Centro de Casos

AIRBNB CASE
In 2007, designers Joe Gebbia and Brian Chesky were struggling to pay rent in their native
San Francisco when an upcoming design conference had fully booked the city's hotel rooms.
Thinking they might be able to house a few conference participants on air mattresses in exchange
for rent money, Gebbia and Chesky launched airbedandbreakfast.com. When, six days later,
they had three guests paying $80 per night for an air mattress on their floor and breakfast, they
knew they had something. Joined by programmer Nathan Blecharczyk, they hurriedly redesigned
and expanded their site for another hotel-swarming event, the 2008 Democratic National
Convention in Denver. Launched two weeks before the August convention, within a week, they had
800 listings. Airbnb was on its way.
Airbnb.com was an unwitting pioneer in what is now known as the "Collaborative
Consumption" space, sometimes known as the "Sharing Economy." By using technology to create a
multi-sided platform for owners and users to connect, and enable underutilized resources to be used
by people who need them, only when they need them. By eliminating the need for everyone to
own an expensive resource like a car, such as ZipCar does, they can lower the transaction costs
for everyone as the network grows.
The Hotel Industry
The traditional hotel industry is familiar to most travelers. Hoteliers have a set inventory
of rooms that they rent out on a nightly basis at rates that vary from cheap to affordable to
exorbitant based on a variety of factors, but namely occupancy, with the intention of maximizing
their revenue per available room ("RevPAR" being the industry term). While every hotelier has their
own pricing model, as a rule, pricing is largely opaque to the traveler, though many websites exist
that compare pricing and aim to drive the rental rate for a particular room down to a hotel's "best
offer." However, hotels are largely in city centers, their offerings are largely standardized and
generic, and, given the number of options, travelers can rarely feel like they "got a deal."

Este caso fue escrito por la Dra. Martha Corrales y revisado por la Dra. Claudia Ramos de EGADE Business School.
El caso se desarroll nicamente para su discusin en clase. No es el objetivo del autor ilustrar un manejo efectivo o
inefectivo de la gestin. El autor ha cambiado ciertos nombres e informacin confidencial.
EGADE Business School prohibe cualquier forma de reproduccin, almacenamiento o transferencia sin el permiso
del autor. Este material no autoriza derechos de copia o reproduccin. Para ordenar copias o solicitar permiso para
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Copyright 2016, EGADE Business School Folio: 2016-01-03

 Airbnbs aim is to disrupt the traditional hotel industry. Their website acts as a multi-
sided platform for the "living space" market. Hosts can list their available spacefrom an unused
bedroom to their entire homeon the site, for a night, a week, or a long-term rental for 3% of
the booking price. Travelers can then choose from an inventory of spaces that suit their
particular travel needs at an agreed-upon price, with up to 15% of the booking fee going to the
site as intermediary.
As the Airbnb network growsin January 2011, the company had one million bookings, by
July of that year it had doubled to two million, by the end of 2011, it had five million, and in June
of 2012 hit 10 millionit steeply lowers the transaction costs associated with finding a living
space. Traditional hotels are forced to compete both on price against a rapidly growing inventory
of distinct properties, particularly in urban areas where the cost of expansion is high, and
during times when their own inventory is lowest.
Significant transaction costs also exist in terms of vetting the quality of both the property
and the person who will use it. After a high-profile disaster in which a renters home was
destroyed by a tenant, and her blog entry about it went international, Airbnb has increasingly
taken on the role of risk mitigant.
Airbnb photographs new listings professionally, insures the property for the host up to $1
million, and their customer service helpline quickly addresses the concerns of travelers who arrive
at a room that does not meet its billing on the site. Moreover, in terms of monitoring and enforcing
compliance, the company uses an extensive reputational review system for hosts and allows them
to collect significant information on potential renters to help ensure that the tenant's motives are
clear, and that the tenant's guests are similarly well-intentioned.
Airbnb's final role in lowering transaction costs is to help negotiate the contract between
buyer and seller. Before accepting a request, a host and guest are allowed to exchange messages
through the site, but Airbnb has developed an algorithm to block messages containing phone
numbers or email addresses. If a host accepts a request, Airbnb authorizes payment and provides
the travelers email address and phone number, with payment arriving to the host via check, direct
deposit or PayPal.
Airbnb's value proposition is easy to understand for both buyers and sellers. For potential
hosts, it allows them to monetize a previously underutilized space within their home (or other
propertysellers have rented out private islands, tree houses, caves, and boats) with a vetted paying
guest for any amount of time they'd like. If you find yourself called away on business and don't
need your apartment for a week, why not rent it out? For travelers, the value proposition is equally
clear. While hotels offer a consistent and generally reliable experience, the inventory is limited,
the pricing is opaque, and rooms can be generic. Why not rent a nice apartment for yourself for a
fraction of what it would cost to stay in a hotel?

Market Opportunity
At its founding in 2007, Airbnbs room leasing model posed a threat to existing hotel room
capacity, as the potential for a flood of newly available rooms could meaningfully reduce the value
of existing supply. Given the large size of the U.S. hotel market - $125.2 billionthe market
opportunity for Airbnb and its host partners was immense.

