A sense of community, cultural immersion, and novel experiences—this is what Airbnb promises its customers. The home-rental company, founded in 2008 by two roommates who couldn’t afford their San Francisco apartment rent, is now valued at over $25 billion after its latest round of funding led by the PE firm General Atlantic.
Airbnb offers an online two-way marketplace for listing and finding rental properties. It boasts over 60 million total guests and has listings in over 34,000 cities around the world, enabling travelers to find cozy, authentic, and peer-reviewed short-term rentals, when their alternatives are expensive and impersonal hotels.
For hosts, Airbnb offers an unparalleled opportunity to earn revenue on an underutilized asset and ties hosts into a thriving network of like-minded individuals, through its blog and social gatherings like Airbnb Open. Many hosts have transformed their Airbnb rentals into thriving businesses and their main source of income. As entrepreneurs, they have invested in upgrading properties and innovating on their service offerings to improve customer satisfaction, which furthers Airbnb’s reputation as well. Airbnb, in turn, rewards these “Superhosts” by providing high visibility to their properties on the website and enhanced customer service support.
The company charges hosts 3% of the booking price and guests 6-12% as a service fee. It projects booking 37 million room-nights per year by 2016. Third-quarter revenues for 2015 alone are $340 million, and are expected to reach $10 billion by 2020. But the company will have an operating loss of approximately $200 million this year, largely due to its rapid growth in new markets. Airbnb’s future rests on its ability to achieve direct network effects, so that both hosts and travelers have good reason to use the marketplace. The company has also faced regulatory hurdles in key markets like New York City, where the Attorney General lodged complaints that Airbnb’s hosts are running “illegal hotels” and violating tax laws.
Despite this, Airbnb is arousing fear among hotel chains and online travel agencies (OTAs), like Expedia, who are recognizing that the new kid on the block could steal their market share. Because it does not own the properties listed on the website, Airbnb does not require large capital investments to fuel growth, in the way that a hotel chain would. Overhead and labor, which are significant costs for most hotels, are also minimal for Airbnb, as hosts have the direct incentive to maintain their own property. Unlike Expedia, Airbnb does not have to negotiate complex contracts with large hotel chains and compete with other booking sites seeking to list the same properties.
Airbnb’s main asset is its elegantly designed website and mobile technology. A novel feature is the abundance of artistic photographs, which showcase the architecture and design of homes, and drive a traveler’s search on Airbnb. CEO Joe Gebbia believes in “aspirational travel” and enlisted over 3,000 professional photographers to capture the imagination of travelers. The online platform also has a blog with stories of Airbnb hosts and the company’s impact around the world.
The company has invested in strategic partnerships. Paypal processes Airbnb’s online payments and as of last month, customer can use American Express points to make Airbnb reservations. Teaming up with Facebook, Airbnb developed “Social Connections” that allows travelers to filter their search by properties listed by their Facebook contacts, a move that could shelter customers from security issues and lower the barrier for booking via Airbnb.
Airbnb is a leader in the so-called “sharing economy”, a new business model enabled by globalization, expanding social networks, and mobile technology. It captures the modern-day consumer’s incessant need for convenience and customization—all at an affordable price.