs more growth.”

But it’s unclear now how much of Airbnb’s inventory is professionally managed in one manner or another. As professionals run a more significant share of overall rentals, the company’s dynamics may shift. Professional companies that enter master-lease arrangements with property developers can’t suddenly pull units off the market during a recession.

Some professional rental managers during the pandemic switched from short-term to long-term stays, and Sonder found success. Others, like Domio and Stay Alfred, have given up. It isn’t yet clear how resilient the professionalized sector will be during a recession. The answer will have a knock-on effect on Airbnb’s economics.

A threat to Airbnb’s distribution power would be the rise of companies like Sonder, which offers professionally run lodging primarily in urban areas; Vacasa, which offers professionally run vacation homes mostly in resort destinations; and Sykes Cottages, which offers vacation homes mainly in the UK. These brands have built up substantial direct-booking audiences.

Might Airbnb buy one of these professionally run brands? The prospectus doesn’t say, but two other facts are notable.

In 2017, Airbnb bought Luxury Retreats, an online marketplace for luxury homes and villa rentals. The prospectus revealed the price to have been $224.1 million, primarily in cash and common stock.

In March, Airbnb ended its joint venture with a Miami developer, NGD Homesharing. As Skift reported, Airbnb had agreed to lend its brand and favorable marketing terms to Niido vacation rental units built or converted by the developer. The partnership went sideways for reasons unrelated to the underlying concept, which had included a 324-unit Niido Powered by Airbnb in Kissimmee, Florida. (Airbnb claimed NGD didn’t deliver the seven projects promised in 2019, among other disputes.) The Niido brand no longer mentions Airbnb in its marketing.

Airbnb told the publication GlobeSt in March that it still planned to work with property developers, just not NGD.

“We look forward to continuing to work with real estate partners to help guests have amazing experiences and hospitality entrepreneurs grow their businesses,” the company said.

Airbnb might seek “vertical” partnerships with developers, or presumably companies that run properties, to maintain its distribution power.

Airbnb Push Into Hotels?

A “horizontal” test of Airbnb’s distribution power is how well it can cross-sell different types of inventory. Can Airbnb start selling hotels to its customers and still retain both demand and supply while keeping favorable profit margins?

Airbnb’s push into hotels began in earnest in March 2019 when Airbnb acquired HotelTonight, an online booking agency that offers last-minute hotel stays at primarily boutique or urban properties. Airbnb’s prospectus on Monday revealed officially that Skift’s reporting was correct last year in saying the purchase price was about $400 million. The financial filing put the price at $441.4 million in cash and stock.

Airbnb also last year picked up an equity stake in Indian hotel brand Oyo, though that deal went unmentioned in the company’s filing Monday.

Yet Airbnb also has been adding hotels under its own branded site and app. The company’s prospectus was remarkably tight-lipped about its plans to distribute hotel rooms or other inventory.

Airbnb has said elsewhere that it is charging single-digit percentage service fees and commissions for hoteliers who list their properties on its platform. Properties generally have to use one of several third-party distribution tech companies to upload and manage their inventory on Airbnb, and these also take a small cut. Currently, the overall distribution cost for adding a hotel on Airbnb is lower than advertising via traditional online travel agencies.

So far, Airbnb, outside of its HotelTonight brand, only wants hotels that meet certain guidelines for style, location, and amenities.

If your theory is that the company with the most beds in the end wins the online travel game, that self-imposed cap isn’t sustainable.

Get more context by reading Skift’s full Airbnb IPO (initial public offering) coverage.