Airbnb and Uber: Changing the Rules of the Hotel and Transportation Industries
By Marc Stephen Shuster Partner, Berger Singerman | December 06, 2015
Co-authored by Jeffrey R. Margolis, Partner, Berger Singerman
Last night over 50,000 people rented an accommodation from a service that offers 250,000 rooms in 30,000 cities in 192 countries, and yesterday alone people used a driving service for more than 1 million trips. They chose their rooms, arranged for their rides, and paid for everything online. But, perhaps surprisingly, their overnight accommodations and rides were provided by private individuals rather than a hotel chain or a traditional taxi service; hosts and guests, drivers and riders, were matched up by Airbnb and Uber which have both emerged as viable mainstream alternatives to traditional hotels and taxi service providers, and their entry into the market has and will continue to have a measurable and quantifiable impact on the traditional hotel industry and the transit business. What's at work here? The underpinning is literally the fight to control logistics for the world! While Apple, Google and Amazon battle in the news for who will be the first driverless car, a quieter war wages where hotels and taxicab companies may well be the victims.
Still in its infancy and most known as start-ups which enable point-to-point exchanges through technology, the "sharing-economy" is the phenomenon of people sharing cars, apartments, homes, rooms and other available goods and services with those who are willing to pay for them; i.e., what's mine is yours for a fee. The sharing-economy provides expanded access to products and services, including peer-to-peer accommodations, travel experiences, and car-sharing, through an on-line market place. Companies have sprung up to serve as matchmakers between sellers and buyers and providers and users. Most well-known, Airbnb matches up owners and renters, and Uber, a car service that pairs riders with nearby drivers. Both Airbnb and Uber are pioneers of the sharing-economy and are changing the rules of the hotel and transportation industries , providing flexible sources of extra income to providers and providing users quick access to cheaper goods and services, available 24 hours a day, 7 days a week through the internet and apps on their smartphones. As an aside, what may be most interesting to the genesis of the "sharing-economy" is perhaps the "Great Recession," which forced many urban dwellers to find supplemental income – both by taking on driver roles to compete with cabs, and renting out their abodes to compete with hotels.
And despite initial dismissal by traditional providers as experiments at best, Airbnb and Uber are now valued in the billions, with the value of Airbnb exceeding that of well-established hotel brands and overshadowed by only the largest hotel chain - Hilton. Net net, the impact of Airbnb and Uber on the traditional hotel and taxi service industries is definitely being felt. Leveraging already existing real estate, as opposed to developing or building a new hotel, Airbnb is expanding the supply of existing lodging rooms by literally using the available inventory of apartments and houses in a given neighborhood. By providing an additional supply of lodging rooms, with constant demand, basic economics principles dictate that traditional hotel prices will go down, and they have. Although the effect of Airbnb is being felt more by lower-priced hotels and hotels that do not cater to business travelers, this alternative platform is also starting to catch on with business travelers as companies are trying to lower costs. One need only wonder what the future will hold which enables Airbnb to compete on a grand-scale with traditional hotel venues – even for the business crowd.
Only around for approximately six years, Airbnb has already shaken the global hospitality industry as Uber has done with the taxi service industry. These alternative providers have grabbed market share and have left the traditional hotel and taxi service industries struggling to play catch-up. Consumers have enthusiastically adopted the services of Airbnb, as well as Uber, with these platforms creating new user behavior by providing additional sources of income and less expensive alternatives. Airbnb continues to become more respected in the industry as consumer behaviors change. People have learned to trust each other; consumers were previously skeptical about sharing services and allowing strangers into their homes or getting into a stranger's car. That attitude, however, is changing.
These sharing-economy alternative providers have forced down prices and led to increasing innovation by traditional providers seeking to maintain and obtain business. Effecting hotel room revenue through lower occupancy rates and decreased hotel room prices, there has been a measurable and quantifiable negative impact on hotel revenue as a result of the sharing-economy, with revenue of traditional hotels decreasing by up to ten percent in areas where Airbnb is most popular. According to a recent report from Boston University, a 10% percent increase in Airbnb supply results in a 0.35% decrease in hotel room revenue, translating into a 13% impact on revenue in markets where the Airbnb supply is the greatest. Airbnb has dipped into room revenues of lower end hotel groups the most. However, as the sharing-economy continues its quick ascension, Airbnb may soon disrupt high end hotel revenues the way other sharing- economy services like Uber did to taxi services. What may be an even stronger harbinger of things to come, hotel circles are beginning to consider ways to "take away"
the Airbnb market in certain locales, by prospectively renting the offerings at market from the owner and then turning around and essentially brokering a transformed, temporarily-branded room, back to the end customer?