Open Innovation in the Digital Economy with Real Estate

Introduction

Airbnb is an online community marketplace providing a platform to rent or lend accommodations. This report will analyse said company, an emblem of the sharing economy, by first explaining its history and business model. Then, it will present the impact of Airbnb on relevant industries and communities in cities and how one can regulate the platform to manage its effect. Finally, it will detail future plans and risks of failures for Airbnb.

History and Business Model

Airbnb was founded by Joe Gebbia and Brian Chesky in 2007. The duo had the idea to rent some air mattresses in their home to pay rent. They would target people that couldn’t find any hotel due to market saturation (they lived in San Francisco). When they realised the potential of this idea, the duo called in Nathan Blecharczyk to join them. Together they developed the website and launched it officially in February 2008. The first goal of Airbnb was then to offer accommodation during big events where hotel rooms would be scarce. In 2009, after joining the Y Combinator, they expanded the website to have listings of rooms, entire houses, apartment, etc. That is when Airbnb found its business model and, in 2010 the company started to grow rapidly. Since then, over 400 million people used the platform to get accommodation (Airbnb, 2018a). Nowadays, Airbnb has over 5 million listings on its website in 81,000 cities across 191 countries (Airbnb, 2018a).

Airbnb sees itself as “a social website that connects people who have space to spare with those who are looking for a place to stay”. This idea is simple yet it disrupted a whole industry. Airbnb’s on-boarding is easy. They are two categories of users. The first one is the hosts. They are the people putting the listings on the website. It can go from simple rooms in your home to entire flats or more extravagant, igloos or treehouses. The second category of users is the guests. They are ordinary people looking for a place to stay. Airbnb takes fees on each reservation: a 6% to 12% fee from the guest and a 3% fee from the host for credit card processing. Recently, Airbnb launched some new services: experiences and places. For the experiences, hosts can share a local activity or leisure for a certain price. For places, guides can help tourists visit certain touristic sites. As we can see, Airbnb provides a service that didn’t exist on a large and global scale before. This leads Airbnb to develop a “Blue Ocean” strategy (Kim and Mauborgne, 2005), where a company creates a new demand in an unchallenged sector.

Airbnb is a model in the sharing economy. Kaplan and Nadler (2017) find three traits to a company in the sharing economy. The first one is use of advanced technology. Airbnb satisfies this trait as it developed powerful software to host all the listings on its website and fulfil the need of millions of travellers with the help of targeted recommendations. The second trait is for the company to be operating in parallel to a well-established industry. This is clearly the case with Airbnb competing against traditional hotels. The last trait is for the company to be running in a grey area of the law. Airbnb does meet this trait as we will see, later on, its relationship with legislative authorities. We can notice that those traits are not enough to define a company in the sharing economy. Constantiou, Marton and Tuunainen (2017) had a different approach to define the key attributes of a company in the sharing economy. They found three attributes: “access over ownership”, “peer-to-peer” and “allocation of idle resources”.

The last two attributes fit perfectly Airbnb as it is only a platform so it facilitates exchanges between people (peer to peer) and the concept of renting one’s home when not in use corresponds to the core philosophy of Airbnb (allocation of idle resources). Those two concepts have a different approach but taken together provide a good overall of the sharing economy’s main idea. Moreover, Constantiou, Marton and Tuuainen (2017) found that they are four models in the sharing economy. Those models are described using two factors, the “rivalry between the platform participants” and the “control exerted by the platform owner”. Applying this model, we can characterise Airbnb in the “chaperones” model where there is a high rivalry between platform participants and a loose control by the platform. Airbnb only gives recommendations to hosts regarding the way properties should be managed and as the hosts fix the price, there is strong competition between them to attract guests.

The Impact of Airbnb

They are some controversies on the impact of Airbnb on industries. The two main industries Airbnb affected the most are the hotel industry and the real estate industry.

Most complaints arose from the hotel industry. This industry is highly regulated and segmented. When Airbnb started growing, it challenged this industry who had not evolved in the past decades. As of 2018, Airbnb with close to 5 million listings worldwide is far ahead of the biggest hotel group, Marriott who has only 1.2 million rooms globally (Marriott, 2018). The hotel industry felt threatened and started to complain about this new actor disrupting their business. The main complaint about Airbnb is insufficient regulations compared to the heavy legislation concerning hotels (Sickel, 2017). Hotels then claimed Airbnb was unfair competition and was impacting their revenues. However, a study discovered that in Texas, an appreciation of 1% in Airbnb listings only reduced hotel revenues by 0.05% (Zervas, Proserpio and Byers, 2017). Those numbers seem to show Airbnb doesn’t have a significant impact on the industry. Nevertheless, the study found the main hotels impacted by Airbnb were low-end hotels and particularly hotels without business conveniences. This study then tried to determine if any regulations on Airbnb would impact the hotel revenues and observed it was insignificant.

