If you are like me and enjoy watching the occasional programme on live television (which seems somewhat neanderthal given the vast migration to streaming services these days) you may have noticed a new and flashy travel booking platform being advertised of late — Vrbo, which stands for ‘Vacation Rental By Owner’. Vrbo is an online travel booking company and Expedia’s answer to Airbnb, the largest global player in home rental booking services. With Expedia looking to expand Vrbo’s reach and take market share from the largest player, this article will aim to examine how much of a threat Vrbo poses to the long term health of Airbnb and whether shareholders should worry about the competitive threats from the likes of Expedia.
The Tale of Two Platforms
Vrbo has actually been in existence for many years under the ownership of HomeAway, a company that also operated a similar homestay platform. Vrbo’s origins are explained by their name ‘Vacation Rentals’ and Vrbo’s customers are typically families with children looking to stay in a property exclusive to themselves. Both platforms, Vrbo and HomeAway, were bought by Expedia in 2015 with the acquisition of HomeAway. In 2020, Expedia merged both platforms into a singular entity under the Vrbo banner and has since stepped up its focus on growing the Vrbo platform into the large addressable market.
Airbnb, on the other hand, was set up by two entrepreneurs in 2008, who had the idea of putting up an air mattress in their San Francisco living room and turning it into a Bed and Breakfast. This idea culminated in the development of a website, ‘airbedandbreakfast.com’, which grew from airbeds and shared spaces into the short-term rental of all kinds of properties you see today. The company name was changed in 2009 to Airbnb. From humble beginnings Airbnb now boasts roughly 4 million hosts on its platform, allowing guests to stay in over 100,000 locations across the globe. Airbnb floated on the Nasdaq in 2020 and now has a valuation of $86 billion.
Current Market Dynamics
As you are likely aware, Airbnb is the market leader in home rental booking services, with a massive lead on any other booking platform. Vrbo has remained pretty dormant for many years. However, there are signs Vrbo is starting to chip away at Airbnb’s roster of hosts and potentially its customers. The Vrbo April ad campaign publicly trashes Airbnb’s customers, whilst also attempting to lure hosts with better rental economics. In March, The Wall Street Journal reported that Vrbo had launched a program to attract Airbnb’s top hosts by offering increased visibility of new properties and transferring their review score from Airbnb so that hosts can join its platform with immediate status. Data from Transparent, a booking platform analytics provider, suggests these campaigns are working; research citing this data suggested Airbnb lost 1 in 10 single-property hosts to Vrbo in the twelve months to March 31st.
Airbnb has faced a host of threats in recent years, from its own hosts to civil authorities looking to curb the rapid expansion of homeowner hotels in their cities. However, it seems as though this is one of the first times Airbnb has faced a credible and direct threat in its specific segment of the travel and tourism market.
So just how big a problem is Vrbo?
Montreal rental channel statistics — AirDNA
Using analytics platform AirDNA, we are able to see a snapshot of the platform skew for hosts in respective catchment areas. Whilst neither platform outwardly discourages listing on both platforms, a dual listing creates many headaches for hosts, who have to navigate two booking systems adding to complexities. Taking a broad view of 16 popular tourist cities, including New York, Sydney and Amsterdam, the combined results showed Airbnb has an 88.8% host share versus 5.3% for Vrbo, with 5.9% listed on both. Below, you are able to see city-by-city data for both respective platforms.
Source: AirDNA city host platform data
Looking at this data, you can see that despite having a shorter time in the market than Vrbo, Airbnb is the dominant force for hosting guests across the globe. Interestingly, on a locational basis, Vrbo does look to have taken share from Airbnb in some geographies, notably the US, with Chicago listings at 14% on the Vrbo platform. However, Vrbo is yet to even scratch the surface in some markets, particularly in Asia and South America, where although the revenue per guest is much lower, the sheer size of some of these markets is not to be underestimated. Looking to a market such as Beijing, where the catchment area for AirDNA delivered 21,000 available locations, 100% were listed on the Airbnb platform. Compare this to a market where Vrbo is reasonably strong, such as Chicago, only 5,500 listings are visible in the catchment area. To me, this speaks volumes to Airbnb’s brand and international reach and goes some way to explaining how much Expedia would have to spend on marketing the Vrbo platform just to chip away at the market Airbnb has created for itself.
So, we have spoken a little about the dynamics imposed on Airbnb from a host perspective, but what about customers?
Scanning the internet for reviews on the Airbnb platform itself can be tricky and somewhat misleading. Trustpilot customer reviews for Airbnb are 1.5/5 stars, otherwise known as ‘terrible’. But the number of reviewers is 7,000. Given that millions of people stay in Airbnbs in a given year, maybe Trustpilot’s reviewers are slightly skewed to those who want to dish some dirt on the platform! Or consequently, those who have had a bad experience with a host and wish to share the experience.
A better judge of the platform’s quality and thus the customer engagement would be the Apple App Store/Google Play reviews and download statistics. Both platforms score 4.8/5* on the App store, however, Airbnb scores 4.6/5* on Google Play Store versus 4.4/5* for Vrbo. The reviewer numbers paint a fascinating picture, with 1.1m reviews for Airbnb on the Google Play Store versus 20,000 for Vrbo. The download statistics for the pair are also drastically different, with 5m+ mobile downloads for Vrbo versus 50m+ downloads for the Airbnb mobile app.
