Airbnb’s ascent to the top
EIS Mini-Project Report
October 7, 2013
Michael White
Kanav Abrol
Airbnb – EIS Mini-Project Report
Contents
Overview ....................................................................................................................................................... 3
The world before Airbnb ............................................................................................................................... 4
Founders – Vision and Timing ....................................................................................................................... 4
Growth .......................................................................................................................................................... 5
Context in which Airbnb came about ........................................................................................................... 6
Online travel agents were already established......................................................................................... 6
eBay had established the model for a 2 sided marketplace ..................................................................... 6
Creating a review system ...................................................................................................................... 6
Creating a payment mechanism ........................................................................................................... 6
It was hard to find a cheap room to stay ................................................................................................. 7
Airbnb Business Model ................................................................................................................................. 7
Commission based business model .......................................................................................................... 7
Network effects......................................................................................................................................... 7
International expansion ............................................................................................................................ 8
Economies of scale .................................................................................................................................... 9
Great cash flows...................................................................................................................................... 10
Providing more value .............................................................................................................................. 10
How the Airbnb ecosystem evolved ........................................................................................................... 10
The traditional hotel ecosystem before internet ................................................................................... 10
The advent of online booking agents gave a huge boosts to standalone BnBs because they were more
discoverable now and could build their reputation ............................................................................... 11
Medium term rental ecosystem ............................................................................................................. 11
Long term rental ecosystem ................................................................................................................... 12
Launch of Airbnb – MVE ......................................................................................................................... 12
Airbnb expanding its ecosystem from its initial MVE ............................................................................. 13
Airbnb Ecosystem – How Airbnb aligned the interests of different actors ................................................ 14
Airbnb at a Glance....................................................................................................................................... 15
Conclusion ................................................................................................................................................... 16
2
Airbnb – EIS Mini-Project Report
Overview
Airbnb is short for AirBed & Breakfast. Started in 2008 by roommates Brian Chesky and Joe Gebbia, it is
meant to be a lower cost alternative to a hotel stay for both business and pleasure travelers. Airbnb
connects people who need a place to stay with people who have place to spare.1 By acting as the
intermediary, Airbnb takes advantage of a growing segment of peer-to-peer transactions. While many
entrepreneurs have tackled the business-to-business (B2B) business model in order to find success,
Airbnb follows the path blazed by such sites as eBay or Craigslist.
Airbnb makes money primarily from service fees when members book a place to stay. They charge a
service fee anywhere from 6 to 12% depending on the price of the booking as well as a 3% flat “hosting”
fee. 2
Like many peer-to-peer business, Airbnb uses its website as well as phone apps in order to conduct their
transactions. Airbnb also considers itself a social networking site, and often plays this up as part of their
offering.
Both hosts and guests must create a profile and can be reviewed by those they have transacted with.
Airbnb attempts to not only offer a place to stay, but create connections and learning opportunities
between its members. Members have the ability to search offerings for anything from floor space to a
private castle and all things in between. Hosts can offer a shared room, a private room in an occupied
place or an entire residence.
1
2
Hosting Manual, 2013. https://www..com/downloads/HostingManual_en.pdf
Hosting Manual, 2013. https://www..com/downloads/HostingManual_en.pdf
3
Airbnb – EIS Mini-Project Report
The world before Airbnb
Airbnb was not the first site to offer or even focus on private short-term rentals for travelers. Craigslist,
couchsurfing.com, vrbo, and homeaway.com among others all offered similar products to Airbnb. There
was a time in which these options were not around. Travelers were dependent upon hotels, motels,
campgrounds and friends in order to find a place to stay while traveling. Longer stays could be arranged
through a real estate broker or occasionally found in a newspaper, but there was no significant presence
of private offerings for one to seven night stays. Travelers were reliant on the professional lodging
sector and travel agents (though less frequently) for the majority of their transactions.
Although websites such as priceline.com, orbitz.com, and hotels.com among others had already made a
significant impact on a travelers ability to see, compare, and choose their best lodging option, what we
refer to as the “private” destinations were still an untapped resource for travelers. Brokers and travel
agents were not incentivized enough to focus on or compete in a traditional travel booking where hotels
were most often the best option. Finding competitive prices for short-term guests was neither a
lucrative endeavor nor best use of one’s time. There was no room for an intermediary or traditional
broker.
