Airbnb In 2018 John D. Varlaro Johnson & Wales University and a friend decided to rent their apartment to guests for @ local convention. To accommo- date the guests they used air mattresses and referred to it as the “Air Bed & Breakfast.” It was that week: end when the idea—and the potential viability—of a peerto-peer roomsharing business model was born. By 2018, Airbnb had seen immense growth and suc- cess in its 10-year existence, The roomsharing com- pany had expanded to dver 190 countries with more than 4 million listed properties, and had an estimated valuation of $31 billion. Airbnb seemed poised to revolutionize the hotel and tourism industry through its business model that allowed hosts to offer spare rooms or entire homes to potential guests, in a peer reviewed digital marketplace. This business mode’s success was leveraging what had become known as the sharing economy. Yet, with its growth and usage of a new business model, Airbnb was now faced with resistance, as city officials, owners and operators of hotels, motels, and bed and breakfasts were all erying foul. While these traditional brick-and-mortar establishments were sub- ject to regulations and taxation, Airbnb hosts were able to circumvent and avoid such liabilities due to participatio i's digital marketplace. In other instances, Airbnb hosts had encountered legal issues due to city and state ordinances governing hotels and apartment leases, Stories of guests who would not leave and hosts needing to evict them because city regulations deemed the guests apartment leasees ‘were beginning to make headlines. AAs local city and government officials across the United States, and in countries like Japan, debated regulations concerning Airbnb, Brian Chesky needed \ irbnb was founded in 2008 when Brian Chesky John E. Gamble ‘Texas A&M University-Corpus Christi to manage this new business model, which had led tp phenomenal success within a new, sharing economy, OVERVIEW OF ACCOMODATION MARKET Hotels, motels, and bed and breakfasts competed within the larger, tourist accommodation market, All businesses operating within this sector offered lodg. ing, but were differentiated by their amenities. Hotels and motels were defined as larger facilities accom ‘modating guests in single or multiple rooms. Motels specifically offered smaller rooms with direct parking lot access from the unit and amenities such as laun ry facilities to travelers who were using their own transportation. Motels might also be located closer to roadways, providing guests quicker and more con venient access to highways. It was also not uncom ‘mon for motel guests to segment a longer road trip as they commuted to a vacation destination, therehy potentially staying at several motels during theit ‘ravel. Hotels, however, invested heavily in additional amenities as they competed for all segments of t8¥ elers, Amenities, including on-premise spa facilities and fine dining, were often offered by the hotel Further, properties offering spectacular views, bo stering a hotel as the vacation destination, may cot ‘tribute to significant operating costs, In total, wages property, and utilities, as well as purchases such # food, accounted for $9 percent of the industry’s tot costs—see Exhibit 1. Conyigt ©2018 by John D. Vaso and John E, Gamble. Al his reservedEXHIBIT 1 Hotel, Motel, and Bed & Breakfast Industry Costs as Percentage of Revenue, 2017 c nes wages 24% 19% purchases 27% 2% Depreciation 10% o% erketing 2% 2% Rent and Utlties 8s 11% otner 13% 2% oe reson ewe, Bed and breakfasts, however, were much smaller, usually where owneroperators offered a couple of rooms within their own home to accommodate guests. ‘The environment of the bed and breakfast—one of cozy, homelike ambiencé—was what the guest desired when booking a rooms. Contrasted with the hotel or motel, a bed and breakfast offered a more personal- ined, yet quieter atmosphere. Further, many bed and 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 4 attraction to tourists, In these areas individuals invested in a home and property, possibly with a his- ‘orial background, to offer a bed and breakfast with sat allure and ambience for the guests’ experiences. Thus, the bed and breakfast competed through offer- ing an ambience associated with a more rural, slower Pace through which travelers connected with their 4osts and the surrounding community. A comparison ofthe primary market segments of bed and breakfasts ‘nd hotels in 2017 is presented in Exhibit 2. While differing in size and target consumer, all Hotels, motels, and bed and breakfasts were subject to city state, and federal regulations. These regulations Covered areas such as the physical property and food ‘aly, access for persons with disabilities, and even ‘cohol distribution. Owners and operators were sub- ‘R210 paying fees for different licenses to operate. "eto operating as a business, these properties and CASE Airbnis In 2018 or EXHIBIT 2 Major Market Segments for Hotels/Motels & Bed & Breakfast/Hostels