How AirBnB Might Ultimately Fail

Is AirBnB's network play really building up to a success?

 

When we think about successful models of network effect, AirBnB is definitely one of the most successful companies that benefited from growing a two sided market. Founded not even a decade ago, they now boast over 1.5 Million listings in 34,000 cities and 190 countries. Early this year, the online lodge renting platform was valued at 25.5 Billion. Growing a double sided market seems to be a chicken and egg problem, but AirBnB had eventually overcame this problem by first growing a rental base through providing the service free in parallel to Craigslist, which also helped them confirm the demand in the market. Having a strong foothold and a focus on quality, it does seem that network effects have efficiently raised the bar of entry for competitors. But why then, would we say that AirBnB might ultimately fail?

Because network effect isn’t made of solid gold, users can leave just as quickly as they’ve came, just look at what happened to MySpace. Here’s why:

 

Less sophisticated participants enter the system and dilute value:

This happens when the network grows exponentially, but the control systems to ensure quality content doesn’t scale as smoothly with it. As new renters join the platform, it becomes harder and more costly to ensure quality. If not done well, AirBnB risks losing what differentiated them from Craigslist in the first place: quality offerings. The value of the platform hence decreases as the content becomes less engaging or relevant to what users are looking for.

The platform by itself holds no value:http://platformed.info/twitter-whatsapp-uber-airbnb-network-effects/

AirBnB relies heavily on a commission system that adds costs to the users for access to their platform, collecting 3% of the renter’s income every time they get a customer through the platform. This means that the more you are making, the more you are paying to them. I have personally heard from an AirBnB host advising me to contact him directly next time I want to visit the city so that we can both save costs by not going through AirBnB. The same happens with online platforms like Handybook that provides services like plumbers and cleaning services. Once the service providers connects with a customer, there is no real obstacle to cut the platform out in future transactions as the value is ascribed to the users on top of it, but not the platform itself.

Long time to reach profitability:

The network play usually starts with providing services to users for lower than cost in order to attract substantial user base. To reach the state where the market is ripe for reaping the benefits usually takes much longer, which makes these investments especially expensive. Companies that are looking to establish themselves to a network scale better make sure they also have VCs with deep pockets. Last year, AirBnB lost over $150 Million and is on the track to losing $200 Million this year according to PrivCo. This leaves us with the question, when will they actually start making money? Are they even positioned to capture the value they are creating?

 

With these potential risks while also facing significant regulatory issues, it is hard to say whether AirBnB’s network effect play is really going to turn out as a success in the long run.

 

 

 

 

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Student comments on How AirBnB Might Ultimately Fail

  1. Very good points overall. I definitely see the possibility of top-performing households leaving the platform (or becoming less active on it) after they realize they can cut out the middleman and advertise online directly to customers. However, this would take coordination between market participants on at least two extra issues: timing of the accommodation (Airbnb solves that problem by only showing accommodation available in the given time frame) and trustworthiness (through its own brand Airbnb does provide extra level of comfort for first-time accommodation users). Before internet search becomes even more efficient than it is today, those two may be worth the extra 3% commission. The latter however indeed becomes an issue if, as you point out, lower quality participants (on both sides of this two-sided network) enter the platform and dilute the value. If any of the sides, or worse yet both, lose faith in the platform, new entrants (with different business model?) may enter the space ending Airbnb’s dominance.

  2. While I also question the ability of renters to cut out the middleman (there is certainly a small subset of repeat visitors who could subsequently go directly to the owner, but for the majority of visitors, they lack this direct relationship), I completely agree with your point that less sophisticated users dilute the value of the platform. I myself have had an AirBnB reservation cancel on me last minute and have known many friends to have this same thing happen. This is horribly inconvenient, and AirBnb does very little to mitigate the problem. They charge renters a small fee for cancellation, but that fee pales in comparison to the inconvenience caused to the customer. Customers simply cannot afford to show up to another city for their vacation, celebration, etc, only to find that they have no place to stay. This problem has sparked a rather emotional reaction from consumers (just Google negative reviews of AirBnb and there are numerous websites dedicated to the topic). This negative emotional reaction can be very dangerous and I believe can just as quickly result in users defecting from AirBnB’s platform.

  3. Great post! Similar to the reviews above, I agree that less sophisticated users can dilute the value of the platform. From my own experience, I have seen lodging options that are overpriced and frankly unsanitary being posted on the platform. For platforms like Airbnb, content is super important. The content in this case being the lodging postings – the company needs to put in more effort filtering and monitoring the content to ensure a pleasant user experience. To your point about cutting out Airbnb and reaching out to the renter directly, I agree that this makes sense if you are revisiting the same city. However, most people who use the site are traveling to a new location and therefore will not have the advantage of cutting out the middleman (Airbnb). This makes sense for a service like Handbook since your location is constant.

  4. With a title like that, how could you not click? 🙂

    I agree that a lot of these service businesses are subject to cutting out the middle man, but I think the difference here is that services is a local need and Airbnb is a remote need. I need a cleaner to come on a regular basis, so I pay Handy and he comes once. Once I verify he does a good job and seems trustworthy, I hire him outside of the platform. Most people renting on Airbnb will not return to the same city for quite a while, let alone want to stay in the same home. Next time I travel it will be to a different place and Airbnb will be needed to provide the same service: connect me to a decent house with a good host.

