This year is shaping up to be the year when Airbnb gets all of its ducks in a row before the big IPO. Investing in adjacent businesses like Oyo is a major part of that strategy. But will any of this ultimately matter — or make a difference — once the company goes public?— Deanna TingSHARETweetSharePostSend
Recent news that Airbnb was considering an investment in fast-growing discount hotel chain Oyo, with mostly a footprint in Asia, underscored the homesharing giant’s quest to build greater global scale — and sent a message that it’s not planning to tap the brakes anytime soon even as it prepares for an eventual IPO.
Spokespeople for Airbnb in the U.S. and in Asia declined to comment on the report but did not deny the news either.
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A spokesperson from Oyo was a little more circumspect and gave Skift the following statement: “As the seventh largest hotel chain operator in the world, Oyo Hotels & Homes is working closely with a range of global distribution partners such as Airbnb and other regional and global players. Our mission is to create quality living spaces and offer those to guests and travelers across the world, and global strategic relationships support that work. None of these relationships are exclusive in nature as Oyo will always strive to offer its accommodation spaces to every potential guest. We don’t have anything further to share at the moment.”
The Oyo news came less than two weeks after Airbnb said it would be buying HotelTonight, a deal that sources told Skift was worth more than $400 million. These notable, back-to-back investments clearly demonstrate Airbnb’s drive to become a comprehensive travel marketplace.
Oyo may not be as recognizable or ubiquitous a name as Airbnb is on a global scale, but it has been catching the attention of a number of travel and technology industry executives for some time, recently raising a $1 billion round of funding with major help from SoftBank.
And it, too, like Airbnb, has grand ambitions to dominate travel and accommodations. In January, Oyo founder and CEO Ritesh Agarwal told Skift he believes Oyo will become the world’s largest hotel chain in terms of scale, revenue, and margin by 2023.
The company, which was launched in May 2013, today has more than 8,500 hotels in more than 230 different cities, but anticipates having more than 25,000 hotels by 2023. Its business model is an interesting, tech-driven twist on the traditional hotel franchise: Oyo signs up hotel owners and gets them to upgrade everything according to Oyo’s standards, offers them training and supplies, and then features those hotels — which often operate in the budget space — on its website, where rooms start for as little as $25 per night. Whenever a room is booked on its platform, Oyo takes a 25 percent commission, just as an online travel agency would. Oyo also markets those same rooms on other distribution channels, Airbnb included.
Airbnb, on the other hand, has been a leader in the private accommodations space and has recently expanded its investments to include in-destination tours and activities in addition to the recently announced plan to buy HotelTonight.
Tech-driven accommodation and marketplace models aside, however, why would a company like Airbnb be interested in investing in one like Oyo?
GETTING IPO READY
Most recently, Airbnb sold common shares of its company at a price that would value the company at roughly $35 billion, and the company has said it eventually intends to go public, likely next year.
Investing in a company like Oyo could be viewed as an attractive move by Airbnb’s investors, many of whom would view the move as a clear sign that the company is continuing to diversify its portfolio, as well as expand its global reach.
Airbnb, traditionally, has not been very acquisitive. The HotelTonight deal, when completed, marks the company’s largest acquisition to date.
And another Airbnb investment most similar to the company’s interest in Oyo would be Airbnb’s December purchase of French concierge services and property management company Luckey Homes.
As for other investments, the last major investment Airbnb has made in an outside company was for the female-focused co-working startup The Wing, for which it participated in a $75 million Series C funding round back in December.
As with its pending acquisition of HotelTonight, an investment in Oyo could potentially yield synergies for Airbnb that align with technology infrastructure, as well as building out the company’s hotel inventory.
GROWTH IN INDIA
Pursuing an investment in Oyo could be especially helpful for Airbnb’s growth in Asia, particularly in India where Oyo has a majority of its inventory.
Earlier this year, Airbnb reported that it saw a 65 percent growth in the number of guests it had in India in 2018, and the company also said that in 2019, it would “double our marketing investment in India,” according to Siew Kum Hong, regional director of Airbnb Asia-Pacific.
India is an important market for Airbnb, and CEO Brian Chesky last visited the country in 2017.
According to Indian government records obtained by Skift, Airbnb’s payments business in India generated approximately $2.8 million in revenue, and its other half of the business generated roughly $5 million in revenue from January 4, 2017, to March 31, 2018. In total, Airbnb saw modest revenue of $7.8 million in the country in that period.
In India, Airbnb has more than 40,000 listings, whereas Oyo has 170,000 rooms. The travel market in India, however, remains dominated by budget accommodations providers such as Oyo, and the venture capital market has flooded that accommodations sector, in particular, in the region.
Price may be a factor holding Airbnb back, or more precisely, the unusual dynamics at play in India’s online travel scene may have distorted the competitiveness of Airbnb’s main product.
In the past few years, venture-capital backed startups like Oyo and its smaller rivals Treebo and Fab Hotels have offered steep discounts for the budget hotel category. Roughly half of India’s domestic travelers shop for budget lodgings, according to a 2017 report by Google and Boston Consulting Group.
