EXHIBIT 3 Airbnb Estimated Revenue and Bookings Growth, 2010-2017 (in millions) Costs 2011 2012 2013 2014 2015 2016 2017 Estimated Revenue $6 $44 $132 $264 $436 $675 $945 $1,229 Estimated Bookings Growth 273% 666% 200% 100% 65% 55% 40% 30% Source: Ali Rafat, "Airbnb's Revenues Will Cross Half Billion Mark in 2015," Analysts Estimate, March 25, 2015, skift.com/2015/03/25/airbnbs-revenues-will-cross- half-billion-mark-in-2015-analysts-estimate/. Airbnb and other similar companies, however, with this change seemed to be how the consumer operated through offering a technological platform, had deemphasized ownership. Instead of focusing on where individuals with spare capacity could offer ownership, consumers seemed to prefer sharing or their services. By leveraging the ubiquitous usage of renting. Other startup companies have been targeting smartphones and the continual decrease in technol- these segments through subscription-based services ogy costs, these companies provided a platform for and on-demand help. From luxury watches to cloth- individuals to instantly share a number of resources. ing, experiencing-and not owning-assets seemed to Thus, a homeowner with a spare room could offer it be on the rise. Citing a more experiential-based econ- for rent. Or, the car owner with spare time could offer omy, Chesky believed Airbnb guests desired a commu- [his or her] services a couple of nights a week as a taxi nity and a closer relationship with the host-and there service. The individual simply signed up through the seemed to be support for this assertion.' A recent platform and began to offer the service or resource. Goldman Sachs study showed that once someone The company then charged a small transaction fee as used Airbnb, their preference for a traditional accom- the service between both users was facilitated. modation was greatly reduced. The appeal of the Within its business model, Airbnb received a per- company's value proposition with customers had centage of what the host received for the room. For allowed it to readily raise capital to support its growth, Airbnb, its revenues were decoupled from the conside including an $850 million cash infusion in 2016 that erable operating expenses of traditional lodging estab- raised its estimated valuation to $30 billion. A com- lishments and provided it with significantly smaller parison of Airbnb's estimated market capitalization to operating costs than hotels, motels, and bed and break- the world's largest hoteliers is presented in Exhibit 4. fasts. Rather than expenses related to owning and oper- ating real estate properties, Airbnb's expenses were that of a technology company. Airbnb's business model in EXHIBIT 4 2017, therefore, was based on the revenue-cost-margin structure of an online marketplace, rather than a lodg- Estimated Market Capitalization ing establishment. With an estimated 11 percent fee per Comparison, 2016 (in billion $) room stay, it was reported that Airbnb achieved profit- Market Capitalization ability for a first time in 2016.* The company's revenues Competitor (in billions $) expected to increase from an estimated $6 million in Marriott International Inc. $40 2010 to a projected $1.2 billion by 2017 (see Exhibit 3). Airbnb 30 Hilton Worldwide Holdings 22 A Change in the Consumer Experience Intercontinental Hotels Group 11 and Rate Airbnb, however, was not just leveraging technology. Sources: Yahoo Finance (accessed June 20, 2017); "Airbnb Settles Lawsuit It was also leveraging the change in how the current with its Hometown, San Francisco," New York Times, https://www.nytimes. com/2017/05/01/technology/airbnb-san-francisco-settle-registration-lawsuit. consumer interacted with businesses. In conjunction [html (accessed June 20, 2017).EXHIBIT 1 EXHIBIT 2 Hotel, Motel, and Bed and Breakfast Major Market Segments for Hotels/ Industry Costs as Percentage of Motels and Bed and Breakfast/Hostels Revenue, 2015 Sectors, 2015 Costs Hotels/Motels Bed and Breakfasts Market Segment B&Bs Hotels Wages 26% 23% Recreation 80%* 70%* Purchases 27% 21% Business 12% 18% Depreciation 10% 9% Other, including meetings 8% 12% Marketing 2% 2% Total 100% 100% Rent and Utilities 8% 11% Other 12% 16% The bed and breakfast market is primarily domestic. "Includes both domestic and international travelers. Approximately 20 percent Source: www.ibisworld.com, rounded to nearest percent. is associated with international travelers. Source: www.ibisworld.com. they competed for all segments of travelers. Amenities, to city, state, and federal regulations. These regula- including on-premise spa facilities and fine dining. tions covered areas such as the physical property were often offered by the hotel. Further, properties and food safety, access for persons with disabilities, offering spectacular views, bolstering a hotel as the and even alcohol distribution. Owners and operators vacation