Friday, March 14, 2014

The eBay of Lodging: Is Airbnb sustainable?

I've been traveling to conferences more recently, so cheap short-term lodging has been on my mind frequently. As a serial procrastinator when it comes to planning trips, I've become quite a fan of Hotwire for finding discounted last-minute hotel rooms. But in a slightly smaller segment of the market, there is also Airbnb which specializes in connecting renters with amateur hoteliers who can rent out a room, a house, or a villa with minimal complications.

Airbnb has a number of advantages for both renters and hosts: it handles payments, so no credit card information needs to be exchanged; and it hosts a mutual rating system, so landlords and guests can review the treatment they received. In many ways, it's accurate to say that Airbnb is like the eBay of lodging.

eBay makes its money by connecting buyers and sellers who would otherwise never meet, and allowing each to build a reputation based on good service. This overcomes the transaction costs which might otherwise make small selling unprofitable, as well as the trust issues of dealing with strangers rather than established businesses.

Rumor is that Airbnb will be going public later this year, with an initial offering valued around $10 billion. Will this be successful, and can Airbnb make it as a public company? If eBay, valued $65 billion, is an accurate analogy, then Airbnb's investors should be laughing all the way to the bank.

But, how accurate is that analogy? In spite of surface similarities, renting out accommodations does invite some unique problems that shipping consumer goods does not. Interactions are more personal; I'll never meet my favorite eBay sellers but Airbnb hosts almost necessarily must come face-to-face with their guests. This makes each Airbnb experience less predictable because the human element is increased.

Perhaps more importantly, Airbnb has the potential to run afoul of local housing and zoning regulations. Depending on location, hosts might have to comply with laws regulating B&B's, motels, and hotels. Many hosts do not worry about these legal complexities, a risky practice that Airbnb's "simple and easy" interface tacitly encourages.

If hotel regulations are violated and no one complains, there is no problem. However, Airbnb is increasingly butting heads with its prime competitors, which are small, locally owned lodging houses and B&B's. These businesses do have to comply with often costly local mandates, and resent being undercut by small-time Airbnb hosts. This gives lots of incentive to complain. The link above is about Spokane, WA where hundreds of complaints were filed by one local B&B against all the competing Airbnb operators. What happens now?

If Airbnb goes public and its business continues to grow, expect these strategic complaints to become more frequent. If Airbnb hosts start having to comply with all of the regulations currently followed by hotels and B&Bs then their cost advantage over these establishments might quickly disappear. There are also free competitors, like which can nibble away at the niche occupied by Airbnb.

In short, Airbnb's business model relies on its operators not being regulated the same way as established lodging business. But, when Airbnb goes public and if its users continue to flout local zoning laws, it might become a victim of its own success.