City Insider: How to value a unicorn

A Morgan Stanley survey suggests hotel groups have little to fear from Airbnb but online travel agents should tremble. City Insider David Stevenson explains

A word today on the vexed subject of ‘unicorns’, the term given to start-ups such as car-hailing app Uber which have attained a valuation of more than $1 billion.

These create a huge amount of excitement among investing and venture-capital types as well as massive cynicism among pretty much everyone else.

In travel I think it is fair to say there ‘good’ unicorns where many see the sense in the valuations put on a firm. Into this category I would put Skyscanner, which was recently reported to be worth over $1 billion after a £65-million fund raising.

There are also ‘bad’ unicorns where virtually everyone thinks the valuation is utterly ludicrous. Into this latter category I would probably put Airbnb.

Obviously I’m not saying the business is bad – though talk to some city officials in places like New York City and they sound fairly annoyed – just that on no possible, sensible basis could Airbnb really be worth $25 billion.

I say this because if one looks at the main competitors to Airbnb, the big hotel groups boasting huge asset backing, that $25 billion valuation looks crazy.

Hilton, for instance – not a bad brand by any yardstick – is worth $24 billion. Marriott and Starwood combined are worth $30 billion and Wyndham is worth a paltry $9 billion.

This ridiculous debate about how much a disruptive technology is worth obscures a more interesting question that has been taxing analysts on Wall Street. Is Airbnb worth this sum because it will truly destroy the existing hotel model?

I’ve always thought that notion laughable – I have never even been remotely tempted to use the service – and a recent widely reported analysis by Brian Nowak’s team at US bank Morgan Stanley rightly identified the more likely potential victims of Airbnb’s disruption as the OTAs.

Nowak’s team came to a number of fascinating conclusions based on a survey of 4,000 travellers:

  1. Airbnb is geared more toward leisure than business travel – the survey reckons only 42% of Airbnb customers are eschewing traditional hotels, and the vast majority of Airbnb guests stay three to five nights.
  2. Airbnb attracts customers from ‘no hotel’ categories. In fact 36% of the company’s customers are switching from bed and breakfast accommodation, while 31% use Airbnb instead of staying with friends and family.
  3. Airbnb’s cannibalising of hotel demand hurts travel agencies more than hotels. If Airbnb really looks dangerous and truly opens up new demographics, why not work with it and dump the OTAs?Remember that OTAs currently charge around 12% to 18% on transactions, while Airbnb charges 3%.“We think investors overestimate Airbnb’s threat to hotels … but underestimate its threat to OTAs,” the Morgan Stanley report concludes.
  4. Airbnb has a huge awareness problem. In Morgan Stanley’s survey only 12% of respondents said they had used the home-rental site. Among those who had never tried Airbnb, 59% said they had never even heard of it.

As I’ve been ruminating in this column for many months, I see lots of problems ahead for the big OTAs and the rise of the sharing economy is just another potential weakness in their business model.

If this analysis is right for hotels, we could even see lower-cost travel operators start to look at the model offered by AirBnb and buddy up with them.

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