Airbnb in 2016: A BusinessModel for the Sharing Economy

In the future, you will own what[assets] you want responsibility for,"commented CEO and founder ofAirbnb, Brian Chesky, concerning the sharing economy in aninterview with Trevor Noah on The Daily Show in March2016.¹ Airbnb was founded in 2008 when Chesky and afriend decided to rent their apartment to gu 1s for a localconvention. To accommodate the guests, they used air mattresses andreferred to it as the "'Air Bed & Breakfast." It was thatweekend when the idea­ and the potential viability-of apeer-to-peer room­ sharing business model was born. While not yet apublicly traded company in 2016, Airbnb had seen immense growth andsuccess in its eight-year exis­ tence. The room-sharing company hadexpanded to over I90 countries with more than 2 million listedproperties, and had an estimated valuation of $30 billion. Airbnbseemed poised to revolutionize the hotel and tourism industrythrough its business model that allowed hosts to offer spare roomsor entire homes to potential guests, in a peer-reviewed digitalmarketplace.

This business model's success wasleveraging what had become known as the sharing economy. Yet, withit5 growth and usage of a new business model, Airbnb was now facedwith resistance, as owners and operators of hotels, motels, and bedand breakfasts were crying fowl. While these tradi­ tionalbrick-and-mortar establishments were subject to regulations andtaxation, Airbnb hosts were able to circumvent and avoid suchliabilities due to par­ ticipation in Airbnb's digital marketplace.In other instances, Airbnb hosts had encountered legal issues due10 city and state ordinances governing hotels and apartment leases.Stories of guests who would noy leave and hosts needing to evictthem because city regulations deemed the guests apartment leas­ eeswere beginning to make headlines. As local city and governmentofficials across theUnited States, and in countries like Japan,debated regulations concerning Airbnb, Brian Chesky needed 10manage ibis new business model, which had led to phenomenal successwithin a new, sharing economy.

OVERVIEW OF ACCOMMODATIONMARKET

Hotels, motels, and bed andbreakfasts competed within the larger, tourist accommodationmarket. All businesses operating within this sector offeredlodging, but were differentiated by their amenities. Hotels andmotels were defined as larger facilities accommodating guests insingle or multiple rooms. Motels s pecifically offered smallerrooms with direct parking Jot access from the unit and ameni­ tiessuch as laundry facilities to travelers who were using their owntransportation. Motels might also be located closer to roadways,providing guests quicker and more convenient access to highways. Itwas also not uncommon for motel guests to seg­ ment a longer roadtrip as they commuted to a vacation destination , therebypotentially staying at several motels during their travel. Hotels,however, invested heavily in additional amenities as they competedfor all segments of travelers. Amenities, including on-premise spafacilities and fine dining, were often offered by the hotel.Further, proper­ ties offering spectacular views, bolstering ahotel as the vacation destination, may contribute to sig­ nificantoperating costs. In total, wages, property, and utilities, as wellas purchases such as food, account for 61 percent of theindustry'stotal costs.

Bed and breakfasts, however, weremuch smaller, usually where owner-operators offered a couple ofrooms within their own home to accom­ modate guests. Theenvironment of the bed and breakfast-one of a cozy, home-likeambience-was what the guest desired when booking a room.Con­trasted with the hotel or motel, a bed and breakfast offered amore personalized, yet quieter atmosphere. Further, many bed andbreakfast establishments were in rural areas where the investmentto establish a larger hotel may have been cost prohibitive, yet thelocation itself could be an attraction to tourists. In these areasindividuals invested in a home and prop­ erty, possibly with ahistorical background, to offet a bed and breakfast with greatallure and ambience for the guests' experiences. Thus, the bed andbreakfast competed through offering an ambience associated with amore rural, slower pace through which travel­ ers connected withtheir hosts and the surrounding community. A comparison of theprimary market segments of bed and breakfasts and hotels in 2015ispresented in Exhibit 2.