destination, may contribute to significant were subject to paying fees for different licenses to operating costs. In total, wages, property, and utilities, operate. Due to operating as a business, these prop- as well as purchases such as food, account for 61 per- erties and the associated revenues were also subject cent of the industry's total costs (see Exhibit 1). to state and federal taxation. Bed and breakfasts, however, were much smaller, In addition to regulations, the need to construct usually where owner-operators offered a couple of physical locations prevented hotels and motels from rooms within their own home to accommodate guests. expanding quickly, especially in new international The environment of the bed and breakfast-one of a markets. Larger chains tended to expand by purchas- cozy, home-like ambience-was what the guest desired ing preexisting physical locations, or through merg- when booking a room. Contrasted with the hotel or ers and acquisitions, such as Marriott International motel, a bed and breakfast offered a more personal- Inc.'s acquisition of Starwood Hotels and Resorts ized, yet quieter atmosphere. Further, many bed and Worldwide in 2016. breakfast establishments were in rural areas where the investment to establish a larger hotel may have been cost prohibitive, yet the location itself could be A Business Model an attraction to tourists. In these areas individuals invested in a home and property, possibly with a his- for the Sharing Economy torical background, to offer a bed and breakfast with Startup companies have been functioning in a space great allure and ambience for the guests' experiences. commonly referred to as the "sharing economy" Thus, the bed and breakfast competed through offer- for several years. According to Chesky, the previ- ing an ambience associated with a more rural, slower ous model for the economy was based on owner- pace through which travelers connected with their ship. Thus, operating a business first necessitated hosts and the surrounding community. A compari- ownership of the assets required to do business. son of the primary market segments of bed and break- Any spare capacity the business faced-either within fasts and hotels in 2015 is presented in Exhibit 2. production or service-was a direct result of the pur- While differing in size and target consumer, all chase of hard assets in the daily activity of conduct- hotels, motels, and bed and breakfasts were subject ing business.case 1 Airbnb, Inc., in 2017 connect JOHN D. VARLARO Johnson & Wales University JOHN E. GAMBLE Texas A&M University-Corpus Christi "In the future, you will own what [assets] you want due to city and state ordinances governing hotels responsibility for," commented CEO and founder of and apartment leases. Stories of guests who would Airbnb, Brian Chesky, concerning the sharing econ- not leave and hosts needing to evict them because omy in an interview with Trevor Noah on The Daily city regulations deemed the guests apartment leasees Show in March 2016.' Airbnb was founded in 2008 were beginning to make headlines. when Chesky and a friend decided to rent their apart- As local city and government officials across the ment to guests for a local convention. To accommo- United States, and in countries like Japan, debated date the guests, they used air mattresses and referred regulations concerning Airbnb, Brian Chesky needed to it as the "Air Bed & Breakfast." It was that week- to manage this new business model, which had led to end when the idea-and the potential viability-of a phenomenal success within a new, sharing economy. peer-to-peer room-sharing business model was born. While not yet a publicly traded company in 2017, Airbnb had seen immense growth and success in its Overview of Accommodation nine-year existence. The room-sharing company had Market expanded to over 190 countries with more than 3 mil- lion listed properties, and had an estimated valuation Hotels, motels, and bed and breakfasts competed of $30 billion. Airbnb seemed poised to revolution- within the larger, tourist accommodation market. All ize the hotel and tourism industry through its busi- businesses operating within this sector offered lodg- ness model that allowed hosts to offer spare rooms or ing, but were differentiated by their amenities. Hotels entire homes to potential guests, in a peer-reviewed and motels were defined as larger facilities accom- digital marketplace. modating guests in single or multiple rooms. Motels This business model's success was leveraging what specifically offered smaller rooms with direct parking had become known as the sharing economy. Yet. lot access from the unit and amenities such as laundry with its growth and usage of a new business model, facilities to travelers who were using their own trans- Airbnb was now faced with resistance, as city offi- portation. Motels might also be located closer to