How much revenue are you losing to Airbnb?
14 FEBRUARY 2014 7:06 AM
The answer lies within a 35-page Boston University research paper, which I’ve read through so you don’t have to.
As you’ve probably seen on our site or in the Daily Update by now, this week the HNN editorial staff tackled the sharing economy in its special report on alternative accommodations.
The concept had been percolating on our story ideas list for a while. How could it not be, with nearly every major conference and event panel addressing Airbnb in some capacity?
But the gun that got this special report out of the gate came courtesy of a Boston University study, titled “The rise of the sharing economy: Estimating the impact of Airbnb on the hotel industry.” We cited the paper a number of places throughout our reporting—and for good reason. The study concludes that “market entrants such as Airbnb can pose a legitimate competitive threat to the hospitality industry going forward.”
I would encourage everyone to read it in its entirety. The study is a treasure trove of fascinating data points and observations. That said, I realize the busy hotel executive might not have time to pour through 35 pages of incredibly dense material, so I’ve done the heavy lifting for you. Here are the six most important things you need to know about this report.
1. Airbnb’s impact on revenues
Just how much could Airbnb steal from your pocketbook? The study concludes that a 1% increase in the site’s listings in a given market would result in a 0.05% decrease in quarterly hotel revenues—at least for the Texas market, which served as the sample.
For sake of comparison, a percentage increase in the supply of hotel rooms is associated with a 0.29% decrease in hotel revenues.
So in a vacuum, Airbnb supply is less threatening than hotel supply. But here’s the rub: Airbnb continues to grow rapidly. From its launch in 2008 to 2012, for which the most recent data was available for the study, the site had more than 4 million guests and more than 10 million nights of cumulative bookings.
I asked the report’s co-author Davide Proserpio how he would respond to a hotelier dismissing the 0.05% impact as negligible at best. His response:
“A more careful reader can infer more by combining the 0.05 figure with Airbnb’s exponential year-over-year growth, recalling that our results say that for every 1% growth in Airbnb hotels take a 0.05% revenue hit. Sure, if Airbnb was growing slowly 0.05% would be negligible, but this isn’t the case.”
2. Airbnb might stimulate demand in addition to cannibalizing it
Looking at the study’s main findings in the section above, one might label Airbnb the hotel industry’s Public Enemy No. 1. While not unwarranted, this dark cloud might have some very real silver linings.
“It is perfectly possible for Airbnb to 1) increase travel demand, 2) drive economic activity for local businesses and 3) at the same time take away business from hotels,” Proserpio explained. “Our study only focuses on the third point. We find that Airbnb has impacted the revenues of certain hotel segments (such as lower-tier hotels, and those not catering to business travel). So, while Airbnb can substitute hotel stays, it is by no means a perfect substitute, at least right now.”
Airbnb has commissioned several reports touting its benefits on a market’s broader economy. (Take them with a grain of salt.) The most recent tallied the total economic impact in the United Kingdom at $824 million in one year.
You can find others by perusing Airbnb’s news release archives.
3. The report speaks of correlations as opposed to causation
My biggest critique of the study is that it measures correlation as opposed to causation. “We show that Airbnb penetration is negatively correlated with hotel revenue,” the report states.
I’m not arguing semantics here. There’s a big difference between the two. One of my favorite oft-cited examples: Sleeping with one’s shoes on is strongly correlated with waking up with a headache. To apply causation, one would prematurely conclude that sleeping with shoes on actually causes headaches. A more rational explanation is that both are caused by a third factor, in this case going to bed drunk.
When I raised this issue with Proserpio, he freely admitted their study, as with any observational study, depends on certain untestable assumptions.
To his credit, however, he and his fellow co-authors did minimize the impact of number of outside factors—such as unemployment, population, room supply, etc.—using complex statistical analysis that is, quite frankly, way over my head.
4. The study is limited in scope
This is not a knock on the researchers. Any academic study such as this begins with a sample, in this case city-level markets in Texas, from which broader inferences can be made about the larger population.
The authors also make clear that all markets are not created equal. The impact of Airbnb is more likely to be felt in densely populated cities where there exists more apartments, condos, lofts, etc. that could be listed on the online marketplace. Hoteliers in suburban and rural areas have little to worry about.