    The other reason I am optimistic about Airbnb is that they are building up barriers: they have technology to verify identities of host and guest, a great customer support team to rebook me if something goes wrong with my rental and, on the host side, guarantee my place up to $1m. Those are things I wouldn’t want to give up to save 3%.

  5. Love the title and picture! You mentioned that fees may drive disintermediation which will lead the AirBnB’s demise. Given the geographic scope of their offering do you think that is a real threat to the business? I use AirBnb because it provides a sense of security for me. I know that money will be exchanged per the listing on the site. While I may contact a host directly during a repeat visit, I will definitely use the platform for travel to new locations and recommend that my friends and family do so as well.

  6. Interesting post, Pipedreamer! While I think many of the concerns you mentioned are certainly risks for AirBnB, I do think they can be overcome. There are two points you mentioned that I’d like to push back on:

    Less sophisticated participants enter the system and dilute value
    You compare AirBnB’s platform as one that may end up like Craigslist, but I respectfully disagree. My understanding right now is that Craigslists’ “quality” filtering model is solely crowd-based. Therefore, if I were to post an item, other users on Craigslist would take a look and see if it looks legitimate or not, and that determines if the post remains online or not. This isn’t necessarily the best approach, since I could post my apartment 100 times on the site, since odds are, the reviewers of my posts are different each time. Further, I can put in a fake e-mail address and spam people (and/or send them to another site) just for the sake of it. Lastly, there is no customer review system on Craigslist; I don’t think I can go back and review a house to say, “Yes, my stay was outstanding,” or “No, it was a horrible experience.”

    With AirBnB, you often login with Facebook (which helps in terms of filtering out spammers), but you also have a huge incentive to upload quality, legitimate apartments, since you are clearly competing with many other users who are doing the same (and when users read customer reviews, filter through star ratings, etc., your listing will essentially vanish if it’s not up to par). Also, from a “spam” perspective, AirBnB can look through the data to see if a listing is present multiple times (i.e., deleting duplicate listings). Given the smart money invested in AirBnB, I find it hard to believe they will allow the platform to dilute itself in terms of quality. Even if they have to spend some more money to ensure it doesn’t become a spam-box, I think they’d realize it’d be well worth, since the revenues they capture upon scaling can be huge.

    The platform by itself holds no value
    While I do agree there are disintermediation risks associated with AirBnB, I don’t honestly think they’ll be that high. You mentioned that you had an AirBnB host advising you to contact him next time, but my push-back to you is:
    • What are the odds that you’ll be regularly going to that city and wanting to stay in the same exact place? Perhaps you want to explore a different part of the city?
    • Assume they were high odds to the question above. What are the odds that your host will have his house available for you next time? It would still make sense for him to put it on AirBnB and have it booked as often as possible versus waiting for the off chance that you need the apartment. And assume he puts it on AirBnB, someone rents it out for a weekend, and then you decide you want it for that same weekend. I’d assume that if the AirBnB host cancelled the reservation on the platform for you, there would be consequences (e.g., bad ratings, strikes on the platform, etc.).

    1. Hi Schwas,

      Thank you for the thoughtful comment! My own few thoughts on your comments:
      I think the two points you point out goes hand in hand. I agree that AirBnB can definitely invest more money into quality control, but currently the mechanisms isn’t bulletproof yet. To my understanding, the current rating system of AirBnB is also crowd-based, given that it’s an aggregated review of people’s experiences. The particular thing about AirBnB is that it is a very personal experience where you meet the host face to face and more often than not there will be some parts you like and some you don’t. What I find myself is that even if some parts of the experience was sub-par, if the owner is a nice person, it prevents me from giving him a full honest review because I don’t want to hurt his business based on my personal experience. Of course, you can say it could be just that I’m too nice and these views are highly subjective, but I think there is definitely potential for these type of “positive” ratings to happen. (Given that the disadvantages of his place that I’ve experienced was nowhere mentioned in any of 50 reviews he got.) Therefore, I don’t think the review system is the best way to sift out lower quality units.

      On the disintermediation risks, I would say that as a frequent traveler between Boston and New York, it is possible that in my needs I would frequent the same AirBnB, as I find the quality level of lodging still highly varies from spot to spot. I don’t think it’s hard to imagine people to stick to their choices when they frequent a city. If a host provides a great place that attracts enough of these travelers, it is possible to reach a critical mass where they no longer to post their place on AirBnB. This is why the traditional Bed and Breakfasts can survive even before the AirBnB platform was invented. I imagine that the places that can reach this state are higher quality units, and if most high value units gradually moves towards this model of cutting out the intermediary due to high demand of a growing user base, the quality of content on AirBnB would eventually go down.

      Of course these are all assumptions and it might take a long time before it hits. I agree with you that before this happens, people will still pay the 3% fee for insurance. I think it is very interesting to see how things will play out.

  7. I don’t know if I agree with you when you say that network effects will weaken AirBnB if less sophisticated participants enter the system and dilute value. Here the network effects only strengthen the platform when users are able to initiate quality control through accurate, honest reviews of the guests and the hosts. After a few negative reviews from guests, a host’s rating will diminish and future guests will be able to easily defer that the option is unattractive. Regardless of future growth, the network effects should remain strong through consumer-driven transparency and authentic feedback that naturally eliminate less sophisticated participants.

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