Sectors, 2017 Recreation 80% 70% Business 12% 10% ‘Other, including 3% 12% meetings Total 100% 100% “The bed & breakfot market wes primary domestic. “includes both domestic an Iternatonal wave Approximately 20% was essocated with infrsaion! raveers. Source: www ibieworldcom. the associated revenues were also subject to state and federal taxation, In addition to regulations, the need to construct physical locations prevented hotels and motels from expanding quickly, especially in new international markets. Larger chains tended to expand by purchas- ing preexisting physical locations, or through merg- ers and acquisitions, such as Marriott International Inc's acquisition of Starwood Hotels and Resorts Worldwide in 2016. A BUSINESS MODEL FOR THE SHARING ECONOMY Startup companies have been functioning in a space commonly referred to as the “sharing economy” for several years. According to Chesky, the previous model for the economy was based on ownership. ‘Thus, operating a business first necessitated owner. ship of the assets required to do business. Any spare capacity the business faced—either within production or service—was a diréct result of the purchase of hard assets in the daily activity of conducting business. Airbnb and other similar companies, however, operated through offering technological platform, where individuals with spare capacity could offer their services. By leveraging the ubiquitous usage of smart phones and the continual decrease in technologycs PART 2. Cases in Crafting and Executing Strategy costs, these companies provided a platform for indi viduals to instantly share a number of resources, ‘Thus, a homeowner with a spare room could offer it for rent, Or, the car owner with spare time could offer {his or her] services a couple of nights a week as a taxi service. The individual simply signed up through the platform and began to offer the service or resource. ‘The company then charged a small transaction fee as the service between both users was facilitated. Within its business model, Airbnb received a percentage of what the host received for the room. For Airbnb, its revenues were decoupled from the considerable operating expenses of traditional lodg- ing establishments and provided it with significantly smaller operating costs than hotels, motels, and bed and breakfasts. Rather than expenses related to ow Jing and operating real estate properties, Airbnb’s expenses Were that of a technology company. Airbnb's business model, therefore, was based on the revenue- costmmargin structure of an online marketplace, rather than a lodging establishment. With an est mated I! percent fee per room stay, it was reported that Airbnb achieved profitability for a first time in 2016.? Airbnib’s revenues were estimated to increase from approximately $6 million in 2010 to a projected $1.2 billion in 2017—-see Exhibit 3. However, it was announced in an annual investors’ meeting that the Company had recorded nearly $3 billion in revenue and earned over $90 million in profit in 2017.3 A CHANGE IN THE CONSUMER EXPERIENCE AND RATE Airbnb, hoviever, was not just leveraging technology. It ‘was also leveraging the change in how the current con sumer interacted with businesses. In conjunetion with, EXHIBIT 3 Airbnb Estimated Revenue and Bookings Growth, 2010-2017 (in millions) 20102014 Estmated Revenue $6 $44, Estimated Bookings Growth 273% 666% 012 $132 200% this change seemed to be how the consumer had gg phasized ownership. Instead of focusing on owns Ss consumers seemed to prefer sharing or renting startup companies have been targeting these segn through subscription-based services and onden help. From luxury watches to clothing, experieng, and not owning-assets seemed to be on the rise. cj ‘8 more experientiatbased economy, Chesky bel Airbnb guests desired a community and a closer tionship with the host~and there seemed to be suppog for this assertion’ A recent Goldman Sachs study showed that once someone used Airbnb, their pry erence for a traditional accommodation was great, reduced.® The appeal of the company’s value proposy tion with customers had allowed it to readily raise tal to support its growth, including an $850 millon cash infusion in 2016 that raised its estimated yaty, ation to $30 billion. A comparison of Airbnb’s 2013 estimated market capitalization of $31 billion to the world’s largest hoteliers is presented in Exhibit 4 EXHIBIT 4 Market Capitalization Comparison, 2018 (in billions) Martiot international Ine. $49 Airbnb $31 Hiton Worldwide Hotdings. $25 Intercontinental Hotels Group su ‘Source: Yahoo Finance (sccessed prt 2018} "Aron Announces 1tWon't Go Public 2018; Business Isley http//vrw busine sinsidercom/arbnb-announeorstowont-ge pubic 2018 20182 leecessea Api 20,2018), ee ee $264 $496 «$675 $945 $1,229 100% 65K SEK OK 30% ‘Sour: Ali Rafe, “Aonos Revenues Will Cross Half Billon Merk In 2015; Anaysts Estmote, Merch 25,2015, shift.com/2015/03/25/ wil-eosehal-illon-markin-201S-analysts-ontimatol. alrhnberevemjecognizing this shift in consumer preference, onal brickand-mortar operators were respond- Hilton was considering offering a hosteblike welers.