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The U.S. Hotel Market
In late 2007/early 2008, the U.S. hotel market was in relatively strong condition. Over the
previous five years, the market had grown by a cumulative 16.2% and had reached peak revenues
of $125.2 billion by the close of 2007. At the close of 2007, national occupancy rates stood at
63.1%, slightly above historical averages. Despite the strong performance of the market through
2007 and early 2008, macroeconomic uncertainty loomed on the horizon. Nevertheless, several
large deals, including The Blackstone Groups June 2007 acquisition of Hilton Worldwide,
suggested that global investors remained bullish on the sector.

Hotel Market Players

At the end of 2007, the U.S. hotel market was tremendously fragmented, with 48,757
different establishments operated by 40,284 different corporate entities. The roughly 49,000
properties were divided into three main categories company owned hotels (e.g. owned and
operated by the hotels brand owner), franchised hotels, and independent hotels. At the beginning
of 2007, approximately 70% of U.S. hotel rooms were operated by franchise owners, 12% were
operated by brand owners, and the balance were independent.
Branded hotels (franchise/brand operated owned) were the most profitable portion of the
market through the 2000s, with average net operating income exceeding that of independent hotels
during the 2002 - 2008 period.
Branded hotels were able to generate higher net operating income by taking advantage of
customer loyalty programs, more sophisticated revenue management techniques, and through their
ability to access large national reservation systems.
Independent hotels did not enjoy these advantages, and as a result, tended to deliver lower
profitability numbers than their branded peers.
Despite relatively low levels of industry concentration, U.S. hotels produced surprisingly
high levels of operating income between 1995 and 2006 generating pre-tax income between $12
and $22 billion each year. Such numbers seem high given what many would describe as high levels
of industry rivalry. However, a closer examination of the industry shows that within local markets,
levels of rivalry are generally lower allowing for relatively high profitability. Survey data shows
that most hotels believe they have only four or five true rivals in their market. This suggests that
local markets are often oligopolies, allowing hotel owners to charge higher rates than could be
expected given the high levels of rivalry in the national hotel market.
U.S. Hotel Guests
U.S. hotel guests fell into two distinct categories leisure travelers and business travelers.
Business travelers represented 44% of total travelers in 2007, paying an average of $119 per room.
These customers were typically less price sensitive than leisure customers and tended to be loyal
to large national brands. Leisure travelers represented 56% of total travelers in 2007, paying an
average of $109 per room. Such customers were generally more price sensitive than their business
travel counterparts and tended to be less loyal to national brands.

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Market Analysis: Airbnb Opportunity
An assessment of the hotel market shows that Airbnb had a potentially compelling market
opportunity at its founding in 2007. The firm was entering a large and profitable market with a new
value proposition that would be attractive to the industrys largest customer segment price
sensitive leisure travelers. By offering a new supply of rooms in markets across the country, Airbnb
had the potential to disrupt local hotel oligopolies and offer consumers a lower cost alternative to
traditional hotels.
Ecosystem Analysis
Adventurous Travel Accommodations before Airbnb
Traditionally, US travelers seeking unique, personal accommodations have had relatively
few options. For those who wish to avoid the pervasive large hotel chains in favor of something
that feels more distinctly local, boutique hotels, motels, hostels, inns, and bed and breakfasts
(B&Bs) have long been the most readily available alternatives. In particular, B&Bs provide
adventurous travelers with benefits not available through standard hotels, such as the chance to
have personal interactions over shared meals with hosts and other guests. This model has developed
a strong niche market in the US, with some fifteen to twenty-thousand B&Bs operating nationwide.
While the process might initially seem simple, Exhibit 1 illustrates the many requisite
steps involving various parties for a traveler to find and stay at a B&B. First, the traveler must
find the B&B. Today, this is increasingly done through online search engines, such as Google.
These searches can lead users directly to a B&Bs website if the search criteria are specific, but
more commonly lead to a number of listings pages, such as Homeaways BedandBreakfast.com.
These listing sites sort B&Bs by location, price, and other features to help travelers select
accommodations, and some provide online room booking services. From the listing sites,
travelers investigate the websites of individual B&Bs. To ensure that travelers will find their site,
B&Bs undertake a series of steps. The B&B owner/operator must first create a website, often by
contracting with professional photographers and web designers. The website must then be
marketed, for which purpose many B&Bs join associations and purchase online advertising.
Of course, the B&B must also focus on its day-to-day operations, ensure that it has adequate
liability insurance coverage, and even map out and recommend local businesses and eateries for
visiting guests. Once their stay is over, many guests write B&B reviews for websites like
TripAdvisor, for the benefit of other travelers.
The Airbnb Ecosystem Adoption Strategy
Airbnb is bringing disruptive innovation to the unique travel accommodations market and, to
a lesser extent, the traditional hotel accommodations market. To deliver on its value proposition,
Airbnb has rearranged several of the players in the ecosystem, brought in new players, and removed
others. In addition to these planned strategies, the company has also relied on recent trends. This
business model might not have been successful even a decade ago, but developments in technology,
shifts in cultural norms, and economic realities in the US and other developed nations have paved a
way for the emergence of Airbnb. Exhibit 2 shows the Airbnb ecosystem.

