- Airbnb Is the Next Groupon (It Just Doesn’t Know It Yet)
The future is bleak for the world’s biggest broker of ghost hotels
Photo by Kyle Glenn on Unsplash
In 2007, Joe Gebbia and Brian Chesky were struggling to pay rent on their San Francisco apartment. In an act of creative desperation, they bought some air mattresses, rented out floor space in their living room, and cooked breakfast for their guests the next morning.
A brilliant company called Airbnb was born.
Fast-forward 14 years and the company is now the biggest name in hospitality. (No one says “I got a Vrbo in San Diego.”) Airbnb is not only a bookings juggernaut with a loyal fanbase, but it’s backed by famous investors and a dizzying marketing narrative that has propelled it to unimaginable heights.
Airbnb, on the surface, is an invincible company:
- They just went public with a nearly $100 billion market cap.
They’re already active in 100,000 cities.
They enjoyed 326 million nights booked in 2019.
They have a huge moat: a competitive advantage of 7 million listings.
They’re the #1 brand in hospitality.
They’ve enjoyed double-digit listings growth for years.
Don’t believe the hype.
Airbnb is undeniably a cool idea and a good-looking brand, but it’s not a groundbreaking patentable innovation that won’t eventually face brutal competition, host revolts, and democratic backlash. Plus, its very business model is fundamentally unsustainable.
Yesterday’s biggest companies used to own assets and create goods and services. Today’s biggest companies own almost no assets and produce neither goods nor services, but instead act as middle-men who take an irrationally large cut for their minor role in the process.
- Uber and Lyft don’t own cars or drive people around.
Facebook/IG/Snap doesn’t create content for its users to enjoy.
Amazon doesn’t produce most of the products in its store.
Airbnb doesn’t host travelers.
So how did these companies come to dominate their industries?
One word: Financialization.
Amazon’s Jeff Bezos was the first person to really perfect this insidious art, and Airbnb is just the latest firm to capitalize on the lethal gambit. The process is simple:
- Find a way to “disrupt” an industry of real producers. (IE book publishers, taxi drivers, content creators, house hosts, etc.)
Create an attractive site/app and charge a fat fee as the broker.
Build a huge amount of media hype to attract colossal amounts of debt and private equity across several rounds of funding.
Rather than paying a dividend to shareholders, use their original investment and their annual profits to strengthen your team and strangle your competition. Make sure the story of your rapid expansion overshadows your mounting losses.
Once you’ve destroyed the competition and have finally started to turn a profit, use the money to swallow up-and-coming competitors and coerce democracy to extract advantages that small companies can’t get.
This is exactly what Airbnb has done.
They lost $135 million in 2015, $136 million in 2016, $70 million in 2017, $16 million in 2018, $674 million in 2019, and $696 million in 2020, with total cumulative losses since 2008 totaling $2.8 billion.
In previous generations, such a dismal record would make a company worthless, with investors avoiding it at all costs. In today’s fairy tale/nightmare of destructive financialization — paired with huge amounts of hype and publicity — Airbnb is seen as a brilliant and important investment, with stock speculators assigning them an initial public market “value” of nearly $100 billion.
And they’re not alone. Lyft lost $1 billion the year before it went public. According to one IPO specialist, “In 2018, 81% of U.S. companies were unprofitable in the year leading up to their public offerings.”
If this sounds like a giant, anti-meritocratic unethical fraud, it’s because it is.
Right now, Airbnb is a market darling. It’s beloved by business celebrities like Y Combinator’s Paul Graham and NYU’s Scott Galloway, men who I deeply admire. And they have good financial reasons for loving Airbnb, though not necessarily ethical ones. There are millions of stock speculators who have a vested interest in ensuring Airbnb’s shiny narrative remains unmarredly positive.
But, as you will see, the megalithic house-booking monopoly faces seven potentially insurmountable challenges in the years ahead:
Just because Tesla gets all the publicity doesn’t mean Volkswagen and Mercedes and Fiat have stopped innovating or selling huge numbers of cars. Hotels may not have Airbnb’s buzz or market cap, but in non-COVID times they still have massive incomes — and unlike Airbnb, many of them turn a real profit.