The issue of “scope” also applies to the sample of Airbnb listings themselves. Because Airbnb does not share individual transaction data, researchers instead focused on the number of distinct listings in the market. A potential hang up quickly becomes apparent in the process; just because someone lists their apartment doesn’t mean it’s actually getting booked, in which case there would be no impact on hotel revenues.
The researchers knew this and did a separate analysis whereby they only included reviewed listings. Airbnb only allows guests who have paid for accommodation to give reviews, so here you have a metric closer to actual transactional data. However, it’s likely a more conservation figure, as not all paying guests actually leave reviews. In any case, the researchers, using reviewed listings in their analysis, found a statistically significant relationship, “albeit with smaller magnitude.”
5. Airbnb could have a broader impact on distribution
The report draws parallels to Craigslist, whose emergence into the classified ad space caused many newspapers to reduce their ad rates. I asked Proserpio whether we’d see a similar situation arise in the hotel space, whereby distributors such as online travel agencies might lower their commissions to compete with the Airbnb model in this sharing economy.
“In the past, hotels relied on big demand, brand loyalty, and lack of alternatives, but now the times are changing,” he said. “Airbnb emerged as a credible threat in only five years and it seems this is just the beginning. Therefore, I expect to see some change/innovation in the hotel industry in the next few years. I am not sure what the right strategy is, but hotels definitely have to react, and fast.”
6. Why Airbnb? What about other online accommodation marketplaces?
Airbnb isn’t the only player in the online accommodation marketplace. Sites like VRBO and HomeAway also provide travelers platforms to book accommodations listed by individuals. So why do we hear so much about Airbnb?
“First of all, Airbnb provides different types of accommodations: whole apartments, private rooms in a shared apartment and even shared rooms,” Proserpio said. “VRBO and HomeAway provide only whole apartments, which substantially reduces what they have to offer. Further, Airbnb focuses a lot on the people aspect of the ‘Airbnb community.’ It actually defines itself as a ‘social website.’ Every user (both hosts and guests) has a profile where one can see photos of the user, description and the reviews (very important for defining the user reputation) received as a guest and host. Also, Airbnb increases trust by requiring a series of verifications from a user to register to the site.
“On the other hand, VRBO and HomeAway focus on the property, leaving little space to the actual users. The review system is one-way (only a guest can review a host) and no verifications are required to register,” he said.
Now on to the usual goodies …
What’s making me happy this week
My first ever CitizenM experience. After a day working from the STR Global office in London’s Bankside district, we swung by the CitizenM across the street for some post-work pints. The hotel lobby lived up to the brand’s reputation. At 5:30 p.m. on a Thursday evening, the place was hopping, abuzz with guests and local white-collar revelers alike.
The open concept seamlessly mixed check-in area, chic bar, food-and-beverage outlet and clusters of comfortable tables and desks for working and socializing. It was the epitome of the public-space-as-communal-hangout road down which most major chains are veering—and an enticing route I’ll explore when booking my next stay in the city.
Stat of the week
Six to 12: Online hotel reviews read by the majority (80%) of travelers before booking a hotel, according to a recent TripAdvisor survey conducted by PhoCusWright. View the findings via infographic.
Other interesting highlights from the report:
- 87% of users agree that an appropriate management response to a bad review "improves my impression of the hotel.”
- More than half of respondents (53%) will not book a hotel that does not have reviews.
- 64% of respondents tend to ignore extreme comments when reading reviews.
Quote of the week
“In my professional life, yesterday was the best day ever.”
—Svein Arild Steen-Mevold, Scandic’s VP in Norway, after the chain announced its acquisition of Rica Hotels, which has 65 properties in Norway.
Reader comment of the week
“Isn’t it great (sad) how we as an industry are allowing social media to rate us!!! With the whole truth, readers get only a picture of what someone thinks or feels. We as an industry need to take back control.”
—Reader “Greg” in response to “JLL: Hotel conditions in Sochi overblown,” which counters various media reports that all hotels in the Olympic host city were not fully operational.
The opinions expressed in this column do not necessarily reflect the opinions of Hotel News Now or its parent company, STR and its affiliated companies. Bloggers published on this site are given the freedom to express views that may be controversial, but our goal is to provoke thought and constructive discussion within our reader community. Please feel free to comment or contact an editor with any questions or concerns.