In other words, a large number of domestic Indian travelers find the consistent service promise of a budget hotel like an Oyo to be preferable to a comparably priced but less predictable homestay offered through a platform such as Airbnb. Oyo, for example, promises basic free Wi-Fi and daily housekeeping at its properties, while Airbnb leaves amenities up to individual hosts and delivery may vary.
For Airbnb to compete in such a market, it can’t necessarily rely solely on its budget-friendly or more value-driven listings as it does elsewhere in the world. Instead, in an effort to capture more of the upscale market, it has to offer a more premium product, which opens up some opportunities for its Airbnb Plus product, which has yet to arrive in India.
“India remains a very difficult market for Airbnb, and this was one of the reasons Oyo was able to scale up rapidly,” said Satish Meena, a senior forecast analyst and New Delhi team leader for Forrester Research. “The investment, if it pans out, will be an acceptance by Airbnb that the business model offered by Oyo in India is suited better to scale in Indian conditions. An investment in Oyo might give them a share in the pie, so to speak. The fight with Oyo is also going to be expensive and long which Airbnb is not looking to enter into currently. Having said that, Oyo also has a lot of challenges in India to make the business profitable, but as of now the fight is going on for acquiring the inventory and customer.”
Seth Borko, senior research analyst for Skift, said that an investment in Oyo could especially help the company in India.
“One potential reason why Airbnb might want to pursue this investment is as a hedge of sorts so that it can benefit from the growth of Indian tourism indirectly through a national champion if its first-party business struggles,” Borko said. “India can be a difficult nation for foreign companies to do business in, and there has been recent backlash against Western giants like Amazon and Walmart. Airbnb is making India a priority but that is no guarantee it can succeed there.”
GROWTH IN THE U.S.
Just as Airbnb faces some challenges in the India market, Oyo faces them in Airbnb’s home market of the U.S. Having just recently launched its business in the U.S. with an initial debut in Texas with its Townhouse brand name, Oyo is eager to go head to head with American economy lodging brands like Super 8 and Travelodge.
Airbnb has amassed a large audience of users both to its websites and its mobile app, and now that it’s featuring hotel product more and more — in addition to buying a hotel booking platform — that could work to Oyo’s benefit, too.
Oyo might find that actively marketing its product on Airbnb could cost less than using other online travel agencies or even Google’s own price-comparison search tool, and because the Oyo brand is relatively still new in the U.S., Airbnb’s platform could facilitate introduction to the U.S. market in a seamless way.
“A listing partnership where Oyo supply is available on Airbnb could be mutually beneficial for both companies. Oyo could potentially get access to more western inbound travelers to India, China, and Southeast Asia, its key markets, that are comfortable booking through Airbnb but would otherwise be unfamiliar or uncomfortable with Oyo,” Borko said.
“For Airbnb, adding hotel properties from one of the fastest growing hospitality companies in the world would be another step towards growing its traditional accommodation inventory. Airbnb has been adding to this inventory slowly, but steadily, through partnerships such as with Siteminder, or acquisitions as with HotelTonight. An Oyo partnership would continue this momentum and could eventually setup a challenge to traditional online booking sites like Expedia Group and Booking Holdings.”
For Airbnb, the potential for product synergies could be very attractive. Airbnb could benefit from Oyo’s distribution and product experience in terms of standardizing brand experience, especially when it comes to managing its own listings, especially the more highly vetted Airbnb Plus product if and when it comes to India.
India doesn’t yet have its own homegrown set of venture-backed property management companies that can offer a comparable service to Oyo’s, so at both ends of the spectrum — both budget and luxury — Airbnb may see potential product challenges in the market.
This is where Oyo’s expertise comes in. In 2017, for example, Oyo attempted to provide self-service independent homes and apartments that it managed with a minimum of service consistency. It brought on more than 3,500 units, which it intersperses within its search results. If Airbnb Plus or a similarly “vetted” type of homesharing product comes to India, Oyo could market it on its direct channels on behalf of Airbnb.
Furthermore, Airbnb could also enlist Oyo to manage a new category of lodgings that isn’t nearly as expensive as Airbnb Plus but has minimum quality standards, too.
Likewise, Oyo might benefit from learning from Airbnb as to how best to manage its own extended-stay home rental model, called Oyo Living, which was launched back in October and meant to target Indian next-generation, long-stay, and business travelers who have minimum stays of at least 30 days. Oyo Living is only available in India at the moment but will soon expand to Japan.
Oyo also has created other brands and is investing in them heavily: In January 2017, the company launched Townhouse, a managed hotel brand designed to function as social hotspot to cater to city dwellers and a new generation of guests.
In other words, both entities might benefit from each other in terms of how best to launch, manage, and expand their respective accommodations products, from the low to higher end.
DISTRIBUTION, SCALE, AND INVENTORY POWER
As many opportunities as there are between Oyo and Airbnb to benefit from one another when it comes to products, similar advantages apply to distribution, scale, and inventory.