In 2012, The American Hotel and Lodging Association put total industry revenue at $155.5 billion with
60% of travelers doing so for pleasure and 40% for business. Only 34% spend over three nights at a
destination while paying on average $107 per night.3 Tracking the private rental market is somewhat
difficult and likely best done by looking at numbers produced by Airbnb. Taxes and legal issues likely
make most numbers prior to Airbnb and similar websites fairly vague.
Founders – Vision and Timing
Brian Chesky and Joe Gebbia founded Airbnb out of creative necessity. Unable to afford their high rent
in San Francisco, they opened their doors to travelers attending a conference nearby. They offered
Airbeds and home cooked breakfast as well as a networking opportunity. The roommates enjoyed this
experience and thought others might as well. After recruiting a third more tech savvy member, Nathan
Blecharczyk 4 the three friends launched airbedandbreakfast.com. They focused on areas with large
events and minimal alternative lodging options. The company has benefited from time in an incubator in
San Francisco as well from over $119 million in VC funding. Along with some very prominent names in
the VC world, Airbnb is also lucky enough to call Ashton Kutcher an investor and brand Advisor. 5 A wellknown celebrity advisor can mean a great deal to a young company.
3
American Home and Lodging Association Home Page. http://www.ahla.com/content.aspx?id=35603
Best Young Tech Entrepreneurs, BusinessWeek.
http://images.businessweek.com/ss/09/04/0421_best_young_entrepreneurs/9.htm
5
An Actor Who Knows Start Ups. New York Times, May 25, 2011
http://www.nytimes.com/2011/05/26/technology/26ashton.html?_r=0
4
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Airbnb – EIS Mini-Project Report
The company quickly realized that brokering sleepovers in and of itself would not drive the company to
success. By focusing on not only offering a dizzying array of places to stay, Airbnb’s founders
concentrated on making their site unique through the benefits of social networking. Like amazon, eBay,
and now Uber (ride sharing), Airbnb uses a modified Facebook style community in order for people to
track and review each other. The commitment to this side of the business has helped Airbnb become
more than just another rental-listing site.
There is any number of terms used to describe the rise of peer-to-peer businesses in the vein of Airbnb.
They take advantage of what many call the share economy6 or collaborative consumption7. Airbnb is
most definitely a product of timing and co-innovation. The progression of the internet and mobile
applications have opened up new doors for businesses and added to the arsenal of informed consumers.
That coupled with the need for lower cost vacation lodging as the economy tumbled created an
environment for Airbnb to thrive. Private home sharing may not offer many of the perks of a traditional
hotel stay, but it is certainly an attractive alternative. Most notably, Airbnb represents a more attractive
price, but it also can offer a more engaging or diverse travel experience for many road warriors.
Not only did Airbnb come up with an innovative strategy for travelers away from home, it also gave
established a new source of income available to many homeowners and renters. The slowing economy
meant the return of staycations, in which individuals or families stayed home instead of travelling. More
importantly for people not only looking to save, but to earn, Airbnb created an alternative source of
income for very little work. The biggest demand on hosts is the removal of privacy in certain aspects of
their lives, but otherwise renting/sharing one of your assets is a very simple source of income.
The idea behind Airbnb is by no means proprietary or patent pending. However, the strong backing of
VC firms and the early buzz surrounding the company gave them an opportunity to grow through
acquisitions both in the United States and abroad. Airbnb was able to grow extremely fast in an
environment where their company was seen as disruptive to the lodging industry.
