Airbnb vs The Hotel Industry, Who Will Win

As Airbnb, the largest peer-to-peer exchange service for hospitality around the world, continues to grow, the government has taken notice. New York Attorney General Eric Schneiderman argues that Airbnb rentals should be regulated like hotels and Airbnb providers should be subject to hotel occupancy taxes.

Airbnb argues its business model merely connects hosts who rent out their private property to short-term subletters. Though major hotel chains like Marriot, Four Seasons and Hilton insist the primary demographics of their hotel patrons differ vastly from Airbnb's guests, and their revenues have not been affected, in the age of Internet disruption, one might assume the hotel industry has been negatively affected by the rise of Airbnb.

Understanding price structure, Airbnb's primary demographic, and a variety of other factors will illuminate the fundamental differences between the hotel industry and Airbnb. (For more, see: Make Money Fast From The New 'Sharing Economy'.)

Airbnb

Airbnb has seen rapid growth from its inception in 2008. With revenues of $250 million in 2013, it doubled its revenues from 2012 and promises to do the same in 2014. With 800,000 listings in 192 countries, Airbnb has established itself as the largest peer to peer hospitality service.

Airbnb’s business model focuses on a marketplace platform where hosts and guests exchange housing for money. Throughout the application process, hosts and guests can find reviews and social media connections to build trust amongst users in the marketplace. While valuable, this approach is not unique to Airbnb. With the influx of digital technology, users can dictate their experiences and affect future consumers' choices through a number of online platforms. While board review systems are not available directly on hotel websites, third party platforms such as Yelp or Expedia provide the same service.

Pricing Structure

While Airbnb provides a platform for peer-to-peer exchanges, it does not have a direct effect on the prices of lodging offered by hosts. Airbnb hosts follow guidelines similar to those used by hotels when renting their homes. Guests seeking short term lodging under 7 nights are likely to pay a premium compared to those seeking longer term stays. When listing your home on Airbnb, hosts have the liberty to set prices for individual nights, weekly stays, cleaning fees, weekend prices and additional guests.

Like in hotels, rooms fetch a premium price on weekends, holidays and when guests exceed number of beds. However hotel visits do not charge a cleaning fee as most hotels have on-staff cleaning services. Furthermore, hotel rooms and Airbnb lodgings are more expensive in higher-demand areas such as major cities or tourist attractions.

In major cities, rent and cost of living is much higher; thus hosts and hotels must factor the rents of a premium location into their prices. However, a major hotel chain maintains a pricing scheme that meets consumer demand, while Airbnb hosts have the liberty to charge what they deem appropriate. In many cases, prospective consumers find that Airbnb offers a less expensive alternative to many hotels. (For more, see: Websites That Save You Money On Hotel Rooms.)

Primary Demographic

Thus far it is inconclusive whether the explosive growth of Airbnb has had an effect on the hotel industry. Visitors of major hotel chains such as Hilton and Marriott are luxury and business travelers. Airbnb does not operate in the same space: it offers vacation rentals and homey environs to low-budget consumers.

While Airbnb rentals and high end hotels do not cross paths, it may be the case that low-end hotels and motels have seen losses due to Airbnb. An average hotel room offers consumers a bed, bathroom and closet with varying levels of comfort. Alternatively, an average apartment offers the same luxuries plus a kitchen a larger living space. For families or groups on vacation, hotels can be limiting while an apartment can be more accommodating.

So far, Airbnb has not entered the high-end hotel market. However travelers charging expenses to their companies are beginning to seek increased amounts of business accommodations from Airbnb. Concur, a business travel and expense management platform, has confirmed this trend by recording a growing number of Airbnb bookings amongst corporate clients.

Taxes and Regulations

A primary difference between the hotel industry and Airbnb is the presence of taxes and regulations in short term rentals. In New York, the term "hotel" includes hotels, motels, inns, B&BS, apartment hotels and condos. Rentals in this category require operators to collect an additional sales tax based on the charge of the room. Furthermore, hotels in New York City must charge a hotel unit fee of $1.50 per day and additional occupancy taxes.

As a prime point of contention, Airbnb has not been subject to occupancy tax laws and has forgone paying the local government’s sales tax. Like a hotel though, Airbnb incorporates a value-added tax within its service fees. A value added tax is a tax assessed on the final sale of goods and services typically associated with accommodations within the European Union. Due to different tax laws, Airbnb and hotels do not charge a VAT to every guest.

Airbnb has been fortunate to avoid many rental and hotel tax laws thus far. Regulations and property laws can be a major concern for hosts. In many states there exist squatter laws in which visitors occupying a space for more than 30 days by law attain tenant rights for the rented space. Furthermore in certain states, it is illegal to sublet a residential space such as a home, apartment or room for fewer than 30 days unless the resident is present at the same time as the guest.

The Bottom Line

Hotel lobbyists and state governments continue to try and impose taxes and regulations on Airbnb as it continues its rapid growth. With recent valuations of over $10 billion, Airbnb will be valued more than several individual hotel chains. Without directly providing a good to consumers, Airbnb has dipped into revenues of lower end hotel groups. As the sharing economy continues its quick ascension, Airbnb may soon disrupt high end hotel revenues the way other sharing economy services like Uber did to taxi services.