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AirBnB’s billion-dollar idea

Five years after Brian Chesky and Joe Gebbia rented out their first air mattress, their business rivaled Hilton Hotels in terms of available rooms. And they don’t own a single hotel.

In 2007, two new design graduates, Brian Chesky and Joe Gebbia, were struggling to pay their rent. To solve the problem, they decided to start a bed and breakfast business in the apartment they shared. They put three air mattresses in the living room and threw in a homemade breakfast. Instead of advertising on established sites, they built their own website – “Airbed and Breakfast.”

The idea for Airbnb was born.
Five years later, thanks to 3 million guests booking overnight stays through Airbnb, they rivaled Hilton Hotels in terms of the number of bookable rooms – without owning a single hotel.

Avaliable world wide

Today, Airbnb is available in more than 34,000 cities in 192 countries. With 2 million homes listed, the platform has made a fundamental change to the way we travel.
“It brings people from all over the world closer together, and provides a more authentic experience,” Aja Guldhammer, Airbnb’s Nordic manager, says over the phone from a rainy Amsterdam street.

Illustration by Erik Nylund

“The range is so varied. There is everything to rent, from small cheap rooms to over 1,400 different castles. There is something for everyone, no matter what you want. One host in Copenhagen rents out at a low price in return for guests spending a few hours with her children, so that they get to meet people from all over the world.”

Soon after the first mattresses were on the living room floor and guests had started coming and going, Chesky and Gabbia were fielding questions from people from around the world about expanding to other locations. They decided to scale up their idea to a platform where other people could also advertise their homes or rooms for rent.

In 2009, they changed their name to Airbnb and started to take a fee from both those who booked a room and those who rented one out. They also started to offer professional photography services to customers who were using the service. Just one year later, fueled by millions of dollars from external investors, the number of rentals increased by 800%, and Airbnb was already in 89 different countries.

In April 2015, The Economist quoted a Boston University study on the hotel industry in Texas, which estimated that in 2016, Airbnb – if it continues to grow at the same rate – would take a 10% share of the industry’s revenue. 

Neighbors might worry

Sofia Orrheim has had several Airbnb guests stay at her studio apartment in Stockholm’s Södermalm.
“I know that staying at a hotel isn’t always a lot of fun, plus I love to give people tips on restaurants and bars, even if they’re sometimes off the beaten track,” she says. “I cherish the idea that I’ve given someone a real taste of Stockholm, while making a little money while I’ve been away.”

Some 5km from Orrheim’s apartment, Alexander Widegren has also rented out his one-bedroom apartment in Östermalm. His place was hugely popular, especially during all the royal weddings in Illustration by Erik Nylundrecent years. However, he’s decided not to rent it out anymore.
“Even though it was fine for me to rent it out, I still worried about the fact that my neighbors didn’t know the guests,” he says. “We don’t usually even lock our front doors in the apartment building, but with strangers in the house, my neighbors’ behavior changed.

“It was good income, but it also took a lot of work. I cleaned up the apartment before and after the guests, moved all my clothes and personal belongings out of the apartment and back in, and I’d have to stay somewhere else or travel. So I basically asked myself whether I wanted to sleep well or get the cash. Nothing beats a good night’s sleep.”

The sharing economy

People starting to use each other’s houses and apartments is part of a larger global trend called the sharing economy, which is also about a change in consumption patterns. Instead of buying services from companies, people are swapping, renting, or borrowing directly from one another.
“The sharing economy is shining a spotlight on everything that is somewhat over-regulated and has high overheads, and it is challenging old structures and businesses,” says Anna Felländer, digitization and future economist at Swedbank, and co-author, (together with economists Claire Ingram and Robin Teigland from the Stockholm School of Economics) of The Sharing Economy.

Digitization has made it easier for private individuals to rent out their sofas, apartments, and cars to strangers, and also to offer services such as giving someone a ride, dog sitting, or leaf-blowing in a more systematic way.

‘Companies such as Uber and Airbnb have opened the door for the sharing economy’

Uber, the transportation network company offering rides in private cars, is another example of a company that can successfully do business in this new marketplace. These types of companies have reshaped traditional business models.
“These digital platforms match people who want to buy, rent, or share products and services with those who are offering them in a very cheap and effective way,” Felländer says.

“What makes it unique is that the transaction costs are so low. You don’t need to invest in a large hotel complex. In the sharing economy there aren’t any overheads, so the companies can compete on price.”