In a study on the impact of Airbnb on real estate, Barron, Kung and Proserpio (2018) found Airbnb has a small impact on housing prices and rental rates. They explain this impact on rental rates because landlords switch from proposing long term rentals to offering short-term rentals. The rise of rental rates causes an augmentation of housing prices as well as the ability to generate revenue from extra housing capacity. Furthermore, in a study by Quattrone et al. (2016) on the beneficiaries of Airbnb in London, the researchers found Airbnb is not necessarily impactful on the real estate industry. While, on the supply side, listings were available throughout the city, demand would still be concentrated in central London. This shows the most desirable Airbnb listings are in neighbourhoods already prone to inflation due to their localisation. Airbnb in this context impacts more the hotel industry, established in traditional touristic areas than the real estate industry.

To overcome the possible negative impacts of Airbnb on those industries, local and national authorities are starting to develop an array of legislation for Airbnb. Most big and touristic cities in Europe and in the United States started to roll out measures to regulate Airbnb. For example, Paris capped the numbers of nights one host can rent his home to 120 (Mairie de Paris, 2018). London (Deregulation Act 2015) and Amsterdam (City of Amsterdam, 2018) followed by capping to respectively 90 and 60 nights a year. Other major cities implemented different measures with the same goal to slow the expansion of Airbnb (New York, Berlin, Barcelona, San Francisco…). Nevertheless, cities are torn between restricting Airbnb - thereby slowing its expansion to satisfy the discontent of local actors and welcoming the economic benefits of Airbnb.

According to Airbnb (Airbnb, 2018b), guests in Airbnb accommodations stay 2 times longer and spend 2 times more than typical visitors. For example, Airbnb claims to have a positive impact on the French economy in 2016 of 6.5 billion euros (Bianchi, 2017). To solve this problem, Quattrone, et al. (2016) propose to use the idea of Miller (cited in Quattrone et al., 2016) where short-term rentals are legalised through “transferable sharing rights”. Those rights would give an individual the right for a certain period to rent his home. Quattrone et al. expand on the idea of Miller by proposing to create “algorithmic regulations” where regulations are adapted depending on real-time demand. For instance, authorities could decide to only permit renting during a specific time frame, holidays for example. Quattrone et al. propose this idea of adaptive regulations because they found that attractive neighbourhoods to Airbnb guests might evolve and change over time, and authorities don’t have the tools to adapt as quickly.

The proposition is to answer the main problem that authorities are facing, Airbnb entrepreneurs. Airbnb allowed the development of new entrepreneurs who would purchase entire blocks of flats or house to list them on Airbnb. Those entrepreneurs are the scourge of municipalities. They are the one responsible for the desertification of the city centre. To take an example, in Paris, the deputy mayor for housing, Ian Brossat said in an interview (Henry, 2018) that Airbnb induced a lost of 20,000 housings in the city centre. To back his claim, he said 26% of accommodations in the Ie, IIe, IIIe and IVe arrondissements are now not inhabited by Parisians. In their paper, Quattrone et al. recommend having a platform for the transferable sharing rights where people could sell their right to others if they do not use it. This would then not solve the problem of Airbnb entrepreneurs as they would still be major players but at least city council would have some control over them and could with real-time regulations restrict the rights in certain neighbourhoods as they see fit.

Future Plans and Risks

Airbnb has big plans for the future. The company unveiled in February 2018 a roadmap to get to 1 billion guest stays (Airbnb, 2018c). The plan includes a diversification of properties to rent with the addition of four new property types. Airbnb is launching a new service called “Collections”, designed to find a place to fit special occasion like honeymoons, weddings, group getaways, social stays… Airbnb also launched two new tiers, “Airbnb plus” and “Beyond” aimed at wealthier and more demanding guest. Finally, Airbnb is going to expand its 'superhost' program and create a new guest membership program to reward its most loyal customers.