Growth
Located in San Francisco, California, Airbnb has over 34,000 cities in 192 countries worldwide. The site
has booked over 8.5 million “guests” and their 2012 estimated revenue was about $180 million.8 As a
private company, their numbers are not released for public consumption. They have grown from 3
founders in 2008 to approximately 130 employees today. There are 12 office locations worldwide while
6
Airbnb and the Unstoppable rise of the Share Economy. Robes. 1/23/2013
http://www.forbes.com/sites/tomiogeron/2013/01/23/airbnb-and-the-unstoppable-rise-of-the-share-economy/
7
Airbnb: Our Rooms Should Be Taxed Like Hotels. 10/3/2013 http://www.wired.com/business/2013/10/airbnbtaxes/
8
Who Will Get Rich From Airbnb Sky High Valuation. Forbe. 10/19/2012
http://www.forbes.com/sites/calebmelby/2012/10/19/peter-thiel-may-invest-150-million-in-airbnb-at-2-5-billionvaluation/
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Airbnb – EIS Mini-Project Report
their headquarters remains in San Francisco. By 2012, Airbnb helped over 60,000 people book a place to
stay in one day. At the moment, Airbnb continues to attract a significant amount of first time users to
their site or mobile app. Returning customers give a company staying power, but they must be recruited
first. It is clear Airbnb is doing fine in that department.
Users of the site have the ability to choose from over 500,000 locations and the list grows daily. Airbnb
lists not only rooms and apartments, but also a few more adventurous lodging options including tree
houses, castles, islands, boats, igloos, and trailers. Pictures, videos, and detailed descriptions help users
sift through a plethora of options in a straightforward manner. The lodging industry has been put on
alert.
Context in which Airbnb came about
Online travel agents were already established
By 2008, online travel agents like Priceline and Expedia were well established. In fact we had players like
Kayak, which were meta search engines and allowed customers to search for hotels for hotel rooms
across the hotels inventory directly as well as across other online travel agents such as Expedia,
Travelocity, Orbitz etc. This meant that customers were comfortable with the idea of booking their
hotels online.
eBay had established the model for a 2 sided marketplace9
eBay started out as an auction site and then evolved into a larger ecommerce marketplace. Initially it
allowed people to sell things they were no longer using. This was like taking a garage sale to a national
market. This created a large catalogue of goods that were available through eBay and the network effect
led to eBay growing exponentially since opening its digital doors in the 1995.
Creating a review system
eBay did face adoption challenges. It was very hard for people to trust each other. They did not want to
buy goods from anonymous users. Since social networking had not been invented at this point, there
was no way to establish people real identity. eBay decided to create a rating system that allowed both
buyers and sellers to rate each other. People with higher ratings were able to sell their goods faster.
Creating a payment mechanism10
One of the major challenges of buying online was making the payments. Give how new ecommerce was,
people were afraid of sharing their credit card details. PayPal created a system to make payments in a
safe secure way. Overtime, PayPal became popular and the most prevalent way of making payments on
eBay. In 2002, eBay bought PayPal.
9
http://en.wikipedia.org/wiki/EBay
http://en.wikipedia.org/wiki/PayPal
10
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Airbnb – EIS Mini-Project Report
It was hard to find a cheap room to stay 11
When the Airbnb founders were visiting San Francisco, they found it difficult to find a place to stay since
most hotels seemed to have been booked. Sometime later when there was a design conference in San
Francisco and Chesky and Gebbia figured out that all the hotels were full. They decided to rent a room in
their apartment for the duration of the conference. They built a website to take the bookings and asked
the conference organizers to link to their website. This worked so well that they repeated this model for
many conferences subsequently.
They soon realized that there was a need in the market for people to stay for short term and they
wanted to solve it.
Airbnb Business Model
Commission based business model
Airbnb allows hosts to list their rooms at any rate they want for free and whenever a guest books the
room they charge between 9% and 15% as a commission.
Network effects
As Airbnb has expanded they have created a tremendous network effect which has led to an
exponential pace of growth. This is primarily been caused by the fact that they are the largest repository
of rooms and have therefore been attracting increasing numbers of both guests and hosts. Their
reputation system also reinforces the network effect since building a reputation on the platform is time
consuming and therefore switching to another platform has high switching costs.
11
http://www.scott-sherwood.com/airbnb-case-study-what-are-your-thoughts/
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Airbnb – EIS Mini-Project Report
12
Exponential growth
International expansion
Since the platform is online and because a lot of the people travel internationally, it made sense for
Airbnb to expand internationally. It started by simply allowing people from outside the US to list their
rooms but it soon opened local offices to study the local markets. Airbnb now provides a lot of
information about the local neighborhoods in the many cities across the world where it has its listings.