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 Many of the actors in the Airbnb ecosystem did not require significant influence to change
their participation. For example, third party service providers such as contracted photographers are
likely relatively indifferent between working for individual B&Bs in the old ecosystem and working
for Airbnb in the new ecosystem. These companies and freelancers likely benefit from the overall
market expansion and increased work opportunities, but they were already happy and active
ecosystem participants before the emergence of Airbnb. However, it is significantly more interesting
to look at a few of the key players Airbnb has actively managed to better understand how the
company developed its ecosystem:
Hosts (homeowners or renters): Moved from Red to Green in the adoption chain
Airbnbs most unique characteristic is arguably its proposition that anyone with a spare bed
(or couch, airbed, etc.) can convert their space into a profitable B&B overnight. This premise is at
the core of Airbnbs offering, as the company must build an adequate base of supply (hosts) to
attract and satisfy demand (guests). However, attracting hosts also represents the companys
greatest challenge. Airbnb is still improving in its ability to attract and retain hosts, but it has already
seen remarkable success with over 5 million room-nights booked, as well as hosts in over 19,000
cities across 192 countries. The companys success has hinged, in large part, on its ability to
attract hosts by addressing their needs and concerns:
Safety and security
For many potential hosts, the idea of letting someone you dont know personally stay with you,
in your home, triggers significant questions about safety and security. Airbnb addresses these
issues by providing a suite of support services to mitigate concern and address any issues that
might arise:
o When listing their accommodations, hosts answer a series of questions to restrict the types of guests
they are willing to host, as well as the terms of the stay. These guidelines are posted to the
accommodation listing.
o Guests can be required by hosts to post a security deposit (held by Airbnb).
o Hosts are covered by a $1 million umbrella insurance policy backed by Lloyds of London for guest
damages.
o Detailed guest profiles, including validated emails and phone numbers, linked Facebook
accounts, guest photos, and even reviews from other hosts who have previously interacted with the
guest are made available to the host before a reservation is made. Privacy controls allow each host
to limit what information is available to potential guests before the host accepts a request for
reservation.
o In-site messaging platforms (chat and video-chat services hosted through Airbnb.com) allow guests
and hosts to interact, get to know each others needs and preferences, and set ground rules
before a reservation is made.
o A 24/7 support line is available for host and guest concerns.
It is interesting to note that many of these measures were developed after the home of an Airbnb
host in San Francisco was vandalized by guests in mid-2011. The company faced significant
public scrutiny after the incident and even issued a public apology.
Communications and logistics
Airbnb simplifies and guides the communications process to minimize headache for potential
hosts. A few key elements of Airbnbs process include:
o Airbnb listings pages display key logistical information such as approximate location (specific
location is revealed once the booking is finalized), availability, pricing by date, check-in and check-

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 out times, house rules, and amenities. This information is organized in a simple, standard design,
preempting questions from potential guests and reducing the need for email or phone contact.
o Airbnb uses a sophisticated smartphone application and simple text messaging to keep hosts
informed of inquiries on their listings. Airbnb.com also features several easy-to-use tools for hosts
to track listings performance and history.
Planning and pricing
Airbnb reduces the burden that would otherwise be placed on hosts to determine how to best list
their rooms, set prices, and even host their guests. The company provides best practices in all of
these areas to maximize host engagement and ensure a consistently positive guest experience.
o Airbnb provides a Quick Start Guide to Hosting as a downloadable PDF file on its website. The
file is filled with tips, checklists, and other information to help hosts set up their listings and provide
a great guest experience.
o Airbnb.com and the mobile application offer price guidance based on a homes value or equivalent
rent, helping hosts determine a reasonable nightly rental rate. Suggested rates are also provided for
longer-term rentals.
Marketing
Airbnb hosts play only a minimal role in the marketing of their listings. Airbnb markets itself
heavily, driving travelers to the site and mobile application. It also provides a number of tools to
help hosts make their listings as attractive as possible.
o Listings sites are well-integrated with social networking platforms like Twitter, Pinterest, Google
Plus, and Facebook. While this does serve to improve security by allowing hosts to see potential
guests shared connections, it also provides a valuable marketing tool as guests share information
within their personal networks about their favorite host listings. The Wish List feature also allows
guests to flag and share listings across social networks.
o Airbnbs web design is cutting-edge, thanks to the companys strong team of designers and
developers (and a few open-sourced code contributions). One example is the infinite scrolling
characteristic: as travelers browse through listings, they can scroll down the website page
seamlessly, surveying an endless stream of high-resolution photos. These types of features improve
the user experience, keeping users engaged with the site and transforming the act of finding
accommodations from a necessary task into an enjoyable activity. In turn, hosts benefit from their
private access to this highly-engaged pool of travelers23.
o Free professional photography services can be arranged directly through Airbnb, allowing hosts to
easily build a professional looking listing. This is a clear advantage for hosts considering other
options such as Craigslist for finding a short-term renter or sublease.