® Other entrepreneurs were con- Bon to eave prene fag urban properties to specifically leverage v's platform and offer rooms only to Airbnb f,, such as in Japan’ where rent and hotel costs ie extremely high EPyo govern the community of hosts and guests, ob had instituted a rating system. Popularized by Fapanies such as Amazon, eBay, and Yelp, peerto- ratings helped police quality. Both guests and - “NOT PLAYING BY JHE SAME RULES ‘Poca! and global businesses criticized Airbnb for _what they claimed were unfair business practices and Iobbied lawmakers to force the company to comply wih lodging zegulatiofs, These concerns illuminated tow due to its business model, Airbnb and its users seemed to not need to abide by these same regula- tions. This could heve been concerning on many levels. For the guest, regulations exist for protection from unsafe accommodations. Fire codes and occu pation limits all exist to prevent injury and death Lvs also exist to prevent discrimination, as tradi tional brickand-mortar accommodations are barred from not providing lodging to guests based on race and other protected classes. But, there seemed to be tvidence that Airbnb guests had faced such discrimi ration from hosts* Hosts might also expose themselves to legal and finaacial problems from accommodating guests. There had been stories of hosts needing to eviet guests ‘ho would not leave, and due to local ordinances the fists were actually protected as apartment leasees. Other stories highlighted rooms and homes being damaged by huge parties given by Airbnb guest. loss might also be exposed to liability issues in the ‘nstanee of an injury or even a death of a guest CASE2 Airbnb in 2018 co Finally, there were accusations of businesses using Airbnb’s marketplace to own and operate accommodations without obtaining the proper licenses. These locations appeared to be individu- als on the surface, but were actually businesses. And, because of Airbnb’s platform, these pseudo. businesses could operate and generate revenue with- out meeting regulations or claiming revenues for taxation Airbnb continued to respond to some of these issues. A report was written and released by Airbnb in 2015 detailing both discrimination on its platform and how it would be mitigated, Airbnb also setted its lawsuit with San Francisco in early 2017. The city was demanding Airbnb enforce 4 city regulation requiring host registration, ot incur significant fines. As part of the settlement, Airbnb agreed to offer more information on its hosts within the city.” And in 2018, Airbnb began partnering with local municipalities to help collect taxes automaticaly for rentals within their jurisdic- tions, helping to potentially recoup millions in lost tax revenue," “WE WISH TO BE REGULATED, THIS WOULD LEGITIMIZE US” Recognizing that countries and local municipalities were responding to the local business owner and their constituents’ concerns, Chesky and Airbnb have focused on mobilizing and advocating for con- sumers and business owners who utilize the app. Airbnb’s website provided support for guests and hosts who wished to advocate for the site. A focal point of the advocacy emphasized how those particu- larly hit hard at the height of the recession relied on Airbnb to establish a revenue stream, and prevent the inevitable foreclosure and bankruptcy, ‘Yet, traditional brick-and-mortar establishments subject to taxation and regulations have continued to put pressure on overnment officials to level the playing field. “We wish to be regulated; this would legitimize us,” Chesky remarked to Noah in the same interview on The Daily Show.” Proceeding forward and possibly preparing for a future public offering, Chesky would need to manage how the progressive business model—while fit for the new, global sharing economy—may not fit older, local regulations.cw i ENDNOTES *ntrvow vith Aon funder and CEO Brian Cesky. The Daly Show wih Trevor Noon Comedy Control Febraty 24,2036, Far stone and O, Zales “ond Enters the Land of Proftsbiy Bicomberg,Jonary 26, 2017, Mipaiferm bloambergtem/news srilas/2027-01 26)vctnbcentors the Iand-of prota accersad June 20, 2017. 50, Zaleski “hse Aon’ Bate o Sty Priata: Blonder Com, Februty 8, 2018, tpifembloonborgcamfvensfare len/2018.02 O6finside-airenies bate {feyrrivate accesses fot 20,208), + nti wah on founder and CEO an esky. The Dat Show with Trevor ooh {oman Corral Fbruary 24,2016, Zivemoge"Goloman Sec’ More nc More People Who Use Aor Dorit Wont to (Go Back to Hota” Bloomberg, February 26, PART2. Cases in Crafting and Executing Strategy 2016, «blosnberscom/newsl s1ieln/9018:02 16 goldman sache-more Snd-morepeople-whe us-nrbnb-don 0) Fahmy lnm Spending Power as ton Weighing Het Lie’ Brn Merch 8,2016 Blomberg Busheseweek yorebioomberg.co/businessveck FY Nakomura and M. Takes “And Faces Major Treat n Jen, Fastest. 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