Expedia’s Acquisition of HomeAway Is Coup to Destabilise Airbnb’s Force

In the past year, Euromonitor has frequently noted that consolidation in the lodging industry is due, and after last week’s news that Hyatt and Starwood are in advanced talks over a merger, it was Expedia’s turn yesterday to announce that it has agreed to acquire HomeAway for US$3.9 billion. Expedia has been on an accelerating buying spree this year, acquiring Travelocity for US$280 million, Orbitz for US$1.6 billion, and now HomeAway. Expedia’s other brands include Hotels.com, Hotwire.com and Trivago. HomeAway will continue to be run largely as a separate entity, but the acquisition is expected to be beneficial for both companies. Here we will discuss the short and longer term effects of the acquisition on HomeAway, Expedia and its main competitors.

Top Intermediaries, Hotels and Private Rental Platforms in 2014

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Source: Euromonitor International
Note: Intermediaries include gross bookings for all travel products. Hotel companies’ sales based on room revenues only.

Expedia pulls away from The Priceline Group with acquisition

In 2014, Expedia registered the highest value sales of any travel company at US$50.4 billion, although it was only slightly ahead of competitor The Priceline Group. The latter, with brands like Priceline, Booking.com, and Kayak, registered value sales of US$50.3 billion in 2014. The addition of HomeAway to Expedia’s portfolio will result in total sales of US$55.3 billion, and would therefore increase the lead of Expedia over The Priceline Group, and ensure the company remains the largest travel player.

Previous collaboration between Expedia and HomeAway led to nothing

HomeAway has previously partnered with Expedia, piloting an initiative to list 10,000 of HomeAway’s vacation rental listings on Expedia in 2013 and listing 115,000 rentals on Expedia in 2014, although the partnership seemed to become a side project for Expedia as it focused its attention on Travelocity and Orbitz. A possible breakthrough came at the beginning of August 2015, as Expedia Germany included properties from HomeAway’s German brand, FeWo-direkt.

This might have been a result of HomeAway’s announcement in June 2015 that it would collaborate with Kayak, a metasearch engine owned by Expedia’s competitor The Priceline Group. During the Q2 2015 earnings call, HomeAway’s CEO Brian Sharples noted that the expected roll-out of properties on Kayak will be before the end of 2015. With the announced acquisition, it is unlikely that the HomeAway-Kayak partnership will continue, and it can therefore be expected that Priceline will have to increase its focus on the holiday rental market through Booking.com.

Acquisition benefits both companies in fight against Airbnb

Expedia’s interest in HomeAway is, however, not solely based on outperforming The Priceline Group. The acquisition is a clear indicator that both HomeAway, portrayed as the main competitor of Airbnb, and Expedia are concerned about the threat Airbnb is posing to their business. Airbnb has taken big steps to boost vacation rentals on its platform –traditionally serviced by HomeAway – and there are growing indications that Airbnb will soon start to offer hotel rooms as well, which is Expedia’s primary lodging focus. With Airbnb announcing a collaboration with Virgin America to start offering an end-to-end product, the company is giving off signals that it wants to compete directly with online travel agencies like Expedia.

Expedia has generally prioritised hotels over vacation rentals in both search results and strategy despite its prior partnership with HomeAway, but the acquisition suggests Expedia is prepared to place more emphasis on rentals than before.  The move strengthens Expedia’s capacity in an increasingly important accommodation category and bolsters Expedia’s position as a travel booking company in a dynamic year for the industry that has included Expedia’s own corporate activity, TripAdvisor’s expansion into travel bookings, and rumours of potential new players including Google.

HomeAway has also announced its intention to change its business model. Until the end of 2013, HomeAway’s income was solely based on a subscription model. The company charged homeowners an annual fee of between US$349 and US$999, but did not receive any further income per booking. Its competitor Airbnb uses a pay-per-booking (PPB) model, taking 6-12% of the value of each booking from guests, and 3% from hosts. This model has proven much more lucrative, which has resulted in HomeAway introducing a PPB system early 2014, taking 10-20% per booking from hosts. It has further announced that it will start charging guests an average of 6% per booking, although specific details are not yet known.

Brian Sharples, CEO of HomeAway said in a statement that the acquisition will offer enhanced distribution, technology and expertise from Expedia. One specific area where HomeAway lags behind rival Airbnb is its online booking system. Earlier this year, during the Q2 2015 call, HomeAway stated that only 50% of its properties are bookable directly online, while agreements need to be made between hosts and guests on an ad-hoc basis for the other properties. The backing of Expedia will put HomeAway in a much better position to push for a fully online-bookable portfolio.

China: Future battleground?

Expedia sold its majority stake in eLong in May 2015 due to high competition in China, resulting in operating losses impacting the company’s global financial performance. Asia Pacific is currently the fastest growing region for the online travel intermediary category but is a region where Expedia has yet to gain a foothold.

HomeAway, on the other hand, is making headway in the Chinese market through a minority investment in Tujia, one of the most successful peer-to-peer platforms in China. Tujia has more than 200,000 listings, and went through a US$300 million funding at the end of July 2015. HomeAway properties can be found on Tujia’s platform for Chinese tourists looking to travel abroad. In an interview with Euromonitor earlier this year, co-founder and member of the Board of Directors at HomeAway Carl Shepherd, said:

“There is so much growth and competition in China’s short-term rental market that we have made the strategic decision to invest in a strong, local partner who can quickly react to the changing local market. My money is always on Chinese clones of foreign companies, because this is how China’s government works. What we put on Tujia from homeaway.com are homes that want to tap into Chinese travellers, and then their page is translated into Chinese. Tujia deals with this, and Chinese travellers can deal with Tujia.”

Unlike Airbnb, HomeAway has partnered with a very successful local player, which at the moment seems a safe and profitable bet.  HomeAway’s established presence in China can be a new way into this largely untapped market for Expedia. While The Priceline Group is a minority investor in CTrip, China’s most successful online travel agency, and Airbnb has found Chinese investors to back its ventures, Expedia is in dire need of expansion in the country, so as not to fall behind its competition. HomeAway could just turn out to be the gatekeeper.