Travelers: Moved from Red to Green in the adoption chain

Travelers demand and preferences for unique accommodations arent new developments,
but there is significant trepidation from travelers in staying in someone elses home. Airbnb
had several levers to manage to entice travelers to use their collaborative rental service.
First of all, Airbnb is relatively inexpensive for the traveler. Unlike hotels, Airbnb doesnt
incur the typical expenses of housing and accommodating travelers like cleaning, maintenance,
utilities, etc. Furthermore, Airbnbs hosts arent in the business of maximizing profits like
hotels. They are simply looking to augment their income while theyre out of town. As a result,
many of the listings on Airbnbs site are priced below-market. Travelers have the opportunity
to visit a new city, travel the world, and create new memories at a fraction of the price.

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 Next, Airbnb is easy to use and is configured to draw the user in. The company uses
high- quality, professional photographers to catalog its listings. The user sees crisp, stunning
photos of their destination and becomes immersed in where theyre going. As mentioned,
the infinite scrolling feature on the site allows users to flawlessly scroll through hundreds
of listings and photos without a hitch. This turns browsing into an experience and keeps the
user immersed in the activity. Once a transaction is finally complete, Airbnb offers top-notch
customer service. They broker all money transfers between travelers and hosts, reducing the
hassle and uncertainty of payment and removing risk for the parties involved. The company
also offers 24/7 customer support to help resolve conflicts.
Finally, Airbnb has made their service social rather than search-based. Piggy-backing off
the trend of social networking and the rise of companies like Facebook, Twitter, Pinterest, etc.,
Airbnb is striving to create a community and make the rental system a personal experience. The
site encourages reviews of hosts and travelers to enhance travel planning and help weed out
bad seeds.
Airbnb also surveys its hosts to provide local recommendations for specific cities. The
Local Lists are intended to improve the experience of people visiting a city for the first time.
By having a great time the first time around, travelers are likely to return to a city and return to
the Airbnb site. The website also has Wish Lists which are lists of alluring locations that users
create themselves. By tagging these locations with a heart, instead of the typical star, Airbnb
found that engagement sky-rocketed. The heart was aspirational, not a generic web shorthand.
The Wish Lists are collaborative and can be linked to Facebook or other social networking
accounts. This helps to grow the Airbnb community and makes it more of a destination site,
somewhere where people will go for fun instead of just a place to book a room.

Online Marketing: Green in the adoption chain

Airbnbs collaborative sharing model in the home rental space is revolutionary. This service
was previously unknown to travelers. Collaborative sharing requires sufficient scale and
networking effects or the business model cannot succeed. Therefore, one of the greatest
challenges on Airbnbs part was spreading awareness for and educating consumers about the
service. Google has the best targeting tools in the online space and Airbnb utilized Google
Display Network and TrueView video ads on YouTube to try to attract and retain the right
customers. By using visual ads to showcase the uniqueness of Airbnbs rental accommodations
and its global scale, the company was able to target the right customers internationally. The ads
allowed Airbnb to show, rather than tell, consumers how their company is different. TrueView
videos provided for short, thorough explanations of the new service. Finally, Airbnb used
remarketing to re-ignite interest from past customers to get them back to the site to search for
more rentals. The strategy worked and Airbnb, with Googles help, was ultimately able to
increase the number of nights booked from 800,000 to 2 million (at the time).

Insurance Providers: Green in the adoption chain

Trust is imperative for Airbnbs hosts. There is great risk in inviting an unknown traveler
into your home amidst your valuables and cherished possessions and mementos. Airbnb is
responsible for upholding the triangular trust between the company, travelers, and hosts. Airbnb
learned this the hard way in June 2011 when a host reported that a renter trashed her apartment,
her belongings, and stole valuables and sensitive personal documents.