Their business model was relatively easy to scale given the nature of the industry it was operating in. By
opening local offices it was able to offer the professional photography services in these international
markets besides producing contents for these local markets.
Airbnb’s first international acquisition happened in 2011 when it acquired Accoleo, which was dubbed
as the Airbnb of Europe.13
12
http://techcrunch.com/2013/02/07/airbnbs-big-2012-4x-guest-growth-and-2x-the-number-of-listings-in-over150-countries-worldwide/
13
http://techcrunch.com/2011/06/01/airbnb-buys-german-clone-accoleo-opens-first-european-office-inhamburg/
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Airbnb – EIS Mini-Project Report
Airbnb now has offices in 12 different countries, and lists rooms in 192 countries.14
Economies of scale
Like most online businesses, Airbnb enjoys great economies of scale. Most of the costs are involved in
developing the underlying technology platform and in marketing the platform to reach wide audiences.
Adding more rooms or more guests to the system does not consume a whole lot of additional resources.
Airbnb is a high fixed costs, low variable costs business. This has hastened its expansion internationally
including it buying other similar business abroad. It bought Crashpadder, based in London, right before
the Olympics to capture the huge surge in the demand for rooms.15
14
15
https://www.airbnb.com/annual/
vhttp://blogs.wsj.com/tech-europe/2012/03/21/airbnb-buys-competitor-for-london-olympics/
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Airbnb – EIS Mini-Project Report
Great cash flows
Airbnb manages the payment process between the host and the guest. It charges the guests the fees for
their stay (or part of a fee in case of long stays). It relays this fee to the host one day after the guest has
checked in. In the meantime, the guest’s money stays with Airbnb. This way Airbnb has a negative
networking capital which it can use to finance its rapid expansion.
Providing more value
In December 2012, Airbnb acquired Localmind16 to help its users figure out what interesting events are
taking place in their local community. This makes users engage with Airbnb in a more fruitful way. They
use this service even outside of their the mere transaction of just booking a room, but they now use
Airbnb to constantly as they travel to understand which events or activities they want to attend. This
way Airbnb is able to addict users to its service thereby further entrenching itself in the market and
increasing the user’s switching costs.
How the Airbnb ecosystem evolved
The traditional hotel ecosystem before internet
Conventional
Travel Agents
Hotels
Loyalty
Programs/
Direct Billing
Regulations
16
http://blog.airbnb.com/welcome-localmind-to-the-airbnb-family
10
Travelers
Airbnb – EIS Mini-Project Report
The advent of online booking agents gave a huge boosts to standalone BnBs
because they were more discoverable now and could build their reputation
Conventional
Travel Agents
Online Travel
Agents
Hotels
Trip Advisor
(Third Party
Reviews)
Standalone Bed
and Breakfast
Travelers
Loyalty
Programs/
Direct Billing
Regulations
Medium term rental ecosystem
People with
space to sublet
Craigslist /
Classifieds
11
Visitors needing
place for short term
stay (few
weeks/months)
Airbnb – EIS Mini-Project Report
Long term rental ecosystem
House owners
with houses to
rent
Realtors /Trulia
/Zillow
People needing
housing for long
term stay (year long
leases)
Launch of Airbnb – MVE
Reputation
(Review
System)
Individuals
with ROOMS to
let
Market Place
12
Travelers
Airbnb – EIS Mini-Project Report
Airbnb expanding its ecosystem from its initial MVE
Airbnb Sequencing
Reputation
(Review
System)
1
Positive feedback –
people who enjoy
their stay eventually
let out their own
beds
1
Individuals
with BEDS to
let
Market Place
Credibility
(Professional
Photos)
Regulator
Safety
(Insurance)
Travelers
2
3
Court
Identity
(Verify using
SSN/ Social
networks)
Legislators
On going Legal
Issues
13
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Airbnb – EIS Mini-Project Report
Airbnb Ecosystem – How Airbnb aligned the interests of different actors
Players
Perceived Benefits
Perceived Cost
Airbnb's alignment strategy
Fear of Room not
being there
Assurance that if booked room is not
available or if it was a fake listing, then an