In the Extraction Economy, money is shifting from asset-heavy hotel companies (like the Holiday Inn) to network-based apps (like Airbnb). But it doesn’t mean two (or 20) other companies can’t get in on that game.
- In addition to adding seamless person-free check-in to its current hotels, Marriott (which has been profitable every single year for a decade and even made a profit through the pandemic) could sell off some peripheral real estate and use the war chest to poach top talent from Airbnb and launch a similar service.
If it wished, IHG (which has been profitable every single year for a decade) could sell some unwanted real estate and use the funds to out-lobby Airbnb, arguing that the app is running commercial businesses in residential neighborhoods, using the courts to drive Airbnb out of many markets. If they protected residential real estate at scale, they’d become international heroes for doing so.
If it’s smart, Choice Hotels (which has been profitable every single year for a decade) will convert a bunch of its underperforming hotels into coworking spaces and use the capital to seed a few hungry startups to go eat the whale.
Don’t count the major hotel chains out just yet — expect a bold few (or perhaps an alliance of chains) to recapitalize and come storming back.
Groupon is Airbnb’s cautionary tale. Everyone thought Groupon was brilliant and invincible until one day they realized it wasn’t. When the water eventually goes out, it will become apparent to all that the emperor of holiday bookings has been pantless the whole time. Like they did with WeWork (and will do with Uber/Lyft), entrepreneurs and investors will eventually wake up and realize Airbnb is not a ground-breaking company with cutting-edge patents or insurmountable advantages. It’s just a pretty-looking booking service with sky-high fees and a giant mountain of debt to keep it competitive.
Expect innovative competition to do real damage in the years ahead.
There are those who laugh at the very thought that there could ever be an Airbnb challenger, but it’s not as far-fetched as it sounds. For years, people thought Netflix was the unstoppable streamer who’d never face competition — now it’s starting to look like the indie underdog compared to giants like Disney, Apple, and Amazon. Imagine what will happen to Airbnb if Google or Amazon decides to eat the holiday-booking market.
Airbnb has a scam problem. And a theft problem. And a gun-control problem. And a racism problem. And a pop-up brothel problem.
To their credit, Airbnb is investing nine-figure sums in upgrading their systems and processes, but that number isn’t going to drop as they expand, especially when they run out of premium properties and have to start accepting less-accountable listings in developing nations.
Insurance is going to be a major issue as well — as hosts demand full recompense for damages and thefts, Airbnb will either have to fork over the cash, assist hosts in a myriad number of lawsuits, or pay huge premiums to wary insurance providers.
The reality is that Airbnb is a ripoff and hosts know it. A host has to:
- Shoulder 100% of the risk.
Do all of the guest-coordination work.
Pay the mortgage, heating and cooling, water, electricity, taxes (which will soon rise as municipalities wise to the situation), and “homeowners” insurance (which will become much more expensive as insurers start treating Airbnbs as a commercial enterprise and not a family home).
Maintain the house and property.
Appease angry neighbors.
Replace worn-down or broken appliances, furniture, and electronics.
Do all the house cleaning and laundry.
Contract any repair work.
Face punitive fines if they don’t obey every single one of Airbnb’s rules.
And yet a mere booking service thinks it’s entitled to 14–20% of the revenue?
Get outta here.
Most Airbnb hosts would happily move platforms if the fees were lower, flexibility was greater, insurance protections were stronger, and customers still booked in large numbers. It makes sense that hosts will begin or continue to post their listings on multiple platforms — with many using property management software like Guesty — and eventually shift to services that are more cost-effective.
In fact, they’ve already started. According to multiple sources:
“More and more Airbnb hosts are bending or breaking Airbnb’s rules and treating the platform as a marketing tool for their private properties.”
Some of the tactics are quite ingenious, and we can expect to see more in the future.