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 They smashed a hole through a locked closet door, and found the passport, cash,
credit card and grandmothers jewelry I had hidden inside. They took my camera, my
iPod, an old laptop, and my external backup drive filled with photos, journalsmy life.
They found my birth certificate and social security card, which I believe they
photocopied kindly using the printer/copier I kindly left out for my guests use
Airbnb hadnt historically taken financial responsibility for such incidents, but when other
episodes started emerging the company clearly needed to act. The key was to add a new player to
the ecosystem, the insurance provider. Airbnb first offered a $50,000 blanket guarantee on personal
property, the Airbnb Guarantee. They then upped this plan, in partnership with Lloyds of London,
to cover up to $1 million in property damages to every host free of charge, the Host Guarantee.
The move was unprecedented for both Airbnb and Lloyds. It has offered peace of mind to Airbnbs
hosts, made it easier for new hosts to opt in to the system, and has even allowed the company to
move upscale to the realm of castles, yachts, etc.
Venture Capitalists: Moved from Red to Green in the adoption chain
Like most start-ups, survival and success is greatly dependent on getting enough capital from
the right investors. Airbnb would not be around today, and will not grow into the future, without
its VC partners. Finding partners at the companys outset was no easy task however. Some of
Silicon Valleys most well-respected VCs (15 A-list investors by some counts) passed on Airbnb
in 2010, never fathoming that travelers would want to stay in some strangers bedroom, or that
someone would be crazy enough to rent it out in the first place.
You have two designers? With this question most meetings in the early days abruptly
ended. The Silicon Valley culture is much more welcoming to MIT than RISD, the co-
founders alma mater. Investors were scared off by a team that had no businesspeople, one just-
hired techy, and two guys who made things pretty. So how did the company finally get
investors on board? Ironically, creativity and design saved them.
In the summer of 2008 Airbnb was running out of cash. Generating just a few hundred
dollars a week and already facing mounting credit card debt, the co-founders desperately needed
another source of funding. In the midst of the 2008 presidential election, the company created two
Airbnb-branded cereals, Obama Os and Capn McCains. The team found a manufacturer to
create custom boxes, bought generic Cheerios and Chex, and repackaged the cereals to sell online
for $40/box. The plan received nationwide news coverage and the attention of several celebrity
enthusiasts. By the end of the election, Airbnb raised $30,000 and more importantly, finally
caught the attention of investors.
In November, 2010, the company raised $7.2MM from Y Combinator, Sequoia Capital,
Greylock Partners and Youniversity Ventures. Paul Graham of Y Combinator said, Those guys
were animals. It was certainly the first time we funded a startup that had two designers and one
hacker. Airbnb was off and running and one year later they secured an additional $112MM in
financing from Andreessen Horowiz, DST Global and General Catalyst, valuing the company at
$1.3Bn. While these company-driven innovations have been critical for engaging hosts, Airbnb
also relied more passively on several growing trends to support their business. First, the
emergence of social networks and social media is gradually altering peoples perception of
privacy.

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 Platforms like Facebook and LinkedIn are increasing peoples level of comfort with sharing
personal information and reducing barriers to interaction with second and third degree network
connections. This growing comfort in informational sharing is critical in Airbnbs model as it
allows them to establish a sufficient level of credibility and trust between strangers. Second,
Airbnb benefitted from a growing trend of adventurous travelers seeking unique accommodations
through couch-surfing or vacation home rentals. Websites like couchsurfing.org and VRBO.com
(Homeaways Vacation Rental By Owner) emerged in the late 1990s to support and popularize
this trend. As travelers began connecting and even arranging accommodations through these
platforms, the benefits and risks of this model became more and more apparent. Airbnb not only
leveraged the momentum of this peer-to-peer travel accommodations model, but was also
able to learn from the successes and mistakes of these earlier movers. Third, and finally,
economic pressures likely strengthened the market for Airbnb, especially in the companys
earliest stages. Founded in 2008, Airbnb grew its user base in the wake of a global financial crisis.
High- unemployment and reduced household incomes in many developed nations, including
the U.S., increased the attractiveness of saving money while traveling and making additional
income by renting out spare bedrooms.
As Airbnb developed, the company moved to diversify into more expensive, high- end
offerings such as rentals of castles, mansions, and private islands. However, the founders still
acknowledge the importance of financially-troubled hosts in providing a strong base of supply,
especially in the companys early years.
The Airbnb Ecosystem Co-Innovation Strategy
Due to Airbnbs remarkable timing for market entry, there was relatively little and quite
manageable co-innovation risk. Services like Googles Display Network and Facebook were well-
established and easily integrated. Photographers already had high-end equipment and the ability
to capture pristine photos and the companys web design was managed in-house. This leaves only
insurance and local attraction reviews as viable co-innovation risks.
Airbnbs $1 million insurance policy is not only the first of its kind, it is also offered free
of charge to its customers. The company was able to accomplish this by teaming up with exactly
the right partner. Whereas most insurance companies would decline this product due to its
seeming riskiness,
Lloyds of London is known for accepting complex and unorthodox risks. One insurance
expert called it a brilliant move on Airbnbs part and that no other insurance company would
have touched this with a 180 foot pole.
The plan works because the Host Guarantee stipulates that if an event occurs the host must
first approach the guest seeking damages, must then approach their own homeowners or renters
insurance provider, and then can approach Airbnb. Some may argue that this makes the policy a
bit of a gimmick, but the proliferation of new listings in the time since its adoption is
undeniable. The company also insists that instances of damage remain an aberration.
With regards to enhancing Airbnbs service through reviews of local attractions, the
company has largely outsourced this innovation to its hosts and guests. Although Airbnb
recently purchased a restaurant review service to help in its efforts, the ongoing cultural shift to
social networking, collaborative consumption, and online customer feedback has led the charge
for Airbnb in this realm of its business. The growing network of US and international hosts and
travelers should help make Airbnbs review service more robust as time passes.