While differing in size and targetconsumer, all hotels, morels, and bed and breakfasts were subjectto city, state, and federal regulations. These regula­ tionscovered areas such as the physical propertyand food safety, accessfor persons with disabilities, and even alcohol distribution.Owners and operators were subject to paying fees for differentlicenses to operate. Due to operating as a business, these prop­erties and the associated revenues were also subject to stateandfederal taxation.

A BUSINESS MODEL FORTHE SHARING ECONOMY

Startup companies have beenfunctioning in a space commonly referred to as the "sharingeconomy" for several years. According to Chesky, the previ­ ousmodel for the economy was based o n owner­ship. Thus, operating abusiness first necessitated ownership of the assets required to dobusiness. Any spare capacity the business faced-ither withinproduction or service- was a di.reel result of the purchase of hardassets in the daily activity of con­ ducting business.

Airbnb and other similar companies,however, operated through offering a technological platform, whereindividuals with spare capacity could offer their services. Byleveraging the ubiquitous usage of smartphones and the continualdecrease in technol­ ogy costs, these companies provided a platformfor individuals to instantly sharea number of resources. Thus, ahomeowner with a s pare room could offer it for rent Or,thecarowner with spare time could offer (his or her) services acouple of nights a week as a taxi service. The individual simplysigned up through the platform and began to offer the service orresource. The company then charged a small transaction fee as theservice between both users was facilitated.

Within its business model, Ai.rbnbreceived a percentage of what the host received for the room. ForAirbnb, its revenues were decoupled from the considerable operatingexpenses of traditional lodg­ ing establishmentsand provided itwith significantly smaller operating costs than hotels, motels, andbed and breakfasts. Rather than expenses related to own­ ing andoperating real estate properties, Ai.rbnb's expenses were that of atechnology company. Airl>­ nb's business model in 2016,therefore, was based on the revenue-cost-margin structure of anonline marketplace, rather than a lodging establishment, with anestimated 11 percent fee per room stay.⁴ The company'sbusiness model that generated fees from room bookings had allowedits revenues to increase from an estimated $6 million in 2010 to aprojected $1.2 billion by 2017.

A Change in the ConsumerExperience and Rate

Airbnb, however, was not justleveraging technol­ ogy. It was also leveraging the change in howthe current consumer interacted with businesses. In conjunctionwith this change seemed to be how the consumer had deemphasizedownership. Instead of focusing on o wnership, consumersseemed to prefer sharing or renting. Other startup compa­nies havebeen targeting these segments through subscription-based servicesand on-demand help. From luxury watches to clothing, experiencingand not owning-assets seemed to be on the rise. Citing a moreexperiential-based economy, Chesley believed Airbnb guests desireda community and a closer relationship with the host-and thereseemed to be suppon for this assertion.5 A recent Goldman Sachsstudy showed that oncesomeone used Ai.rbnb, their preference for atraditional accommodation was greatly reduced.6 The appealof the company's value proposition with customers had allowed it toreadily raise capital to support its growth, including an $850million cash infusion in 2016 that raised its estimated valuationto $30 billion.

Recognizing this shift in consumerpreference,traditional brick-and-mortar operators were respond­ing. Hilton was considering offering a hostel-like option totravelers.7 Other entrepreneurs were con­structing urban propertiesto specifically leverage Ai.rbnb's platform and offer rooms only toAi.rbnb users, such as in Japan8 where rent and hotel costs wereextremely high.

To govern the community of hosts andguests, Ai.rbnb had instituted a rating system. Popularized bycompanies such as Amazon, eBay, and Yelp, peer-to-peer ratingshelped police quality. Both guests and hosts rated each other inAirbnb. This approach incentivized hosts Lo provide quality ser­vice, while encouraging guests to leave a propeny as they found itFurther, the peer-to-peer rating system greatly minimized theotherwise significant task and expense of Airbnb employeesassessing and rating each individual participant within Airbnb'splatform.