road- cials, owners and operators of hotels, motels, and bed ways, providing guests quicker and more convenient and breakfasts were all crying foul. While these tradi- access to highways. It was also not uncommon for tional brick-and-mortar establishments were subject motel guests to segment a longer road trip as they com- to regulations and taxation, Airbnb hosts were able muted to a vacation destination, thereby potentially to circumvent and avoid such liabilities due to par- staying at several motels during their travel. Hotels, ticipation in Airbnb's digital marketplace. In other however, invested heavily in additional amenities as instances, Airbnb hosts had encountered legal issues Copyright @ 2017 by John D. Varlaro and John E. Gamble.Recognizing this shift in consumer preference, tra- Airbnb guests. Hosts might also be exposed to liabil- ditional brick-and-mortar operators were responding. ity issues in the instance of an injury or even a death Hilton was considering offering a hostel-like option of a guest. to travelers. Other entrepreneurs were constructing Finally, there were accusations of businesses using urban properties to specifically leverage Airbnb's Airbnb's marketplace to own and operate accommo- platform and offer rooms only to Airbnb users, dations without obtaining the proper licenses. These such as in Japan where rent and hotel costs were locations appeared to be individuals on the surface, extremely high. but were actually businesses. And, because of Airb- To govern the community of hosts and guests. nb's platform, these pseudo-businesses could operate Airbnb had instituted a rating system. Popularized and generate revenue without meeting regulations or by companies such as Amazon, eBay, and Yelp. claiming revenues for taxation. peer-to-peer ratings helped police quality. Both In 2016, however, Airbnb had acted in response guests and hosts rated each other in Airbnb. This to some of these issues. A report was written and approach incentivized hosts to provide quality ser- released by Airbnb, detailing both discrimination on vice, while encouraging guests to leave a property its platform and how it would be mitigated. Airbnb as they found it. Further, the peer-to-peer rating also settled its lawsuit with San Francisco. The city system greatly minimized the otherwise significant was demanding Airbnb enforce a city regulation task and expense of Airbnb employees assessing and requiring host registration, or incur significant fines. rating each individual participant within Airbnb's As part of the settlement, Airbnb agreed to offer platform. more information on its hosts within the city. Not Playing by the Same Rules Local and global businesses criticized Airbnb for "We Wish to Be Regulated; This what they claimed were unfair business practices and Would Legitimize Us" lobbied lawmakers to force the company to comply Recognizing that countries and local municipalities with lodging regulations. These concerns illuminated were responding to the local business owner and how due to its business model, Airbnb and its users their constituents' concerns, Chesky and Airbnb seemed to not need to abide by these same regula- have focused on mobilizing and advocating for con- tions. This could have been concerning on many sumers and business owners who utilize the app. levels. For the guest, regulations exist for protection Airbnb's website provided support for guests and from unsafe accommodations. Fire codes and occur hosts who wished to advocate for the site. A focal pation limits all exist to prevent injury and death. point of the advocacy emphasized how those particu- Laws also exist to prevent discrimination, as tradi- larly hit hard at the height of the recession relied on tional brick-and-mortar accommodations are barred Airbnb to establish a revenue stream, and prevent the from not providing lodging to guests based on race inevitable foreclosure and bankruptcy. and other protected classes. But, there seemed to be Yet, traditional brick-and-mortar establishments evidence that Airbnb guests had faced such discrimi subject to taxation and regulations have continued nation from hosts." to put pressure on government officials to level the Hosts might also expose themselves to legal and playing field. "We wish to be regulated; this would financial problems from accommodating guests. legitimize us," Chesky remarked to Noah in the same There had been stories of hosts needing to evict interview on The Daily Show." Proceeding forward guests who would not leave, and due to local ordi- and possibly preparing for a future public offering. nances the guests were actually protected as apart- Chesky would need to manage how the progressive ment leasees. Other stories highlighted rooms and business model-while fit for the new, global sharing homes being damaged by huge parties given by economy-may not fit older, local regulations