The relationship between Airbnb and its hosts is already quite strained because of rising fees, damage disputes, and the COVID crunch, but as Airbnb clamps down further and further on its hosts, it’s not going to win them any new friends.
Expect new apps to rise quickly — we may even see a group of Airbnb superhosts join together and start their own cooperatively-owned platform that can put a lot more money back in host pockets.
Because remember: Airbnb is just a broker. And if the real estate industry has taught us anything, it’s that brokerages are essentially unnecessary in the age of the internet, and commissions will eventually be driven to near-zero.
Scott Galloway defines the Menace Economy as “the pursuit of wealth at the expense of other human beings.” He includes Uber, Lyft, Robinhood, and Facebook in that number, and Airbnb certainly fits the bill. It does none of the work, yet it extracts a huge amount of money from its hosts, and as you’ll soon read, even far more from our global society.
Some of us have already stopped staying in Airbnbs for this reason. Ethical bloggers are already encouraging fellow travelers to avoid using Airbnb for a huge number of reasons. Sites like AirbnbHell are exposing the realities of how unjust this business truly is.
Assuming you believe the narrative that society is on a slow-but-steady march toward justice, fairness, and equality, then Airbnb’s current business model stands no chance in that future vision. Travelers will simply boycott Airbnb on a personal level, choosing to re-allocate their holiday dollars elsewhere.
(For those planning vacations for 2022, check out FairBnB.coop or these 5 ethical alternatives to Airbnb for responsible tourists.)
Airbnb is destroying affordability in cities around the world. According to data from AirDNA, in New York City it has “raised rents, removed housing from the rental market, and fueled gentrification,” with Black residents being 6X more likely to be affected by Airbnb-induced housing loss than white residents.
“Airbnb consistently undermines the City’s efforts to preserve affordable housing, and regularly attempts to thwart regulations put in place to protect New York City residents.” — NYC Council
Half the holiday rentals in Barcelona are illegal, with housing councilor Janet Sanz being forced to unleash Airbnb patrol squads at taxpayer expense. “Our attitude is zero tolerance. We will do everything we can to guarantee the right to housing in the city. Barcelona exists for its people. The priority is it’s a place to live.”
Airbnb is shattering communities. Locals can no longer afford to live in their home cities, with workers forced to move further and further away from their jobs, adding billions of hours to their collective daily commutes. Not only are renters paying unnecessarily-inflated rent prices, but would-be purchasers — individuals, couples, and families — are now competing in bidding wars against capital-armed investors.
Close to home
On the street where I live, one in four houses sits empty for much of the week, but they’re packed with tourists on the weekend. It’s an increasingly difficult place to raise a family, as sale prices have skyrocketed and rentals are virtually non-existent. One acquaintance recently broke down weeping at our door — she lost her apartment and there was literally nothing else available anywhere remotely near her price range.
One of our village friends, a former police officer, lost her longtime resident-neighbor to a full-time Airbnb investor. Soon the house was crawling with partiers who parked on her lawn and blocked her driveway. After complaining dozens of times, the landlord came for a visit and spoke his “truth” bluntly:
“At the end of the day, I live two hundred miles away and just don’t give a fuck.”
Our village’s major fear right now is that we’ll soon reach a tipping point where there will be so many Airbnbs and so few families that the council will shut down the excellent local school — a true death knell for a village like ours. At Christmas, the undecorated Airbnb houses sit dark and silent amidst the festivities, a constant reminder of our rapidly-diminishing community at the hands of outside investors.
How did this happen?
Airbnb’s original model was sound: for home-owner/occupiers to rent out floor space, couches, and spare rooms. But it quickly morphed into something else: an all-commercial enterprise in an all-residential area.
Instead of renting a spare room, professional hosts are buying up family homes and turning them into full-time ghost hotels. In doing so, Airbnb hosts have crossed a line: they’ve commercialized residential real estate and commodified an essential element of human survival — shelter itself.
