Airbnb drops $200M to further its travel takeover

The home-sharing startup is buying Canada-based Luxury Retreats to capture more of the highly lucrative luxury rental market.

This week, Airbnb is expected to complete the acquisition of Luxury Retreats, a Canadian startup that replicates Airbnb's business model for high-end homes. The deal is expected to be valued around $200 million in cash and stock offerings.

Luxury Retreats has more than 4,000 properties in its listings, including Richard Branson's island and Francis Ford Coppola's villa. On top of the focus on high-end luxury rentals, the platform also offers a concierge service for its guests, offering them the ability to book private bartenders, chefs, masseuses, and the like.

It should be noted Airbnb is trying out something similar with Airbnb Trips, a platform to connect guests with local tourism services that launched late last year.

Three Steps Closer to Monopoly

This move by Airbnb would appear to have a threefold purpose. First, the home-sharing startup wants to expand its user base and this acquisition would capture a high-value segment. Luxury renters have the available resources to travel more often and book more expensive properties, which provide greater margins.

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Luxury Retreats is already profitable and the boost in marginal revenues will help secure and bolster Airbnb's profitability, which is a rather recent development. Shoring up the profits and meeting expectations will be crucial for when the company goes public, which some speculate could happen this year.

Second, Airbnb is simply looking to move upstream and consolidate the market for vacation rentals. Purchasing Luxury Retreats will boost its market share substantially in terms of dollars spent, preventing startups from disrupting its success so far and making it increasingly difficult for established hotel chains to save themselves from Airbnb's eventual monopoly over travel.

Finally, this purchase could be seen as a Airbnb taking a swipe at Priceline (which has owned Booking.com for more than a decade and a bevy of other smaller travel sites) and Expedia (whose $3.9 billion acquisition of Airbnb competitor HomeAway took place little more than a year ago).

The two online travel agencies have made significant moves to gain a foothold in the home rental market in order to combat Airbnb's rise, but it looks to be a long slog if they want to take down the $30 billion startup. Their growth rates aren't anywhere close to Airbnb's and Expedia even missed its profitability expectations due to pumping money into HomeAway.

Hotels Are Getting Screwed

The real losers from this acquisition are hotels. A paper from Boston University recently found that Airbnb had a noticeable negative effect on hotels in Texas. While this research focused on a dataset limited by geography, Texas surely can't be a particularly unique segment of the US travel market, aside from the Alamo, of course.

In fact, more research shows the hotels are forced to compete with an established Airbnb presence by lowering the prices, which naturally hurts their revenues.

Hotels have huge overhead costs to handle (as opposed to Airbnb's near-zero marginal costs) and operate with an archaic franchise model designed to apportion the heavy lifting to the hotel owners. As their market share decreases and profitability is increasingly threatened, these hotel owners will put more pressure on the chains (think Marriott and Hilton) to deliver value.

Airbnb's acquisition of Luxury Rentals specifically bodes poorly for luxury hotels. The opportunity to stay in an appropriately staffed villa that feels like a home offers much more appeal to wealthy travelers than a standard hotel.

These hotel owners could be persuaded by market forces to consider working with Airbnb and sever their business ties with the chains, radically transforming hotels for good.

Marriott and Hilton would never want this outcome, but aren't doing much to avoid it. Their best play is to start adding value to the hotel booking process, which can be executed via digital transformation.

The hotel chains ought to build a platform that provides real transparency in their inventory and pricing, but also build out a concierge platform similar to the one developed by Luxury Rentals. In addition, the chains could band together to improve repeat bookings by creating a single sign-on portal and make rewards points transferable.

With this marketplace strategy, the hotels can build a wall around their offerings and compete on price like before.

Regardless, it's looks like hotels are waging a lackadaisical fight with Airbnb, whose ascendancy has only been checked by political maneuvering and copycat competition, not true innovation.

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