Felländer says that while there’s competition between offerings within platforms, monopoly situations between the different platforms can easily arise.
“Airbnb has been one of the ‘first movers’ and they have gained a critical mass of trust on these platforms, and there is a kind of self-regulation,” she says. “This creates reluctance among users to move to a platform that is ‘second best.’”

Copied business model

Nevertheless, a number of companies have successfully copied Airbnb’s business model, such as Housetrip and Wimdu. One successful example is online-based rental service HomeAway, which was recently bought by travel booking giant Expedia – for €3.5 billion. Another is the American company Wework, which started renting out shared office space in 2010 and today is valued at over €8.5 billion.

In Sweden, new startup Workaround is looking to emulate this success.
“Companies such as Uber and Airbnb have opened the door for the sharing economy,” Rikard Hegelund, co-founder and CEO of Workaround, told Dagens Industri recently. “There is now an openness toward this kind of solution.”

Airbnb has also encountered resistance. Some of it has come – unsurprisingly – from the hotel industry, which argues that sites like Airbnb risk the safety of guests and lead to unfair competition.

Illustration by Erik Nylund

Of course, there have been setbacks as well.
In 2010, a woman had her house completely trashed and all her valuables stolen by a guest. Air­bnb initially refused to help the woman, as it had no legal responsibility to do so, but later it relented. Shortly after that came another horror story, when a host had his apartment vandalized. He was also robbed and became a victim of identity theft.

Criticism began to spread that the company had lured people into a false sense of security and left them in the lurch when something bad happened.

Chesky, the CEO, publicly apologized to the hosts, and Airbnb launched a new Airbnb guarantee of $50,000 (which varies by country) to cover vandalism or theft. The amount has been since raised to $1,000,000.

In dispute with authorities

The company has also been in dispute with a number of authorities in America and Europe that are concerned about the uncontrolled growth of private holiday home rentals and the difficulty in collecting the taxes that property owners are required to pay on this income.

In New York, it is illegal for private individuals to rent out their home for a period of fewer than 30 days unless the landlord also lives there at the same time. In Berlin and Barcelona, private short-term lets are known as “illegal housing,” and landlords risk being fined.

In many cities and countries, subletting requires permission, without which tenants who rent out property that they themselves are renting risk losing their tenancy. In Stockholm, the Rent Tribunal Board ruled in 2015 that a tenant association can refuse to allow short-term lets to tourists. What impact this will have in practice, however, is unclear. Guldhammer, Airbnb’s Nordic manager, points out that it is always the landlords’ responsibility to ensure they comply with the law.
“We’re in more than 190 countries and we have guidelines hosts should check before renting out their place, including checking whether they are allowed to do so,” she says. “If it’s not allowed, they shouldn’t do it.

“We would like to talk with the cities about how we can work together and how they can benefit from people sharing their homes with guests,” she says. “This is so new, and we need to work together to resolve it.”

‘Every economic paradigm shift involves the loss of jobs’

According to Felländer, the legislation has simply not kept up with the sharing economy. She quotes a famous quote by Swedish finance mogul Jan Stenbeck: “Technology always beats politics.”
“You have to have a flexible approach to the rules in order to not over-regulate or kill something that can create a lot of jobs and value for the economy,” she says. “We must embrace this and still produce a ­legal framework that ensures people don’t get used.”

The European Commission decided last fall to draw up an agenda for the sharing economy, which over the coming years will lead to a range of new draft legislation and guidelines for services such as Uber and Airbnb.
“Every economic paradigm shift involves the loss of jobs,” Felländer says. “Established industries are challenged in a dramatic way. But this is a huge opportunity for self-employment and integration because the barriers to entry are so low.”

Some cities have already chosen to adapt to the new sharing economy. Last year, Amsterdam introduced an “Airbnb-friendly law” that allows rentals of up to two months for up to four people at a time – provided the host pays tax on the income. France, too, has relaxed its rules on short-term lets. Britain is reportedly also open to change.

According to Reuters news agency, 80 million nights are expected to be booked via Airbnb this year – double the 40 million of 2014.

Guldhammer points out another advantage for a city’s tourism.
“The hosts often do not live in the traditional tourist areas, where hotels usually are located, so this spreads tourism to other areas that are off the beaten track,” she says. “This means that guests spend their money in new and different areas, buying their coffee at the local café, and so on.”

Never underestimate the importance of an air mattress for an economic paradigm shift.

 

Text: Michaela Möller

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