Airbnb and the Sharing Economy

Smartphones caused the rise of the third generation of the internet. When the iPhone was launched in June 2007, 1.1 billion users were connected to the internet, mostly through their PCs. Ten years later, and thanks to the smartphone, 3.8 billion people - 51 percent of the world’s population - were connected. Again, the medium was the message. The smartphone provided a new experience and thus a quantum leap in the connection to the internet. Being cheaper, personal, and portable, smartphones connect individuals anywhere and anytime.

The mobile internet is very different from the PC internet. Apple developed a closed operating system that would not allow any third-party software to be downloaded to the phone without Apple’s permission (see Chapter 8). Every app available in the app store has been previously approved by Apple. Google developed a model that was similar, but not so rigid. This contrasts with the PC ecosystem, as PC users are free to download any software they please, with no vetting by the company that runs the operating system: Microsoft. This results in more freedom, but also in more bugs, privacy breaches, and so on.

Apps were developed by third parties to fully exploit the network effects of the new medium. WhatsApp facilitates communications between a growing pool of users and a more personal and intense engagement (Chapter 8). Individuals can easily share their thoughts in real time, but also their houses (Airbnb), their work (Taskrabbit), and their transportation (as explained for Uber in Chapter 13 and BlaBlaCar in Chapter 14). Network effects empowered by platforms with billions of users transform more and more sectors.

In October 2007, Brian Chesky and Joe Gebbia, two unemployed designers, built a web page to sublet three air mattresses in the living room of their apartment during a big design conference in San Francisco. The ambition was to create an app so that guests could book accommodation in a private residence as easily as they could in a hotel. Airbnb built an app where homeowners (hosts) could list the space they wanted to offer for rent (a room, a full house, a castle), with all the relevant information, including pictures, price per night, etc. Guests could identify the accommodation they were interested in, communicate with the host through the site, book the accommodation and then pay for it, always through the app. Airbnb takes a commission of 6-12 percent.

The app grew slowly during its first months, mostly through so-called “guerrilla marketing.” It was only in April 2009, when the venture capital firm Sequoia invested $585,000 in the firm, that the platform started to grow, reaching weekly bookings of $100,000 in August 2009.22

Creating trust was key to the growth of Airbnb. Guests and hosts both provide evaluations of each other, which are available for the rest of the community to check before contracting. As the number of transactions grows, a significant number of evaluations are available, creating a digital reputation for each player. All payments take place through the platform. Once the guests make the payment, it is escrowed by Airbnb, which only pays the host 24 hours after the guests’ arrivals and only in case no complaint has been raised by the guest. Airbnb offers secondary insurance to cover liabilities for hosts and guests.

Airbnb has grown impressively, as a result of the power of indirect network effects. As more homes are available for rent, more guests join the platform, which leads to more house-owners being interested in joining the platform. As stated in the IPO filing, Airbnb is in the business of building networks: “Hosts and guests attract each other to Airbnb, creating a global network across more than 220 countries and regions.”23 The multi-sided market has grown to cover the globe. Travelers using the service as guests in $an Francisco would then join the platform as hosts in their home city in Paris, attracting guests in other European cities. The wider the geographic availability of homes, the more attractive the platform became for guests, further reinforcing the virtuous cycle.

By 2018, Airbnb was listing more than 5 million accommodation options in more than 81,000 cities in 191 countries, had revenue of $2.7 billion, and profits of $93 million.24 The $585,000 investment made by Sequoia in 2009 multiplied to a valuation of $11.76 billion in 2020 when Airbnb went public. The whole of Airbnb had a value of $ 100 billion.

In 2017 Airbnb expanded its product range from accommodation to other travel services, coined as “experiences,” such as walking tours, cooking lessons and a whole set of services to be locally provided to travelers. Once a digital platform ignites, it can easily expand to neighboring markets, building on the existing network effects.

Airbnb is a digital platform in a multi-sided market. It does not build hotels, own real estate, manage the accommodation, or even contract the provision of the accommodation service with guests. Airbnb is merely an intermediary, a matchmaker that facilitates the contracting between hosts and guests: the two sides in the multi-sided market. The Court of Justice of the European Union had to confirm this, as the French association of professional accommodation providers challenged it, claiming that Airbnb digital services “forms an integral part of an overall service, whose main component is the provision of an accommodation service.” The Court confirmed that “the compiling of offers using a harmonised format, coupled with tools for searching for, locating and comparing those offers, constitutes a service which cannot be regarded as merely ancillary to an overall service coming under a different legal classification, namely provision of an accommodation service.”25

Airbnb is a leading example of the so-called “sharing economy.” Thanks to digital platforms and the reduction of transaction costs, private individuals can share their assets (housing, vehicles, ability to provide small services, etc.) with other private individuals, in competition with traditional corporations. Similar platforms are Uber or Taskrabbit.

 
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