Peerless?

“Can Airbnb establish a global rental accommodation brand?”

A year ago Airbnb, a peer-to-peer home rental website, “raised $112M in funding, valuing it at $1.3bn, according to people close to the deal.” I nearly wrote about the many questions that such a “valuation” raises but have decided to just talk about the business today.  Airbnb started in San Francisco in 2008 and is now going global, thanks to the money it raised. Twelve months down the track, from the the funding round, it now has something to shout about.

It has just reported that it has 200,000 properties registered and has had 10m nights booked in the last five months. Both these figures doubled in the preceding half year. I make that about 24m nights a year with a mean occupancy ratio of about a third. Looking around the website I’d guess that the conservative nightly rental could be about $50, so possibly run rate cash flows of $500m pa. Airbnb take a fee of 3% that gives it run rate revenues of $15m per annum, plus interest on the cash sloshing around as it keeps it in escrow from the time of reservation until the guests arrive. At this stage of the game I assume it is not making a profit, as it now has offices popping up all over the place.

There is no doubt that there is demand for this sort of thing, as there are several similar businesses around the world, but probably not many with so much cash to invest. It has used some of it to acquire two similar companies in Europe, Crashpadder and Accoleo, but still has Windu in Germany, 9flats in the UK and iStopOver in Canada, to contend with as competitors in this space. It seems to be doing particularly well in the “vacation accommodation landscape” as one analyst put it.

On the face of it all this seems very impressive and I can see the value of an international brand in the “vacation accommodation landscape” particularly for US travellers who would value the benefit of a familiar brand more than most. I’m less sure though within each territory just what value the brand would add and what there is to stop others jumping on this particular band wagon, as barriers to entry seem quite low to me.

There is also the question of cost to establish itself as a big name in this sort of thing internationally. Margins are pretty small and they have already found out that they need to ensure “hosts” homes after one or two cases of damage. Also, just how big is the demand for this sort of thing?  It is competing head on with some pretty well organised and respected brands in the hotel space and numerous holiday let and swap businesses too.

This is an early stage business and it is still finding its feet but I expect it will need to pick a niche where it can offer a strong emotional component to its brand, rather than just the practicalities of intermediating accommodation, if it wants to succeed long term. Patriotism and fear of the unknown works well for several US travel brands, for US travellers, where it seems to be having most success to date and maybe that is its best focus.

While I can see a potential niche business here, whether there is much money in it is another thing all together. It is not cheap to run a genuinely international business, nor will it be easy to manage either. It may well be that as an adjunct to an already established travel brand, like an airline, travel portal, or travel firm, or even a US hotel brand, it could work and be both a protective move and possibly even a diversifying move to acquire it before it develops fully.

Airbnb is a neat but rather exposed and fragile idea that has a long way to go before it becomes a proven business. It is though a “high concept” idea that appeals to some investors and my guess is that with enough buzz it may end up as part of something bigger before it ever finds out how well it would do on its own.

Mark

 

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