The hotel industry used to be a one-sided market where bookings were mostly arranged by travel agencies. This changed due to the introduction of the internet and the rise of platforms. On these platforms, demand and supply interactions are facilitated in order to create value.
A great example is Airbnb, which created a consumer-to-consumer platform to solve the problem of traveler accommodation. With Airbnb, people can both book and offer a place to stay. More rooms available on Airbnb, means more renters and more renters will lead to more rooms. This effect is referred to as a positive cross-side network effect.
Industry Disruption
Due to platforms like Airbnb the whole industry structure is disrupted. This can be explained by looking at porter’s five forces, operational activities and the value chain.
The emergence of platforms has reduced the barriers to entry. All that is required to enter the hotel industry is an available room. This also caused a decrease in the bargaining power of suppliers. Some of this bargaining power shifts to the end consumer, since more information is available online. Also, the rivalry among the competitors has gotten fiercer with the introduction of platforms. Airbnb can reach long-tail consumers, and by doing so, they have effectively expanded the market.
Looking at the operational activities it can be seen that, contrary to traditional businesses, platforms control very few recourses. Additionally, Platforms are less concerned with optimizing internal processes, as there simply are fewer compared to traditional businesses. Lastly, Platforms do not deal directly with customer, and therefore for do not focus on creating customer value. Instead, their focus is on managing the amount of interactions.
There is also a change in value chains. A traditional value chain consists of independent companies each trying to add value individually. The value chain of a platform combines the value of all members by funneling both consumers and producers into one financial chokepoint. This newly created ecosystem can make use of demand side economies of scale, resulting in stronger network effects, which increases the size of the ecosystem.
Future prediction
Below we will summarize the characteristics of the platform based hotel industry and look at how the platform structure is expected to develop based on these characteristics.
The first characteristic is the “Strength of Network effects”. The supply-side encounters negative same-side effects, as an increased competition will scare of new suppliers. However, the positive cross-side network effects will overcome this effect. In addition, positive same-side effects occur for the demand-side, as a larger amount of end-users will add value through reviews and by sharing experiences.
A second characteristic is that ‘Multi-Homing Costs’ are relatively low. Both the demand and supply do not face high switching costs.
The last characteristic of the industry is that there is a ‘High Demand for Differentiated Features’.
Based on this information we can predict that there is no potential for a ‘Winner-takes-all-market. The industry is rather looking at a Multi-homing industry, with multiple platforms offering similar services.
