The sharing economy is scaring the hotel industry.
Two giant US-based hospitality companies with extensive operations in Australia are uniting to form the world’s biggest hotel chain. And it’s difficult to avoid the conclusion that they are doing so to combat the threat of Airbnb.
Marriott International announced overnight it is buying Starwood Hotels, owner of the Westin, Sheraton and W brands, for $US12.2 billion ($17.2 billion).
The deal, if approved by regulators and stockholders, would create one hell of a monster in the hotel business, an entity with 1.1 million rooms in more than 5,500 hotels in over 100 countries. By way of comparison, accommodation marketplace Airbnb has said it already has 1.5 million rooms and full house listings in more than 190 countries.
Here’s way to look at this deal: Starwood is being acquired at a price that works out to roughly half an Airbnb. The sharing economy startup was last valued at about $US25 billion in the private markets, according to a media report, which is incredible when you consider it was only founded in 2008 (and had trouble securing initial funding at the time).
That being said, startup valuations are notoriously opaque and often inflated by complicated structuring that limits the risks for venture capital fund backers. So the $US25 billion figure should be taken with caution.
In any case, everything suggests Airbnb is growing like crazy. Documents reviewed by the Wall Street Journal in June showed that while it’s currently losing money, it expects to hit $US900 million in gross revenue this year, rising to $US10 billion by 2020, when it would have $US3 billion in operating earnings.Like Uber, one of the few thing standing in the way of Airbnb’s seemingly inexorable rise is more regulation. The service has previously been banned in cities like New York and has been investigated by regulators in New South Wales.
Meanwhile, local representatives from the company (and Uber) are being hauled before a government enquiry into tax avoidance this week (even though it is not clear whether either is actually profitable here). But as Uber has shown, when a product is satisfying consumer demand it is very difficult to stop.
Marriott’s CEO acknowledged as much in a recent earnings call, noting that Airbnb is “here to stay”. Hotel companies face major disadvantages in competing with an asset light company like Airbnb: they have to employ lots of staff and own or lease extensive properties and provide many services. rather than just run and app and process payments.
The idea that hotel chains should merge and scale up to ward off the Airbnb threat is hardly new. Now it’s already happening.