Earlier this month, the New York Times reported on a concerted effort by the hotel industry to use regulations to attack Airbnb.
Per the Times, a hotel industry trade group, the American Hotel and Lodging Association, took credit. The group counts Marriott International, Hilton Worldwide and Hyatt Hotels as members.
Hotel brands are going up against competitors who have much more favorable cost structures and unit economics.
According to documents obtained by the newspaper, Airbnb’s regulatory struggles in the last year were the result of a sustained campaign by the hotel industry against the platform and its hosts. (In hotel industry jargon, they were lobbying against “short-term rentals” and unregulated “commercial operators.”)
While these efforts may yield short-term results, they won’t stall the inevitable changes coming to the hotel industry. No matter how hard the hoteliers press, these trends are driven by economic realities and market conditions that no amount of lobbying will undo.
The hotel industry isn’t the first group of incumbents who have tried to ward off platform disruption by appealing to regulators. As linear businesses dominated for most of the 20th century, regulatory regimes in most industries haven’t yet adapted to account for platforms. That’s why appealing to regulators has been a common tactic for industries faced with a platform threat.
Unfortunately for the hotel industry, in the face of a growing modern monopoly like Airbnb, these efforts typically fail. At best, they will only stall the inevitable change that’s coming to the industry.
In the early 2000’s, eBay faced a host of lawsuits related to fraud on its consumer marketplace. Most cases were ultimately decided in eBay’s favor – such is the power and agility of the marketplace.
Similarly, PayPal faced its own legal battles early in its lifetime. Incumbents and their trade groups were pushing for PayPal to be designated as a commercial bank, but since the company didn’t make loans or pay interest on account balances, the designation didn’t make sense. PayPal eventually won out and banks have had to adapt to the reality of digital payments. More recently, Lending Club initially faced similar issues after pressure from banks on regulators.
And finally, the taxi industry fought with ride-hailing platforms like Uber and Lyft without much evident success. How many taxi companies have filed for bankruptcy since Uber’s inception?
So while the hotel industry’s efforts have ample precedent, history shows they aren’t likely to be successful in killing off the threat from platforms like Airbnb.
Rather than focusing on acquisitions and pressuring regulators, the hotel industry should be focusing on creating true digital transformation.
The legacy business model of hotel brands is increasingly looking like just a sub-scale platform business with worse economics.
This means accepting the reality that platforms already dominate the hotel industry and will continue to do so. On one side, you have online travel agency (OTA) platforms Hotel Tonight and Booking.com, as well as the semi-linear models of Expedia and Priceline.
On the other, you have platforms like Airbnb that are unlocking new sources of inventory and competition.
Hotel brands are going up against competitors who have much more favorable cost structures and unit economics. The legacy business model of hotel brands is increasingly looking like just a sub-scale platform business with worse economics. Large hotel brands and chains won’t improve their long-term position doubling down on their legacy business models. The typical digital transformation playbook of layering over mobile apps and connectivity on top of their existing business models will not be enough.
Marriott, the largest hotel brand in the world, has about 1.2 million rooms, with another 200,000 in development. In contrast, Airbnb has nearly 2.5 million listings. There’s no reason that Marriott shouldn’t be operating on the same scale. In so doing, it would also significantly improve its valuation and multiple with investors, who value the market power and defensible network effects that large platforms enjoy.
While brands still own the high-end segment of the market, this trend likely won’t sustain it self for long. Airbnb recently completed its purchase of Luxury Retreats, which signals its intention to move upstream to creating higher quality travel experiences.
Hotel brands need to embrace platform innovation before it’s too late.
Airbnb’s trajectory looks like a classic case of disruptive innovation, where the competitor attacks from below while incumbents try to retreat up the value stream. Rarely does this work out well for the incumbents and hospitality seems to be no exception: Airbnb is already making moves to capture the business travel market.
To succeed, hotel brands need to embrace the most fundamental type of digital transformation: changing business models via platform innovation.
Hotel industry incumbents have established brands with consumers, very successful loyalty programs and significant distribution and technological infrastructure. By opening up these resources to third-party hotels and providing more inventory transparency, these brands could transform themselves into true platforms.
If the chains don’t capitalize on this opportunity, someone else will, whether its Airbnb or one of the OTAs. In this world, hotels will continue to see their share of the travel pie shrink as alternative lodgings become more popular and the market power of OTAs continues to grow.
While regulatory lobbying may help slow down this shift, it can’t stop it. The change is driven by the underlying economics of the travel market and of the ability platform businesses to erode the competitive advantages of their linear competitors.
The declining fortune of hotel brands is by no means inevitable. If the modernize and transform their business models, these companies can continue to thrive well into the 21st century.
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