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Analysis of Airbnb Business Model
Airbnbs success since its 2007 launch has been remarkable. Few could have imagined at
Airbnbs founding that three inexperienced business people could grow their start-up from
nothing to a $1.3 billion valuation within just five years. This breathtaking trajectory leads to a
key question how was Airbnb able to deliver such incredible amounts of value creation in such
a short amount of time?
Airbnbs success seems to hinge on three main factors the firms position as a best
mover in the room leasing industry, its ability to effectively reposition risks within its ecosystem,
and its ability to sequence success consistently adding features that built on its initial footprint.
The Best Mover, Not the First
At its founding in 2007, Airbnb was not the only player in the room-rental industry. Other
players, such as Craigslist or bedandbreakfast.com had already entered the market and were acting
as intermediaries between travelers and hosts across the globe. Despite this first mover advantage,
neither firm enjoyed the success of Airbnb, suggesting that the room rental industry favors best
movers over first movers.
A closer examination of the industry at Airbnbs founding shows that the room rental
intermediary space is generally unfavorable to first movers. In particular, traditional (scarcity of
inputs, cost differentials) and strategic sources (size of the market and the simplicity of the
product) of first mover advantage are generally unfavorable in the room rental intermediary space.
While new economy sources of competitive advantage show a potential advantage for a first
mover, none of Airbnbs initial competitors had meaningful network effects or lock-in traps that
would have allowed it to build an easily defensible competitive position in the marketplace.

As it entered the market in 2007, Airbnb took advantage of the fact that success in the room
rental intermediary market was not dependent on first mover advantage, but rather on best mover
advantage. Airbnb created a website that meaningfully improved on the offerings of competitors.
Craigslists inability to offer customers a guarantee of quality prevented it from gaining share in
the market, as both hosts and travelers were unwilling to risk dealing with unsatisfactory
counterparties. Airbnb was able to circumvent these concerns by creating an elaborate review
system that allowed both hosts and guests to better vet potential accommodations and customers.
This innovation allowed Airbnb to gain the trust of the two key players in the ecosystem hosts
and guests and take share from Craigslist.
In addition to its development of a powerful vetting scheme, Airbnb also improved upon
the offering of bedandbreakfast.com by aggregating a larger, more efficiently sized collection of
rooms for rent. Bedandbreakfast.com and other similar sites offered a stable of rooms located in
small inns across the United States. While the collection of inns was certainly heterogeneous, the
variety of offerings provided by these competitors did match that of Airbnb. Airbnbs ability to
offer a unique travel experience from a loft in SoHo to a Boeing 727 in the Costa Rican rain
forest allowed it to gain share from the bed and breakfast aggregators.
By entering the market after Craigslist and bed and breakfast reservation aggregators,
Airbnb was able to deliver a service offering that was best in class. The firm was able to offer
hosts and guests alike the opportunity to vet their counterparts something its competition was
unable to do. Additionally, Airbnbs ability to quickly build a wide variety of room offerings
allowed it to unseat existing competitors and offer guests the opportunity to experience unique
travel experiences.

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 Favorability
Advantage source
for FMA
Scarcity of inputs
Cost differentials
Traditional
Sources
Switching costs Moderate
1. Efficiently sized
Strategic sources
2. Simple product
Network effects and
critical mass
New Economy
sources
Lock-in traps Moderate
Private vs public
standards
Notes
Hosts and guests are available in
Low plenty both in domestic as well
as international markets.
Product development costs -
Usually reduce as the products
become simpler and
development costs go down
with new technology advances.
Low Customer acquisition costs -
Airbnb grew their initial user base
almost completely on the back of
craigslist. Its competition can also
use similar channels to acquire
customers.
Although the switching costs
were low initially, Airbnb has
increased them by
implementing reviews and
detailed profile options in the
product.
The market is quite large and the
Low product can also have multiple
differentiation factors.
Airbnb platform has significant
direct and indirect network effects
between hosts and guests. Over
High time, it has attained critical mass
in terms of number of active
users.
By collecting a lot of information
from its users, Airbnb has created
an incentive for its users to remain
on the Airbnb platform.
Regulatory environment will
affect Airbnb and its
Low competition in a similar
manner.

By being the best mover Airbnb was able to build a dominant market position that few
can challenge today.
Effectively Repositioning Risks in the Ecosystem
Airbnbs success is also attributable to its ability to transition risk from its two most
important constituencies guests and hosts to other portions of the ecosystem. This transition
of risk made Airbnb an invaluable intermediary in the room rental ecosystem and cemented its
position as a powerful platform that all market participants rely on to make the room rental
transaction process as painless as possible.

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 Risk Traditional Room Airbnb Ecosystem Notes
Review system
provides quality
Poor Quality
Risk bearer Renter Risk bearer Airbnb signal
Rooms
Risk profile High Risk profile Low Airbnb provides 24/7
(Traveler)
customer service to
guarantee quality

