Transparent analysis: The state of Airbnb at IPO

Worldwide: Vacation rental data provider Transparent provides its insights into Airbnb’s imminent IPO and analyses how it has been able to reach this milestone in its development.

Airbnb’s IPO marks a milestone in the travel industry and consumer internet as a whole. By redefining traveller expectations and establishing a new type of lodging, Airbnb built the second most valuable travel company in the world in just a decade. Its example as a “sharing economy” company catalysed a generation of venture-backed companies.

For us at Transparent, Airbnb serves as a lodestar. Our mission is to establish the data source of record for short-term rentals, so making sense of their business has been a motivation over the past five years. Now, as public market investors consider investing in Airbnb, we want to share observations on key questions facing the company.

Who are today’s Airbnb hosts?

While the precise alchemy of Airbnb’s brand is a mystery, Airbnb’s supply and its host community is surely a huge ingredient.

Airbnb defined the “sharing economy”. Airbnb taught travellers how a transgression – going into a stranger’s house – could unlock an amazing experience. Instead of settling for a cookie-cutter hotel in a sterile tourist district, travellers could experience real life in any neighbourhood, guided by welcoming local hosts. Moreover, these Airbnbs were 30 per cent cheaper than a hotel and came equipped with better space [e.g. living rooms and bedrooms] and amenities [e.g. kitchens, washer / dryers].

For many years, this experience was available exclusively on Airbnb. Airbnb hosts effectively operated as Airbnb franchisees. Airbnb served as its sole source of demand. Airbnb provided the tools, software and training to run their business. And these suppliers self-identified as Airbnb hosts.

Over time, the composition of Airbnb hosts evolved. A generation of hospitality entrepreneurs identified the arbitrage between long-term residential leases and the revenue from Airbnb rentals. These operators rapidly increased the stock of professionally managed inventory. They also attracted capital; over the past decade $2 billion was invested in short-term rental property managers.

Professional operators viewed themselves in different terms than the original Airbnb hosts. Instead of identifying as “Airbnb hosts” with a quirky, personal experience, they built their own hospitality brands [e.g. Sonder, Vacasa], established direct relationships with consumers, and defined a standard, consistent hospitality experience. Rather than relying on Airbnb software, they developed their own systems. And unlike legacy Airbnb hosts, they sought to maximise revenue by distributing inventory as widely as possible.

These “Airbnbs” were not just available on Airbnb, they also appeared on Google Hotel Finder, Booking.com, Expedia, not to mention their own websites. For consumers, stays with these hosts have important differences – instant booking [but at the expense of personal interactions with hosts], consistent furnishing and standards [but a more generic, hotel-like environment]. Professional managers raise the floor, reducing the frequency of Airbnb horror stories; professional managers also lower the ceiling, eliminating transcendent moments that establish the brand.

So who exactly are Airbnb hosts today? And how do traveller experiences vary across different kinds of hosts? To address these questions, we’ve compiled the following observations:

  • Shared accommodations comprise just 20 per cent of current Airbnb listings. Today, the vast majority of Airbnb supply are entire homes and apartments, and this has been the fastest growing component over the past three years.
  • The majority of Airbnb listings now come from professional managers. Individual hosts have shrunk from 47 per cent of all listings as recently as March 2018 to 37 per cent. Small property managers [between two and 20 listings] comprise the largest portion of Airbnb supply, but larger property managers are also growing fast.
  • The more listings managed by an individual host, the more likely they are to list their inventory across multiple channels. 60 per cent of listings managed by a large property manager [e.g. managers more than 100 listings] appear on more than just Airbnb. By contrast, less than 20 per cent of listings managed by an individual [e.g. just one listing] appear on multiple channels.
  • Individual hosts deliver the best guest experience. Individual hosts provide the beating heart of the Airbnb brand. Based on traveller reviews, travellers consistently rate these hosts the highest.
  • Airbnb enjoys the most listings and greatest exclusivity across every country. In most countries, Booking has the second most listings, but Expedia is very competitive in the US.

How powerful is the Airbnb brand, and what does it imply for Airbnb’s ability to capture consumer demand?

Without question, Airbnb has built a leading brand of our time. Capturing the hearts of consumers requires a vision, not just a business model, and travellers around the world bought into Airbnb’s invitation to “belong anywhere”.

Brand matters in the travel industry thanks to Google’s stranglehold over search. A huge proportion of travel spend begins with search, and this fact makes Google the most valuable player in the travel industry. In 2017, when Expedia and Booking spent $7.2 billion on Google advertising, Google’s travel business was valued by some at $100 billion. By 2019, their spend had grown 50 per cent and exceeded $11 billion. More telling, Expedia and Booking’s spend increased even as their CEOs made reducing dependence on Google a strategic imperative.