Full-time Airbnbs are clearly commercial enterprises and shouldn’t be tolerated in residential neighborhoods that are trying to foster community and affordability. If someone turned a house into a bar or a grocery store or a mechanic shop, they’d get shut down in a heartbeat, but somehow it’s OK to turn a family home into a clerk-free hotel?
Yet millions of houses will be transformed into ghost hotels as Airbnb expands. In Australia, 35% of Airbnbs aren’t even owned by the listed host; they’re simply subletting them to vacationers in a perverse game of real estate arbitrage.
Airbnb’s future is essentially as a broker for ghost hotels.
Because these professional ghost hoteliers are focused on high occupancy rates, their pricing is typically a bit lower than legitimate resident-hosts, further undermining the original Airbnb vision. It’s a vicious downward spiral with no end in sight.
Thankfully, cities still have options in the fight to protect their communities:
- Some cities will make ghost hotels illegal, or ban Airbnb outright. (As in Mallorca, where they banned the company after residential rents rose by 40%, or in Santa Monica, where they eliminated 80% of all Airbnbs, or in Charleston, which wisely requires the owner to live on-site.)
Some cities will impose a nights-per-year limit, arguing that since resident-owners theoretically should only be able to rent out their homes while they’re on vacation. But it takes a lot of taxpayer dollars to enforce. 44% of the Airbnbs in Paris are full-time ghost hotels, despite a French law that caps holiday rentals at an incredibly generous 120 days per year. Japan allows 180 days per year, but it’s still not enough to stop what they call “tourist pollution.” New York has a one-host-one-home policy and a multiple dwelling law, yet nearly 50% of all Airbnb bookings are still illegal.
Some cities will regulate the industry and force hosts to obtain a commercial license or hotel registration, like Berlin’s anti-Airbnb law.
Other cities will institute new taxes. Hotels pay commercial taxes and hotel taxes, and there’s no rational reason why full-time Airbnbs shouldn’t pay the same. Smart municipalities are already charging an investor surcharge on new house purchases, while others are adding a hefty non-resident tax. Hopefully, city councils will use this new revenue to build new primary-residence housing at rates that real homeowners can actually afford.
Wise cities will even institute resident-only zoning laws, protecting entire neighborhoods or districts from commercial hotel activity — call them Airbnb-Free Zones — ensuring only real families can live in certain areas.
By their own admission — according to their filing documents — Airbnb realizes that fighting cities in court will be a long-term risk to their profitability:
“Compliance with laws and regulations of different jurisdictions imposing varying standards and requirements is burdensome for businesses like ours… While we seek to work with governments, we have in the past, and are likely in the future, to become involved in disputes with government agencies regarding such laws and regulations.” — Airbnb’s SEC filing
Did you catch that? Airbnb fully plans to wage war on the global public. They’ve already sued and beaten New York City.
What kind of ethical business needs to fight democracy to extract a profit?
Even when and where Airbnb wins, it will still hurt
Like Uber and Lyft’s $200 million war against its own drivers, even in cities where Airbnb does prevail in the courts, it’ll be an expensive and costly fight every single time. Already, ten European cities — Amsterdam, Barcelona, Berlin, Bordeaux, Brussels, Krakow, Munich, Paris, Valencia, and Vienna — have banded together to send a joint letter to the European Commission, asking them to address the “explosive growth” of Airbnb listings which is leading to soaring long-term rental costs in their cities.
And Airbnb is in 100,000 cities, all of whom have a bona fide reason to fight Airbnb to the death.
Not only will the company have to spend a boatload of cash in every city to lobby politicians and convince voters that having 20-plus ghost hotels per street is somehow a good idea, but winning will simply embitter residents on a political level. Even if Airbnb wins hundreds or thousands of these battles, it will eventually become clear that the war was a Pyrrhic victory at best.
Airbnb’s long-term business model is fundamentally flawed. The reality for Airbnb — and for every other growth-focused corporation in late-stage capitalism — is that it needs to grow forever. It stands to reason that, as Airbnb monopolizes more and more of the market (having already acquired HotelTonight and Urbandoor, and likely to go after Booking.com, Vrbo, or Tujia at some point), they’ll eventually face an anti-trust lawsuit from the government.
