Airbnb has agreed to acquire discounted last-minute hotel booking platform HotelTonight. Specific pricing details haven't been disclosed, though the amount is reportedly near the company's most recent valuation of $463 million, according to The New York Times and Bloomberg.

This marks the largest acquisition to date for Airbnb, which previously purchased high-end travel website Luxury Retreats for about $300 million in 2017. Rumors of the hospitality giant's acquisitive interest in HotelTonight became public in January; a Wall Street Journal report on a prospective deal came just a few months after HotelTonight CEO Sam Shank said in a television interview with Bloomberg that he was "definitely thinking" about an IPO.

Interestingly, when asked how he viewed competition from Airbnb at the time, Shank told Bloomberg: "We see them as incredibly complementary to what we do."

In contrast to Airbnb's rapid growth, HotelTonight has had a more modest funding history. Founded in 2010, the San Francisco-based company raised a $3.25 million Series A the following year at a $15 million valuation. But that value quickly grew to $331 million with a $45 million round in 2013 and then $463 million with a $37 million round in 2017. Previous investors include Accel, Battery Ventures and Aspect Ventures. In 2015, the company laid off 20% of its workforce as it sought profitability, per TechCrunch, a milestone it eventually reached.

Safety in (hotel) numbers

The HotelTonight acquisition falls contrary to Airbnb's established pattern of competitive harm to the hotel industry.

An early 2018 scholarly research report by Harvard Business School assistant professor Chiara Farronato and MIT postdoctoral fellow Andrey Fradkin analyzed the 10 US cities that hosted Airbnb's largest market share in 2014. The local hotel industry in each city reported an average 1.5% net loss in revenue and a 1.3% loss in total nights booked after Airbnb established a presence. As the company has since grown significantly and added additional services since 2014, the damage to hotels has most likely grown considerably.

The HotelTonight acquisition therefore partially represents a diplomatic offering to the weakened hotel industry and an acknowledgment of Airbnb's inability to fully meet existing demand, such as during surges caused by local conventions and festivals.

Regarding the acquisition, Shank stated in a news release: "[W]e knew people wanted a better way to book an amazing hotel room on-demand, and we are excited to join forces with Airbnb to bring this service to guests around the world. Together, HotelTonight and Airbnb can give guests more choices and the world's best boutique and independent hotels a genuine partner to connect them with those guests."

Beyond competition with the hotel industry, many cities, such as Seattle, San Francisco and New York have accused Airbnb of harming local housing availability by motivating landlords to offer properties to short-term visitors on Airbnb rather than providing long-term leases to residents.

New York City, for example, passed a bill in July 2018 that would've allowed the city to more easily determine whether a property owner was legitimately renting spare living space or illegally appropriating long-term rental properties for short-term Airbnb use, contributing to a housing shortage. The bill was blocked by a federal judge in January and remains under appeal.

By acquiring HotelTonight, Airbnb is hedging against potential future regulations limiting rental availability due to local housing laws. If a city, such as New York, were to further regulate Airbnb's presence, eliminating high-volume hosts and a significant amount of listings in the process, the platform could use HotelTonight's supply to replace the lost revenue. This would lead to retention of customers that would otherwise have to resort to other lodging options outside the platform.

In addition to existing customer retention, hotels serve as an extension and a sales funnel for new customers to its core hosting business. As potential customers search many platforms for lodging options, cold prospects disinterested in Airbnb's private host offerings may become warm prospects upon seeing established, traditional hotel offerings at discounted prices. The company claims that almost 90% of first-time customers that booked a hotel room through Airbnb's existing limited selection later returned to book a private host listing.

As legal challenges in New York, Miami Beach, Los Angeles, Boston and other cities threaten a significant chunk of Airbnb's core hosting business, the company's hotel offerings may grow in demand as customers rely on the traditional lodging option when hosts are short in supply. This, in turn, may lead to a smoother, less legally-difficult road for the company to grow in coming years, particularly with an IPO expected sooner rather than later.

Related content