Not Playing by the Same Rules

Local and global businessescriticized Airbnb for what they claimed were unfair businesspractices and lobbied lawmakers to force the company to comply withlodging regulations. These concerns illuminated how due to itsbusiness model, Airbnb and its users seemed to not need to abide bythese same regulations. This could have been concerning on manylevels. For the guest, regulations exist for protection from unsafeaccommodations. Fire codes and occupation limits all exist toprevent injury and death. Laws also exist to preventdiscrimination, as traditional brick-and-monar accommodations arebarred from not providing lodging to guests based on race and otherprotected classes. But, there seemed to be evidence that Airbnbguests had faced such discrimination from hosts.⁹

Hosts might also expose themselves to legalandfinancial problems from accommodating guests. Therehad been storiesof hosts net"11ing to evict guests who would not leave, and due tolocal ordinances the guests were actually protected as apartmentleasees. Other stories highlighted rooms and homes being damaged byhuge parties given by Airbnb guests. Hosts might also be exposed toliability issues in the instance of an injury or even a death of aguest. Finally,therewere accusations of businesses using Airbnb'smarketplace to own and operate accommo­ dations without obtainingthe proper licenses. These locations appeared to be individuals onthe surface, but were actually businesses. And, because of Airb­nb's platform, these pseudo-businesses could operate and generaterevenue without meeting regulations or claiming revenues fortaxation.

"We Wish to Be Regulated, This Would LegitimizeUs"

Recognizing that countries andlocal municipalities were responding to the local business ownerand their constituents' concerns, Chesky and Airbnb have focused onmobilizing and advocating for con­ sumers and business owners whoutilize the app. Airbnb's website provided suppon for guests andhosts who wished to advocate for the site. A focal point of theadvocacy emphasized how those par­ ticularly hit hard at the heightof the recession relied on Airbnb to establish a revenue stream,and prevent the inevitable foreclosure and bankruptcy.

Yet, traditional brick-and-mortarestablishments subject to taxation and regulations have continuedto put pressure on government officials to level the playing field."We wish to be regulated, this would legitimize us,"Chesky remarkedto Noah in the same interview on The Daily Show.10Proceeding forward and possibly preparing for a future publicoffering, Chesky would need to manage how their progressivebusiness model-while fit for the new, global shar­ ing economy- maynot fit older, local regulations.

1) DIAGNOSIS: A somewhat detailed analysis and summary of thebackground factors, issues, events, actions, and facts leading upto the problem(s) involved in the case or incident. What has beenhappening that brought about and culminated in the particulardifficulties or problems now facing us?

2) FOCAL POINTS FOR ACTION:Identify the real problems and issuesto be resolved. This step is critical: do not be misled orsidetracked by irrelevant details or mere symptoms. (Pigors givesthis illustration: “A young man graduated with honors from atop-ranking business school. Presumably he should have been wellprepared to tackle administrative problems. But he failed to makegood on his first job. He rationalized his failure by saying: “Ifonly someone would give me a problem, I know I could solve it. Butall I can see here is a mess!”)

3) DEVELOP ALTERNATIVES: Starting with your definition of theproblem(s), identify possible alternative courses of action, and evaluate them in terms of possibleconsequences, feasibility, practicality, and success.

4) DECISION AND RECOMMENDATION: As a result of your evaluationin step 3, decide upon a course of action. Make a recommendation asto the ‘best’ alternative to be adopted, in your judgment.Recognizing that there is seldom if ever ‘one right answer’, it isimportant that your conclusion be supported by adequate, reasonableexplanation, evidence, logic and justification. BUT MAKE ADECISION, right or wrong: remember that we must be actionoriented.

5) IMPLEMENTATION: Consider and explain the implementation ofyour recommendation. Anticipate problems or obstacles toimplementing your action plan. Who must do what? How? What abouttiming, short-range and long-range? Provisions for control andfollow-up?