How bad could it get?
There are currently more than 114 million house-renters in America. But by mathematical necessity, Airbnb needs to onboard an exponentially-increasing number of residential properties in order to maintain double-digit growth figures. What happens to renters and homeowners when Airbnb is devouring 10+ million houses per year?
Is the company really “creating value” in the $100-billion range if it costs society trillions in elevated real estate and rent prices, increased commuting time, and the total loss of community?
It stands to reason that, as Airbnb hosts swallow more and more of the residential real estate market there will inevitably be a breaking point where desperately out-priced renters simply revolt and do to Airbnbs what folks did to the windows of Jehovah’s Witness halls starting in the 1950s: smash them to smithereens.
Paul Graham, one of the earliest investors in Airbnb, has called it the cockroach of startups. In the end, Airbnb might very well be an unkillable company like Groupon, but hopefully, it only lives on in a much-more ethical form. It’s added great design and elegant booking to the world of travel, no doubt, but the cost to society is far too great.
In the end, Airbnb’s demise will actually be very good news for marketers, hosts, entrepreneurs, startups, travelers, and the public at large.
- For marketers, more host platforms will create more marketing options, more niche specificity, less ad competition, and far more affordability. There’s also the opportunity to pitch hotels and brands of all sizes, helping them get back in the fight against the monopoly-contender in the ring.
For hosts, let’s hope future platforms are compelled to charge far fewer fees and give much stronger insurance protections.
For entrepreneurs, there’s the opportunity to build bona fide, elegant, innovative Airbnb challengers. As individualist-consumerist society grows, expect to see a proliferation of highly-curated sites in the years ahead. (It’s not unlikely that we’ll see groups of superhosts join together and start their own co-op sites, too.)
For startups, there’s the opportunity to work with city governments to build exciting new tourist-focused buildings in legal commercial zones, perhaps even crowdfunding the investments needed to build and maintain them. We can expect much innovation in the hospitality sector as enterprising companies create an ethical third model, a golden middle between traditional hotels and Airbnb-type sites.
For travelers, expect hotels to wake up and bring real competition and creativity to the hospitality industry again, and expect cities to create new tourist zones so travelers can enjoy the global while allowing locals to flourish.
For the public at large, we desperately need housing and rental prices to fall by double-digit percentage points, so hopefully, governments can resist the onslaught of corporate cash that continues to erode democracy and our local communities. We can protect residential real estate and create a thriving tourist industry, and the investment will create an untold number of jobs in the process.
Airbnb is little more than a story stock. It took a good idea and a metric ton of debt and private equity and strangled its competition. It made a few people very rich, and the wider society much poorer. Its weakening relationship with its hosts, rising democratic distrust, the coming onslaught of meaningful competition, and its impending battle with every major city on earth makes it unlikely that Airbnb will go the distance.
Sure, the stock price will likely still climb for quite a while — it’s one of the biggest brands in the world, with a truckload of new equity and an army of high-profile business celebrities who are invested in its success at all costs— but don’t expect our grandkids to know what we’re talking about when we say we used to “Airbnb our way around the world.”
Perhaps the ultimate irony is that the young men who couldn’t afford to pay their rent are now about to make it harder for tens of millions of others to do just that.
Should society and the market really reward them for that? Or is it time to really question how we define contributing “value” to society?
The room-booking companies of tomorrow have much to learn from Airbnb: Treat your hosts better. Don’t charge nearly so much. Don’t overestimate your value to society. Don’t commercialize residential neighborhoods. Don’t try to bully and buy your way to a monopoly. Don’t take more than you give. Don’t mess with democracy.
Instead, the marketers and startups of tomorrow must grow businesses with sound economic foundations, on long-term sustainable models, with deep care for customers, investors, democracy, and the planet. Instead of being big and famous, just be truly great.
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- Date of publication:
- Thu, 01/14/2021 - 07:32
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