Source: Google Trends
The above graphic shows the overall Google search trends for the two platforms over the last five years. Whilst web searches for Airbnb have been pretty volatile, and during the pandemic took a real hit, there has since been a recovery, and the gap between the two platforms has returned to its typically wide distance. Whilst both companies have shown little real growth in search term frequency over the last five years, clearly, Vrbo is not much further forward today in generating organic traffic than it was five years ago.
So, to summarise these various data points, it is looking likely that Vrbo remains a very small scale competitor to the global force that is Airbnb, and, thus far, Airbnb’s hosts and customer base remain intact.
Can Airbnb hold on to its position of strength?
Well firstly, there is an argument that keeping competitors like Vrbo away could be relatively easy due to the nature of network effects. The network effect is, by definition, the derived utility for a user of a platform based on the other number of users. In simple terms, the benefits of a platform grow with each additional user. This can be seen in various other industries and platforms such as property portals, social networking and even physical exhibition space. In the case of Airbnb, the sheer volume of customers ensures that hosts get competitive rates for their properties and the volume of hosts means that customers have a fantastic choice when choosing to book a short term rental. Let’s add in the fact that switching platforms may incur a risky loss of revenue for hosts and that customers may be wary of booking with less well-known platforms, and this creates a very compelling argument for Airbnb’s network effect to remain intact.
This network effect plays into another strength for Airbnb, which enables it to maintain a large gap between itself and any competition. Due to Airbnb’s powerful status as a booking platform, the company can enjoy significantly lower customer acquisition costs than competitors. Airbnb has become synonymous with booking a short term rental; the word has almost become a noun — when anyone says ‘let’s book an Airbnb for the weekend’ we are all aware of what they are referring to. This results in a much lower sales and marketing spend for Airbnb versus peers in the travel booking sector, with Airbnb’s sales and marketing expense for the last three years averaging 33%. This is compared to Vrbo’s owner Expedia, which typically spends 52-55% of revenues on sales and marketing. With sales and marketing expenses comprising the main cost for any online booking platform, the likelihood of competitors up-seating Airbnb with additional marketing is probably low, considering most competitors marketing budgets are likely at their proverbial limits.
Bringing it back to the specific threat from Vrbo, I would expect the damage Vrbo could inflict on Airbnb to be somewhat limited due to its ownership by Expedia. Expedia, being a listed entity with large institutional shareholders, has a responsibility to manage its entire business in a prudent fashion. Expedia has gone through a tough period, as its main booking business has faced a pandemic-related downturn, thus existing shareholders are unlikely to approve of an aggressive, capital-intensive marketing crusade against an incumbent such as Airbnb — a risky strategy that could put the existing business in jeopardy. Consequently, if Vrbo was in private equity or venture capital hands with deep pockets and cheap liquidity, I could see Vrbo posing a much bigger threat to Airbnb in the short term.
Is Airbnb better off with Vrbo in the market?
‘The only thing better than a monopoly is a near monopoly’ — Eddy Elfenbein
To quote one of my favourite investment writers, Eddy Elfenbein of crossingwallstreet.com, who wrote, “[w]ith investing, the only thing better than a monopoly is a near-monopoly. (The full-on monopolies tend to get too much government attention.)” I think that Airbnb could even be better off with a small competitor like Vrbo in the mix. We are aware that Airbnb has had high profile battles with regulators in the past — typically municipal bodies who aren’t impressed with rising rents, displacement of local residents and the likely lobbying from local hotel groups facing declining demand for overnight stays in the area due to a saturation of listings from personal homeowners. However, with other companies involved in the market to a minor extent, it makes Airbnb less of an easy target; regulators now have to face two entities and a growing network of stakeholders who may oppose heavy-handed regulation.
For me, the real benefit to competition is that it spurs innovation and drives companies to be better in order to win customers. Taking example from sport, would you expect any tennis, basketball or football player to play at the level or quality they do without competition? Maybe they wouldn’t need to in order to win, however, the point remains, the absence of competition doesn’t exactly stimulate performance. You can see this sort of theme playing out for Airbnb with their recent update to add over 100 innovations to its existing platform, creating credible benefits for both users and hosts. Whilst this may have occurred regardless of competitive threats, it is likely Airbnb focuses on developing and improving their product to remain abreast of competition.
In summary, Airbnb looks to have an extensive lead in its core offering, which leads to strong network effects and low customer acquisition costs. The threat from Vrbo pertains to be fairly minimal, and, whilst in the hands of Expedia, it is unlikely Vrbo can spend the sort of money required to make a real difference in up-seating the global market leader. Ironically, Vrbo’s inclusion in the home-owner rental market may even be net positive for Airbnb, as it makes Airbnb a harder target for regulators, increases total share of voice for home rental vacations and also spurs innovation in the space due to the nature of competition.
Airbnb may be a buy or a sell, depending on your investment style and perceptions of the company and the wider market, but in my opinion, Vrbo’s competitive activity should not be a deciding factor in the investment decision.