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Airbnb in 2016: A Business Model for the Sharing Economy

In the future, you will own what [assets] you want responsibility for,"commented CEO and founder of Airbnb, Brian Chesky, concerning the sharing economy in an interview with Trevor Noah on The Daily Show in March 2016.1 Airbnb was founded in 2008 when Chesky and a friend decided to rent their apartment to gu 1s for a local convention. To accommodate the guests, they used air mattresses and referred to it as the "'Air Bed & Breakfast." It was that weekend when the idea­ and the potential viability-of a peer-to-peer room­ sharing business model was born. While not yet a publicly traded company in 2016, Airbnb had seen immense growth and success in its eight-year exis­ tence. The room-sharing company had expanded to over I90 countries with more than 2 million listed properties, and had an estimated valuation of $30 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 model's success was leveraging what had become known as the sharing economy. Yet, with it5 growth and usage of a new business model, Airbnb was now faced with resistance, as owners and operators of hotels, motels, and bed and breakfasts were crying fowl. While these tradi­ tional brick-and-mortar establishments were subject to regulations and taxation, Airbnb hosts were able to circumvent and avoid such liabilities due to par­ ticipation in Airbnb's digital marketplace. In other instances, Airbnb hosts had encountered legal issues due 10 city and state ordinances governing hotels and apartment leases. Stories of guests who would noy leave and hosts needing to evict them because city regulations deemed the guests apartment leas­ ees were beginning to make headlines. As local city and government officials across theUnited States, and in countries like Japan, debated regulations concerning Airbnb, Brian Chesky needed 10 manage ibis new business model, which had led to phenomenal success within a new, sharing economy.

OVERVIEW OF ACCOMMODATION MARKET

Hotels, motels, and bed and breakfasts competed within the larger, tourist accommodation market. All businesses operating within this sector offered lodging, but were differentiated by their amenities. Hotels and motels were defined as larger facilities accommodating guests in single or multiple rooms. Motels s pecifically offered smaller rooms with direct parking Jot access from the unit and ameni­ ties such as laundry facilities to travelers who were using their own transportation. Motels might also be located closer to roadways, providing guests quicker and more convenient access to highways. It was also not uncommon for motel guests to seg­ ment a longer road trip as they commuted to a vacation destination , thereby potentially staying at several motels during their travel. Hotels, however, invested heavily in additional amenities as they competed for all segments of travelers. Amenities, including on-premise spa facilities and fine dining, were often offered by the hotel. Further, proper­ ties offering spectacular views, bolstering a hotel as the vacation destination, may contribute to sig­ nificant operating costs. In total, wages, property, and utilities, as well as purchases such as food, account for 61 percent of theindustry's total costs.

Bed and breakfasts, however, were much smaller, usually where owner-operators offered a couple of rooms within their own home to accom­ modate guests. The environment of the bed and breakfast-one of a cozy, home-like ambience-was what the guest desired when booking a room. Con­trasted with the hotel or motel, a bed and breakfast offered a more personalized, 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 an attraction to tourists. In these areas individuals invested in a home and prop­ erty, possibly with a historical background, to offet a bed and breakfast with great allure and ambience for the guests' experiences. Thus, the bed and breakfast competed through offering an ambience associated with a more rural, slower pace through which travel­ ers connected with their hosts and the surrounding community. A comparison of the primary market segments of bed and breakfasts and hotels in 2015is presented in Exhibit 2.

While differing in size and target consumer, all hotels, morels, and bed and breakfasts were subject to city, state, and federal regulations. These regula­ tions covered areas such as the physical propertyand food safety, access for persons with disabilities, and even alcohol distribution. Owners and operators were subject to paying fees for different licenses to operate. Due to operating as a business, these prop­ erties and the associated revenues were also subject to stateand federal taxation.

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 previ­ ous model for the economy was based o n owner­ship. Thus, operating a business first necessitated ownership of the assets required to do business. Any spare capacity the business faced-ither within production or service- was a di.reel result of the purchase of hard assets in the daily activity of con­ ducting business.

Airbnb and other similar companies, however, operated through offering a technological platform, where individuals with spare capacity could offer their services. By leveraging the ubiquitous usage of smartphones and the continual decrease in technol­ ogy costs, these companies provided a platform for individuals to instantly sharea number of resources. Thus, a homeowner with a s pare room could offer it for rent Or, thecarowner 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, Ai.rbnb 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 establishmentsand provided it with significantly smaller operating costs than hotels, motels, and bed and breakfasts. Rather than expenses related to own­ ing and operating real estate properties, Ai.rbnb's expenses were that of a technology company. Airl>­ nb's business model in 2016, therefore, was based on the revenue-cost-margin structure of an online marketplace, rather than a lodging establishment, with an estimated 11 percent fee per room stay.4 The company's business model that generated fees from room bookings had allowed its revenues to increase from an estimated $6 million in 2010 to a projected $1.2 billion by 2017.