Airbnb covers property

loss or damage due to
theft or vandalism
Security and Risk bearer caused by an Airbnb
Risk bearer Airbnb
safety accidents Host Risk guest for up to $1M.
Risk profile - Low
(Host) profile High Airbnb allows hosts to
vet the quality of users
through reviews,
profiles, etc.
At Airbnbs founding in 2007, the cost of a host and a guest transacting on a room rental
was prohibitively high. Travelers were generally reticent to rent from homeowners or apartment
owners, as they had no ability to differentiate between the quality of offerings listed on Craigslist
or other room rental services. This combined with a lack of a meaningful recourse option for
travelers to make the potential costs of renting a room dangerously high. No traveler wanted to
spend their money on a room in an unfamiliar geography that was not up to their standards. As a
result, travelers generally did not rent single rooms in homes or apartments. Airbnb recognized
this hurdle and offered a two pronged solution - in exchange for a service fee, Airbnb would
provide travelers with both a quality guarantee (backed by 24/7 customer service) and access to a
database of reviews on each room location. By shifting risk from the traveler to itself, Airbnb
significantly lowered the transaction costs of renting a single room and opened up a potentially
large market of customers.
Airbnb was also able to lower the transaction costs for hosts. Until the advent of Airbnb,
hosts had little insight into the quality/trustworthiness of their guests. Many feared that if they
rented their homes to outsiders, they could potentially fall victim to theft or see their property
damaged. As a result of these risks, homeowners were generally reluctant to rent their homes to
strangers. Recognizing the potential worries of homeowners, Airbnb worked to shift risks from
hosts to another portion of the ecosystem by giving hosts a $1 million umbrella insurance policy
from Lloyds of London. By mitigating the risk of property damage and theft, Airbnb made the
prospect of renting property much more attractive to homeowners across the globe.
By transitioning risks from hosts and travelers to other portions of the ecosystem, Airbnb
was able to meaningfully lower transaction costs and build a dominant position in the room rental
market. By effectively repositioning risks, Airbnb gained traction in the market and was
able to build an unmatched network of travelers and hosts. This network has created significant
barriers to entry and prevented new players from threatening Airbnbs supremacy in the room
rental market.
Successfully Sequencing Innovation
Airbnb was also effective in sequencing the expansion of its value blueprint in a way that
allowed the ecosystem partners to be ready and enabled them to come together to create value.

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Minimum viable footprint The current state-of-art website and services offered by Airbnb is
a far cry from the initial product. Launched under the name of Air Bed and Breakfast, the
website was just an online portal for renting space on a strangers airbed or couch. In a review,
Techcrunch noted The site is spare but it does the job. Exhibit 3 shows a listing from the
2008 version of Airbnbs website. Typically, each person offering a room put up a picture of
themselves and the apartment or house, along with some very basic information. Travelers could
make reservations and pay for the stay on the website. Airbnb needed only a web platform to
connect travelers and locals to successfully create new value in the ecosystem. Not only did
Airbnb assemble the smallest configuration of elements that were needed in the ecosystem, it
also created unique commercial value and became popular among young travelers and
conventioneers. Thus the minimum viable footprint was formed by the combination of limited
website features, travelers, and hosts, and was simple, valued and extendable.
Staged Expansion - In 2009, the founders realized that the users wanted to use the site for more
than just renting space in someones house and were actively posting rental listings for
apartments, houses and vacation rentals. They also realized that increased and varied choice is
more appealing for consumers and decided to re-brand their website as Airbnb to incorporate
a variety of local accommodation options. By verifying the users preferences before casting
a wider net for housing rentals, the founders ensured that this expansion benefitted from its
existing user base. The site still allowed users to post airbed and couch listings, which continues
to be popular amongst consumers. But with a wider market, AirBnB soon grew to 2,500 listings
and close to 10,000 registered users.
Between 2009 and 2010, Airbnb introduced a number of new features in its website to make
user experience more personal. In 2009, Airbnb added a Groups feature to its website to make it
easier for people who share interests (e.g. photography) or have another connection with each
other (e.g. alumni whove attended the same university) to share travel accommodations and
recommendations. Later, Airbnb added a new Social Connections feature to its website. Airbnb
Social Connections allowed users to hook up the service to their social graph via Facebook
Connect. In the listings for cities around the world the users could now see an avatar if a
Facebook friend was friends with the host or had reviewed the host. By this time, the
boundaries between virtual and real social networks had disappeared.

13
Not just the early adopters, but even the mainstream population had become comfortable sharing
private information and making real world connections using virtual social networks such as
Facebook. From a technical point of view, Facebooks open API platform was required
for these enhancements to integrate with the social networks in a seamless manner. With this
expansion of its value blueprint, Airbnb also increased the value creation potential for its next
product enhancements.
Until 2011 Airbnb had always been focused on helping people rent out their apartments and
homes, but historically the service had been about short-term rentals. Although it was possible to
book longer stays, most people turned to the site as an alternative to booking a hotel room for a
week as opposed to renting out a condo for a month or three. That changed with the launch of the
Sublets feature in 2011. Airbnb delayed the launch of this feature to ramp up its safety features.
In order to convince people to rent out their apartments and homes for the long term, Airbnb
needed to revamp its safety features. The new safety features put in place after a backlash helped
in addressing safety concerns in the minds of users.
In late 2011, Airbnb also decided to revamp its mobile offerings and launched its Android app
with international expansion in mind. At the time, Airbnb served over 19,000 cities in 192
countries and expected its user base to double from its mobile offerings. Although smartphones
and mobile apps had started penetrating the US market in 2009, it took a couple of years for the
rest of the world (especially in emerging economies) to catch up in terms of number of
smartphones per capita. When Airbnb finally decided to launch its Android app, Android had
captured close to 50% of the entire worlds market share. In this stage, Airbnb successfully
expanded its user base using new services and new channels.
Airbnb - A Radical Innovation in the Making
Airbnb is emerging into a classic case of disruption. Internet-driven disruption first started
on the demand side and impacted the retailers and the traditional media industry. Recently, with
the emergence of the social web and real online identity, disruption has now moved to the supply
side as well. Service industries which require significant investment to create supply can possibly
be disrupted by lower-end services as long as the platform has a strong procurement and curating
model. Airbnb, unlike many other competitors, has thus far built the capabilities to disrupt the
market from both the demand and supply sides.
The hotel industry faces the potential for large-scale disruption by new entrants, finding
initial demand from the low-end of the market. The disruption here could be on two dimensions:
technology linkages or market knowledge linkages.