Airbnb stands alone as the one travel company that has not relied on Google. Two-thirds of its visitors come directly to Airbnb, a dramatically higher share than the rest of the industry. The power of these consumer relationships was illustrated in Airbnb’s Covid response. When bookings collapsed, Airbnb slashed marketing spend. Yet despite eliminating this budget, Airbnb traffic was largely unchanged. Instead, customers that previously came through paid campaigns instead came directly to Airbnb.

But while Airbnb’s brand has carried the company to this pinnacle of success, how powerful a growth engine will this continue to provide? Will Airbnb continue to enjoy a unique brand position as it broadens its offering and faces more direct competition? To better understand Airbnb’s brand strength and demand mix, we’ve compiled the following analysis:

  • Airbnb enjoys a huge direct traffic advantage, but competitors’ marketing investment over the summer enabled them to grow traffic faster than Airbnb. When Airbnb cut marketing spend, the percentage of traffic coming directly to Airbnb increased from 55 per cent in April to 66 per cent in August. And even in the face of this marketing reduction, Airbnb still increased traffic by 159 per cent over this period. By comparison, Booking.com remained reliant on marketing investment, so its direct traffic share shrunk from 43 per cent to 40 per cent but its total traffic increased by 327 per cent.
  • Even as Airbnb has reached enormous scale, it continues to attract new customers. Despite its scale, new travellers continue to discover Airbnb every year. The evidence suggests that Airbnb is far from exhausting its core market.

How meaningful are Airbnb’s competitors?

Airbnb has become synonymous with short-term rentals. For years, Airbnb was the short-term rental alternative to hotels, which the hotel industry demonstrated with endless lobbying efforts targeting Airbnb [none of which stopped Marriott, Hyatt, Accor and Choice from launching their own short-term rental products].

Today Airbnb faces real competition in short-term rentals from leading travel platforms. Expedia spent $4 billion to acquire VRBO and now includes this inventory as a core part of its lodging search. Booking has made short-term rentals a focus, from “commercials that champion “hotels, homes, and everything in between” to their CEO citing alternative accommodations as a “growth driver for years to come”.

These rivals compete for access to supply. While Airbnb enjoys a real advantage in total listings, listing on multiple platforms is a dominant distribution strategy for property managers. Listings distributed on every channel generate 31 per cent more bookings per listing than those exclusive to Airbnb. It stands to reason that the cross-listing trend will continue as professional managers play a growing role.

Booking and Expedia also challenge Airbnb for consumer demand. Booking has made short-term rentals a key element in its consumer marketing. At the same time that Airbnb withdrew from Google’s HotelFinder product, Booking recommitted to this channel. Thanks to these investments [and its position as the largest travel site in the world], Booking’s short-term rental demand has grown quickly. Today, Booking generates ~70 per cent of Airbnb’s stays in short-term rentals, and Booking’s short-term rental business has grown more quickly since the onset of Covid.

Competitive dynamics will play a key role in the development of the short-term rental market for years to come. Will Airbnb continue to enjoy exclusive access to unique supply or will a growing percentage of hosts list on their competitors as well? When hosts lists on other channels, where will they put the lowest price, and will price variation encourage consumers to shop around? Will consumers continue to view Airbnb as a category of one when some form of short-term rental inventory is available on every distribution channel? To make sense of these competitive dynamics, we’ve pulled together the following research:

  • Airbnb controls the lion’s share of short-term rental listings, and today a relatively small percentage of listings appear on more than one channel. Two-thirds of all whole-home inventory appears on Airbnb, two-fifths appear on Booking, and one-fifth appear on Expedia. At the risk of nerding out on this question, this listing count comparison understates available supply. Because professional inventory is a greater percentage of Booking and Expedia supply, their listings are available for a greater percentage of the year, and run at higher utilisation rates. Also, Booking’s supply count is affected by cardinality, the instance where a property manager has many units of the same kind in a given location [e.g. 20 identical studio apartments in a given Miami Beach condo building]. For the purpose of this analysis, those 20 studio apartments are treated as one listing [given that they provide consumers with the same choice of location, amenities, and hosts]. Booking.com’s claim of 6.7 million listings is a count of the number of short-term rental rooms; Booking’s 2020 10-K notes that they have 2.1 million homes of short-term rental supply.
  • Airbnb supply exclusivity has eroded a little in mature markets but held steady faster growing, emerging markets. In more mature markets like Europe and the US, Airbnb host exclusivity is still high [50 per cent+ of hosts are exclusive], but there is a steady trend of these hosts starting to use other channels. In younger, faster growing markets like Asia and Latin America, a greater percentage of hosts remain exclusive and there is no evidence of hosts moving into other channels.
  • Inventory utilisation [i.e. the number of bookings per listing] increases as professional property managers add more channels. For professional property managers, inventory listed on all platforms generates the most demand [21 booked nights per month] of any distribution strategy. However, hosts that list exclusively on Airbnb also generate substantial demand [16.5 booked nights per month]; one can see why small PMs or hosts might forgo the complexity of managing multiple channels.
  • Airbnb’s inventory advantage is most pronounced in urban markets. Given Airbnb’s roots in urban markets, it stands to reason that its inventory position remains strongest in these areas. Booking [thanks to its history in European markets like Italy] and Expedia [as a result of Vrbo’s focus on vacation rentals] is in a stronger position in leisure and rural markets.
  • Airbnb generates the most bookings in the short-term rental industry, but other platforms have vibrant channels and are growing quickly. Traveller reviews provide a good way to track booking trends over time. This data indicates that Booking has grown faster than Airbnb post-Covid, which is consistent with its larger marketing spend.

How successfully has Airbnb moved into new markets beyond its initial “sharing economy” offering?

A hunger for innovation and growth has driven Airbnb since its inception. Not content with creating a new category of lodging, it has sought to redefine other aspects of travel and the Airbnb experience. The IPO provides a moment to revisit some of these initiatives.

Airbnb Experiences

Experiences are perhaps the most significant attempt to expand Airbnb’s offering. With Experiences, consumers can book unique local activities, in addition to places to stay. Because these Experiences are only available on Airbnb, they provide another way to differentiate the Airbnb brand as other OTAs begin listing short-term rental inventory. And Experiences provide hosts with additional sources of income, further cementing their loyalty to the platform.

To better understand Experiences, we compiled the following analysis:

  • Unlike accommodation hosting, experiences are largely an individual-driven product. While the majority of Airbnb accommodation listings come from professional managers, individuals dominate Experiences supply. Only two per cent of Experience hosts have more than five total experiences. While accommodations property managers can acquire more homes or apartments to scale their operations, Experiences do not lend themselves to the same scale. Experiences are a labour-dependent operation, with diseconomies of scale. This likely provides Airbnb with more leverage over its suppliers; it also means Experiences will grow more slowly.
  • Experience hosting is a more challenging business than accommodations. Only 25 per cent of Experience hosts have more than 20 traveller reviews. If Experience hosts cannot scale or systematise their operation in the same way, it stands to reason that Experiences hosts also churn at a higher rate.
  • Experiences are an almost exclusively urban phenomena. With limited exceptions [Bali, Havana], experiences occur in cities.

Long-term stays

Nomadic living – individuals who have given up a fixed address to move around the world – has become more commonplace thanks to Airbnb. Creative professionals with location flexibility could drop their leases and live and work in any part of the world.

Even prior to Covid, Airbnb recognised this use case. In August 2019, it acquired Urbandoor, an Airbnb-like marketplace serving extended trips, relocations and longer-term stays. And in December 2019, it invested in corporate housing brand Zeus Living. The brand promise to “belong anywhere” opened the door to new ways of living.

And Covid has been rocket fuel for the trend of using short-term rental inventory for long-term stays. The average length of stay for an Airbnb booking has increased by 50 per cent since April 2020, and other short-term rental platforms have shown similar increases.

Driven by greater professional flexibility and the promise of living like a local anywhere in the world, long-term stays are poised to drive growth into the future.

Airbnb Plus

Announced at its ten-year anniversary event in 2018, Airbnb Plus sought to reach a broader audience. With Plus, Airbnb developed a brand standard, documented in a 100-point checklist covering amenities [e.g. wi-fi speed], cleanliness, and an Airbnb-approved aesthetic. Like hotel brands, hosts would be vetted for their adherence to these standards. Just as Marriott loyalists know what to expect in a Courtyard, travellers could trust the quality and consistency of these listings.

Two years later, the program has yet to achieve scale. Against a goal of 75,000 listings by year end 2018, the program now has about 20,000 listings.

Conclusion

As dedicated observers and advocates of the short-term rental industry, we are thrilled to see Airbnb reach the IPO milestone and be valued at tens of billions of dollars by the public markets. The short-term rental industry can no longer be dismissed as “alternative accommodations”.

For more information, visit the Transparent website.