Both companies gain to benefit from expanded access to new markets and customers, said Simon Lehmann, CEO and founder of AJL Consulting. “This type of investment can definitely help in terms of the types of guests you have, not just in supply but also in demand and the type of customer you address with brand value.”
Lehmann also said that by investing in Oyo, Airbnb is potentially allying itself with a formidable competitor, too. “It could also be perceived as Airbnb getting its hands on a potentially big competitor: ‘We don’t want to let them grow without us having a say in that.’” He noted that Oyo has raised $1 billion in capital in its latest round, while it has taken Chesky and his team longer to raise a billion in capital. “Airbnb knows Oyo has a lot of strength, and the growth rate of Oyo in India, Southeast Asia, and India is massive. Is this simply an acquisition or will a stake in Oyo help Airbnb because they view it as a potentially huge competitor that has seen some phenomenal growth and they want to be a part of that story?”
The fact that this potential investment is both global and allows for Oyo to retain its existing and future relationships with other partners is especially important.
For example, Oyo has formed an interesting marketing deal with MakeMyTrip, an India-based online travel agency. While both companies have not disclosed the terms of their contracts, other than to say they signed a new deal this month, industry observers have noted that since 2018, the typical Oyo hotel in India is bookable only within three days of arrival on Oyo’s own site, app, and on MakeMyTrip exclusively. Test searches conducted by Skift for individual properties on the sites for different dates support this observation. The exclusivity shared between Oyo and MakeMyTrip has made it a challenge for Booking.com, another rising player in the Indian domestic market, to access critical last-minute inventory.
Moreover, perhaps Airbnb might be interested in having a last-minute exclusivity option for Oyo’s inventory in the U.S. and Europe (perhaps even on HotelTonight, too?), giving Oyo more access to this audience of customers and helping broaden Airbnb’s distribution and inventory, as well as giving Airbnb an advantage over other online travel players, Booking Holdings included.
“An interesting connection between HotelTonight and Oyo is that both are mobile-forward hospitality companies,” said Borko. “HotelTonight was natively developed for mobile, and it only just a few months ago even started offering a desktop version. All of Oyo’s hotel software too has a strong mobile focus, and this includes back-end apps specifically designed to process franchise applications, manage hotel renovations, and for property management. The mobile approach is a competitive advantage in India where mobile is the device of choice to access the internet, effectively leapfrogging desktop browsers.”
Given Oyo’s other strategic partnerships with Grab and China Lodging, among others, a partnership with Airbnb will also help deepen and widen the expanse of Oyo reach.
THE BIGGER PICTURE FOR TRAVEL OVERALL
If Airbnb does indeed decide to invest in Oyo — it’s as good a guess as anyone’s whether an investment will actually take place, given Airbnb’s previous track record of rumored investments in such companies as Lyric and Sonder — it’s possible that the deal could be mutually beneficial for both entities as they seek more growth and better distribution on a global scale.
Other online travel agency competitors will likely take note, and more traditional lodging companies as well as similar hotel brands will also do the same. Online travel agencies will likely see this as a move toward more competition. Hotel brands will see if Oyo’s unique tech-driven economy brands can compete with their own. Consumers, ultimately, could benefit the most from increased inventory and access to accommodations.
Regardless, however, it’s not yet clear exactly what kind of impact this potential investment may have, warned Borko.
“We don’t know the details of this deal or if it even includes a partnership,” Borko said. “And this is only an investment, not an outright acquisition. So we may be overstating the importance of this deal too much.”
Not only that, but there’s also the much larger question to consider: As Airbnb expands its reach into other businesses and markets, does it risk losing its identity and brand value in the long run?
“Airbnb’s deep-down DNA is host-centric DNA, but I think they have realized that being host-centric doesn’t make a $30 billion valuation at IPO,” Lehmann said. Whereas Airbnb’s competitor, Booking.com, has focused primarily on transactions and getting hotel guests to book non-hotel accommodations, Airbnb has taken a different approach, piloting such products as Airbnb Trips and Airbnb Plus, testing the waters of luxury with Luxury Retreats, and even hiring a global head of transportation, and, most recently, deciding to buy HotelTonight and, perhaps, investing in Oyo.
“Combining all of that could be extremely powerful, and ultimately they want to build out an OTA [online travel agency] and move into the hotel space, but Oyo addresses a different type of customer that’s lower end and budget, and it also has a certain type of hotel experience; it’s another approach to the strategy,” he added.
As Airbnb continues to build itself into that end-to-end platform for travel, Lehmann warned the company needs to ensure it “doesn’t get too distracted by all the other things they are doing, and building the right brand-value recognition will be a massive challenge.” He continued, “What does Airbnb stand for at the end of the day? Does it stand for the sharing economy anymore? If their strategy isn’t focused enough, that could be dangerous as well.”
That danger becomes even more heightened when Airbnb starts being more than just a marketplace, as demonstrated by its Luckey Homes acquisition of a property management company. What happens if or when Airbnb invests in a company like Oyo that’s both marketplace and brand operator/manager?