14
 Initially, when services like Craigslist were launched their technology linkages were not
much different from traditional online hotel listings or advertisements, but they did manage to
capture a market segment that was looking for cheap accommodations in unique, difficult to find
locations. While these services had potential value, they did not offer much additional benefit in
terms of ease of use, rating systems, etc. In contrast to Craigslist, Priceline greatly enhanced the
technology behind hotel search services. However, Priceline did not target a different market
segment. It instead offered the same services to the same customers with better integration of
online payment, customer ratings, pictures, etc. In essence, Priceline was a sustaining innovation.
In contrast, Airbnb melds the two into a low-end, and eventual new-market, disruption. By
leveraging its technology and social networking competencies, Airbnb can successfully provide
its services to customers looking for cheap accommodation alternatives in markets that are not
always efficiently targeted by traditional hotels.

How Sustainable is Airbnbs competitive advantage?

In the wake of its tremendous success, multiple new players have emerged to challenge
Airbnb in both domestic and international markets. However, Airbnb has been able to constantly
maintain superiority over its competition. The table below analyzes just how unique and
sustainable the success of the Airbnb innovation is.

Competitive advantage Rare? Substitutable? Imitable (ST)? Imitable

Business model X
Pricing model X
Brand X
Access to supply X
Product X
Management X
Access to capital X
Multi-sided platform X
Airbnb has positioned itself for a long-term superiority over its competition in the
collaborative consumption model by building a multi-sided platform between hosts and guests.
This platform has strong same-sided (direct) and cross-sided (indirect) network effects. The
advent of social media has acted as a catalyst to increase the network effects on this platform,
and Airbnb has capitalized on this opportunity by implementing features such as social
connections. Although it is difficult to determine whether or not this platform has reached a
critical mass yet, there is no doubt that a multi-sided platform of this size and such strong network
effects cannot be easily replicated or replaced.
High unemployment and low hiring levels in the wake of economic recession (2008) caused
a large number of households to consider offering unused space in their homes as short-term
rentals. By capturing this demand at the right time, Airbnb created one of the largest supply pools
of verified and reviewed short-term rental listings. Airbnb has already surpassed Hilton Hotels
as the largest player in the hospitality industry based on number of rooms available as
early as mid-2012. Creating a similar supply pool might be feasible in the long-term, but there
is a very low possibility that it can be done in the short-term. The competitive position of
Airbnb is further strengthened by the fact that it will take a long time and significant investment
for a competitor to create a similar supply pool.

15
Airbnbs Path Forward
There are three logical avenues for Airbnbs growth in the future, either standalone or in
combination:
1. Continue to consolidate the existing position in the overnight stay market
2. Expand into new markets that align with the current business model (e.g. geographic
expansion)
3. Expand into new markets that are outside the current business model (e.g. leasing non-
accommodation spaces)
The first path is a necessity. Airbnb has begun its disruption of the travel accommodation
market, but it needs to expand its marketing and customer retention efforts to grow its network
and complete the disruption of B&Bs and, ultimately, traditional hotels. Airbnbs growth in
nights booked has grown exponentially in the first five years if its existence. However, the US
lodging industry was valued at $138 billion in sales as of 2011. There is yet untapped potential
for Airbnbs services.
Second, there are multiple opportunities to expand into new markets that fit nicely into
Airbnbs existing business model. Airbnb is a large player in the US and especially Europe.
Although Airbnb has listings in over 26,000 cities across 192 countries, its presence in cities
outside of the US and Europe is relatively small. The company should focus on building its scale
in other global cities and emerging markets. Airbnb can also expand into other product
offerings that align with their business model, i.e. longer-term rentals and sublets. In fact, the
companys expansion into this area is already underway. Airbnb has built strong relationships
with many of its hosts, and longer-term rentals are a natural extension of their competency.
Third, Airbnb can begin to extend its services into new businesses that are currently
outside of their model. Airbnbs key value proposition is that it can create a forum to rent
underutilized spaces to price sensitive consumers. There are several markets outside of
overnight accommodations that fit this profile. Ideas include unused office space that can be
rented to entrepreneurs, small startups, or freelancers. There is also a market for leased event
space on the high-end like convention centers or banquet halls and on the lower end like
restaurant space for corporate events, family reunions, etc. By expanding their business from
brokering overnight accommodations to brokering underutilized private and public spaces in
general, Airbnb can rapidly increase the growth and value of its business.

16
Exhibit 1

Exhibit 2

Exhibit 3

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