A Change in the Consumer Experience and Rate

Airbnb, however, was not just leveraging technol­ ogy. It was also leveraging the change in how the current consumer interacted with businesses. In conjunction with this change seemed to be how the consumer had deemphasized ownership.   Instead of focusing on o wnership, consumers seemed to prefer sharing or renting. Other startup compa­nies have been targeting these segments through subscription-based services and on-demand help. From luxury watches to clothing, experiencing and not owning-assets seemed to be on the rise. Citing a more experiential-based economy, Chesley believed Airbnb guests desired a community and a closer relationship with the host-and there seemed to be suppon for this assertion.5 A recent Goldman Sachs study showed that oncesomeone used Ai.rbnb, their preference for a traditional accommodation was greatly reduced.6 The appeal of the company's value proposition with customers had allowed it to readily raise capital to support its growth, including an $850 million cash infusion in 2016 that raised its estimated valuation to $30 billion.

Recognizing this shift in consumer preference,traditional brick-and-mortar operators were respond­ ing. Hilton was considering offering a hostel-like option to travelers.7 Other entrepreneurs were con­structing urban properties to specifically leverage Ai.rbnb's platform and offer rooms only to Ai.rbnb users, such as in Japan8 where rent and hotel costs were extremely high.

To govern the community of hosts and guests, Ai.rbnb had instituted a rating system. Popularized by companies such as Amazon, eBay, and Yelp, peer-to-peer ratings helped police quality. Both guests and hosts rated each other in Airbnb. This approach incentivized hosts Lo provide quality ser­ vice, while encouraging guests to leave a propeny as they found it Further, the peer-to-peer rating system greatly minimized the otherwise significant task and expense of Airbnb employees assessing and rating each individual participant within Airbnb's platform.

Not Playing by the Same Rules

Local and global businesses criticized Airbnb for what they claimed were unfair business practices and lobbied lawmakers to force the company to comply with lodging regulations. These concerns illuminated how due to its business model, Airbnb and its users seemed to not need to abide by these same regulations. This could have been concerning on many levels. For the guest, regulations exist for protection from unsafe accommodations. Fire codes and occupation limits all exist to prevent injury and death. Laws also exist to prevent discrimination, as traditional brick-and-monar accommodations are barred from not providing lodging to guests based on race and other protected classes. But, there seemed to be evidence that Airbnb guests had faced such discrimination from hosts.9

Hosts might also expose themselves to legaland financial problems from accommodating guests. Therehad been stories of hosts net"11ing to evict guests who would not leave, and due to local ordinances the guests were actually protected as apartment leasees. Other stories highlighted rooms and homes being damaged by huge parties given by Airbnb guests. Hosts might also be exposed to liability issues in the instance of an injury or even a death of a guest. Finally,therewere accusations of businesses using Airbnb's marketplace to own and operate accommo­ dations without obtaining the proper licenses. These locations appeared to be individuals on the surface, but were actually businesses. And, because of Airb­ nb's platform, these pseudo-businesses could operate and generate revenue without meeting regulations or claiming revenues for taxation.

"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 suppon for guests and hosts who wished to advocate for the site. A focal point of the advocacy emphasized how those par­ ticularly 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 government 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.10 Proceeding forward and possibly preparing for a future public offering, Chesky would need to manage how their progressive business model-while fit for the new, global shar­ ing economy- may not fit older, local regulations.

1) DIAGNOSIS: A somewhat detailed analysis and summary of the background factors, issues, events, actions, and facts leading up to the problem(s) involved in the case or incident. What has been happening that brought about and culminated in the particular difficulties or problems now facing us?

2) FOCAL POINTS FOR ACTION: Identify the real problems and issues to be resolved. This step is critical: do not be misled or sidetracked by irrelevant details or mere symptoms. (Pigors gives this illustration: “A young man graduated with honors from a top-ranking business school. Presumably he should have been well prepared to tackle administrative problems. But he failed to make good on his first job. He rationalized his failure by saying: “If only someone would give me a problem, I know I could solve it. But all I can see here is a mess!”)

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

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

5) IMPLEMENTATION: Consider and explain the implementation of your recommendation. Anticipate problems or obstacles to implementing your action plan. Who must do what? How? What about timing, short-range and long-range? Provisions for control and follow-up?

Reference no: EM132191149

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