alternate room is provided
Fake Listings
4 way Verification of all hosts using a
physical id, a social network, email and
phone
More Personal - Get to
know new people
Availability - Rooms even
available in peak seasons
such as
concerts/conferences in
small towns
Not being able to
see the room
Allowing hosts to upload photos and
location on map; Providing professional
photographer for free
Time to search
through so many
options
Algorithms to surface the right rooms
Rent a room on specific
dates/ short term
Not knowing the
guests
Rating system and references that guests
can provide
Transparent and flexible
pricing
Guests ransacking
the place/stealing
Insurance from Airbnb to cover major
losses or damages
Clean up required
after guests leaves
Provision for charging guests a one-time
clean up fees
Potentially Cheaper
More Variety/Lots of
options
Traveler
Host
Potential boost to tourism
Regulato
rs/Legisla
tors
New
Player Urban
Bellhop
Taking pictures of
the house
Free professional photographer available
Taking business
away from existing
constituents - Hotels Fought the case in courts
Lack of minimum
standards
Tax loss since hosts
are not paying
tourism tax
Both Hosts and guests
benefits from the services
they provide which makes
exchanging keys, getting
the house cleaned and
providing concierge services
easy
Hosts and Guests
have to pay money
to use this service
14
Tight monitoring of hosts and guests and
using review system to enforce quality of
stay
Still fighting in courts
Airbnb might try to start providing such a
service in future as a convenience for its
customers and to get some additional
revenue
Airbnb – EIS Mini-Project Report
Airbnb at a Glance17
17
http://www.probnb.com/10-million-nights-booked-in-airbnb
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Airbnb – EIS Mini-Project Report
Conclusion
In theory it would have been possible to rent a room for a few days even 10 years ago. It never
happened since there were many different attributes of a market place that did not exist before Airbnb
came along. It was able to aggregate the demand, intermediate the financial transition, verify the
identity of both parties and finally it was able to underwrite the experiences of both sides the
transaction. Airbnb essentially was able to remove the friction from a marketplace that could have
emerged a long time ago but needed someone to provide the infrastructure as well as take some risks.
Though Airbnb is currently the leader in peer-to-peer room rentals market, it has yet to solve many legal
hurdles to gain further legitimacy. It is fighting a case in New York to understand whether it is legal for a
host to rent to a guests, especially given the rent control laws there. The regulators are now taking
notice of Airbnb, given its now huge scale, and are trying to figure out how they can regulate Airbnb and
its hosts as hotels. If the hosts were to be considered hotels, then they would require various
permissions to operate and would have to comply with hotel codes such as marking the nearest fire
exits. Such regulatory move would not only threaten Airbnb but the entire sharing economy. Thankfully
Airbnb has gotten favorable ruling in NY on Sep 27, 2013.18
Another major challenge facing Airbnb is that if
the hosts are considered operators of hotels,
then they would have to collect tourism tax.
This would surely adversely impact Airbnb’s
market, making it harder for hosts to enroll and
adding an administrative burden for Airbnb.19
Airbnb is part of the new sharing economy that
has been expanding rapidly over the past few
years. 3.5 Billion dollars are expected to flow
through this sharing economy that includes
Airbnb, Uber, RentTheRunway, TaskRabbit etc.
Airbnb is clearly making the right moves to
make the most of this opportunity.20
Airbnb’s Brian Chesky on the Cover of Forbes
Magazine’s February 11, 2013, with the story
“Airbnb And The Unstoppable Rise Of The Share
Economy”21
18
http://news.cnet.com/8301-1023_3-57605081-93/airbnb-helps-tenant-win-appeal-in-ny-rental-case/
http://www.economist.com/news/technology-quarterly/21572914-collaborative-consumption-technologymakes-it-easier-people-rent-items
20
http://www.forbes.com/sites/tomiogeron/2013/01/23/airbnb-and-the-unstoppable-rise-of-the-share-economy/
21
http://www.forbes.com/sites/tomiogeron/2013/01/23/airbnb-and-the-unstoppable-rise-of-the-share-economy/
19
16