While Airbnb seems on the path of future growth and expansion, it is not completely protected against failures. Tauscher and Kietzmann (2017) analysed a multitude of companies in the sharing economy to find causes of failure. Some causes are relevant to Airbnb: “low customer lock-in”, “low control over service quality” and “unexpected changes in the legal environment”. The first cause relates to the low switching cost for either guest or host to change platforms if a strong competitor of Airbnb would emerge. The second one is relative to the loose control of Airbnb on its hosts. Although as explained in the roadmap, Airbnb wants to tackle this problem by developing programs to standardise more fully its offer. For the last cause, the increasing regulations arising in various cities around the globe could seriously curb Airbnb’s growth.

Conclusion

Airbnb is now a major player in the hospitality industry. With a valuation of 30 billion dollar and generating profits, Airbnb has the power to fuel its expansion and accomplish its vision for the future: focusing on end-to-end travel experiences. Even though the company faces some controversies from competing industries, local communities and regulators, Airbnb can still find a way to work and grow with those affected by its service.

Reference list

1. Airbnb (2018a) About us. Available from: https://press.airbnb.com/fast-facts/?region=United%20Kingdom (Accessed 25 November 2018)
2. Airbnb (2018b) The Economic Impacts of Home Sharing in cities around the world.
3. Available from: https://www.airbnb.co.uk/economic-impact (Accessed 25 November 2018)
4. Airbnb (2018c) Airbnb for everyone. Available from: https://www.airbnb.co.uk/new (Accessed 26 November 2018)
5. Barron, K., Kung, E., and Proserpio, D. (2018). The sharing economy and housing affordability: Evidence from Airbnb. SSRN Electronic Journal.
6. Bianchi, F. (2017) 'Airbnb a reversé 1 milliard d'euros de pouvoir d'achat aux Français'. BFM Business. 13 July 2017. Available from: https://bfmbusiness.bfmtv.com/entreprise/airbnb-a-reverse-1-milliard-d-euros-de-pouvoir-d-achat-aux-francais-1215999.html (Accessed 25 November 2018)
7. City of Amsterdam (2018) Temporary holiday rentals and Bed & Breakfasts. Available from: https://www.amsterdam.nl/en/housing/holiday-rentals-b-b/ (Accessed 25 November 2018)
8. Constantiou, I., Marton, A., and Tuunainen, V. K. (2017). Four Models of Sharing Economy Platforms. MIS Quarterly Executive, 16(4).
9. Deregulation Act 2015, c.20. Available at: http://www.legislation.gov.uk/ukpga/2015/20/section/44/enacted (Accessed 25 November 2018)
10. Henry, C. (2018) Ian Brossat : «Il faut interdire les locations Airbnb dans le centre de Paris». Le Parisien. Available from: http://www.leparisien.fr/paris-75/ian-brossat-il-faut-interdire-les-locations-airbnb-dans-le-centre-de-paris-05-09-2018-7877826.php (Accessed 25 November 2018)
11. Kaplan, R. A. and Nadler, M. L. (2017) Airbnb: A Case Study in Occupancy Regulation and Taxation. University of Chicago Law Review Online, 82(1), pp.103-115.
12. Kim, W. and Mauborgne, R. (2005). Blue ocean strategy. Harvard Business Review.
13. Mairie de Paris (2018) Meublés touristiques. Available from: https://www.paris.fr/meubles-touristiques#vous-souhaitez-louer-votre-residence-principale-dans-sa-totalite-ou-partiellement-dans-la-limite-de-120-jours-par-an_4 (Accessed 25 November 2018)
14. Marriott (2018) Marriott International Reports First Quarter 2018 Results. Available from: http://news.marriott.com/2018/05/marriott-international-reports-first-quarter-2018-results/ (Accessed 25 November 2018)
15. Quattrone, G., Proserpio, D., Quercia, D., Capra, L., & Musolesi, M. (2016). Who benefits from the sharing economy of Airbnb?. Proceedings of the 25th international conference on world wide web (pp. 1385-1394). International World Wide Web Conferences Steering Committee.
16. Sickel, J. (2017) The U.S. Hotel Industry's Lobbying Muscle & What It Wants to Accomplish. Business Travel News. 17 June 2017. Available from: http://www.businesstravelnews.com/Lodging/The-US-Hotel-Industrys-Lobbying-Muscle-What-It-Wants-to-Accomplish (Accessed 25 November 2018)
17. Tauscher, K., & Kietzmann, J. (2017). Learning from Failures in the Sharing Economy. MIS Quarterly Executive, 16(4), 2.
18. Zervas, G., Proserpio, D. and Byers, J. (2017). The Rise of the Sharing Economy: Estimating the Impact of Airbnb on the Hotel Industry. Journal of Marketing Research. 54(5), pp.687-705.

Cite this page