Research Analysis report of Airbnb

Amine Berrada

Course: MBA 501

Section: N 72

Student number: 574 972 493

Submitted April 11th, 2014

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Executive Summary

The report is a research analysis of Airbnb, Inc, which purpose is to deliver insights to an internal

and external client to support strategic planning. Airbnb that was founded on august 2008 is an

online platform allowing property owners to freely post their listing on the site, and travelers to check

for places where to stay. The services are provided online via the website or the application

available for smartphones. The target market of the company is the users of the website that are

property owners (hosts) and travelers (guests). Airbnb competitors can be divided in two categories:

Websites promoting the hotels bookings like Expedia, or the websites operating in the same field

like CouchSurfing, 9flat, Homeaway, and so on. Accompanying its international expansion, it has

acquired number of its competitors such as Accoleo, CrashPadder, NabeWise and Localmind. The

business model of the company is unique since it makes all its revenues from online activities which

classify it in the Pure-Play business. As a result, the internet business models of Airbnb are

brokerage (because the website works as a broker meeting hosts and guests together, creating

instead a virtual marketplace and facilitating transactions) and community model (users are loyal

due to the network effect that builds reputation). The Internet also impacted the way firms formulate

the competitive strategies; The bargaining power of buyers become high because the users find

themselves with more choices for product and services; The switching cost reduces because the

users have more information about the offers; The threat of substitute products increases because

the existing products become obsolete, new digital services and products are created such as the

disruptive product and services; The barriers of entry are almost eliminated due to the fact that

internet does not require any big investments; and as a result, the rivalry among existing firms

increases because making differences between the products become difficult, beside the fact that

there is resemblance of offers. Overcoming the challenges posed by e-business activities for Airbnb

came by shaping an online platform that provides interaction leverage (reduces the costs and efforts

required for a diverse array of participants by coordinating their activities). The key value lies on the

set of protocols and practices designed to facilitate interaction between users. The paper also

analyzes Carr´s article (IT doesn´t matter) where he declared that internet is no longer considered

as a competitive advantage and it became a commodity accessible to everybody. The case does not

apply because Airbnb is a real example of an online company being evaluated at 10 billion in just 5

years´activity. The future competitive environment for Airbnb is to find other ways for guarantying

security for its users, but also to look on the legislative aspects that could impact negatively the

activity of the company.

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Table of Content

1. Description of the Company:........................................................................................................... 3

1.1. Services and Target Market: ................................................................................................... 3

1.2. Distribution Channels: ............................................................................................................. 4

1.3. Number of employees and length of time: .............................................................................. 4

1.4. Competitors and Acquisitions: ................................................................................................. 4

2. Engagement in E-business and Internet Business Models ............................................................ 5

2.1. Engagement in E-business : ................................................................................................... 5

2.2. Internet Business models : ...................................................................................................... 5

3. Impact on the competitive strategies and Challenges posed by E-business activities : ............... 6

3.1. Impact on the competitive strategies....................................................................................... 6

3.2. The challenges posed by the e-Business activities: ............................................................... 7

4. Carr´s writing : ................................................................................................................................. 8

5. Future competitive environment for Airbnb: .................................................................................... 9

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1. Description of the Company:

Airbnb.com is an online company allowing property owners to freely post their listing on the site,

surcharging fees only when a deal is made (Brennan, 2011). The website is a marketplace where

travelers demand to find an accurate place where to stay, meets the hosts offers that could be

private rooms, entire apartments, castles, boats, manors, tree houses, tipis, igloos, private islands,

or other properties (Brennan, 2011). The company that was founded in 2008 by Brian Chesky, Joe

Gebbia and Nathan Blecharczyk has recorded in 2013 more than 500.000 listings in 33,000 cities, in

192 countries, and served around 11 million guests (Mengel, 2013). Returning back to its origins,

Airbnb is brought from the previous name of the company which is “Airbed & Breakfast”. The

concept came from the simple idea when the co-founders (at that time students) were living

together, they were renting out a place from their loft and offering home-made breakfast for visitors,

all to cover the cost of their living. The essential need turn out to a business, and they launched

officially the Airbedandbreakfact.com on august 2008 (schonfeld, 2008). In 2009, the founders

change the name to Airbnb.com and expanded their activity to cover all kind of accommodations

(Brennan, 2011). They financed their company first via selling a special edition breakfast cereal of

the USA presidential candidates, then after received a $20.000 from Y combinatory investment

(Rao, 2009). The company has been growing significantly through the years, and in 2010, it has

succeeded in raising up $7.2 million in series A funding from Greylock Partners and Sequoia Capital

(Wortham, 2010). In 2011, the company raised $119.8 million in venture funding; whereas in March

2014 the company announced that it is going to receive $400 to $500 million, bring it to a valuation

of $10 billion (Rusli et al, 2014). If the funding round turns out to be successful, the company will be

considered as the most valuable startup in all times.

1.1. Services and Target Market:

a) Services

Aibnb, Inc provides to its users an online platform that connects freely between hosts and renters.

This online platform could be accessible from the application on a smartphone or online via the

aibnb.com or any other websites through which Airbnb provide services (yu, 2012). The concept

comes from the “economy sharing” or as know by the “Collaborative Consumption” where people

make good use of their assets by providing services to other people through a specialized virtual

Marketplace, which is the case of Aibnb.

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b) Target Market:

The target Market is the users of the website that are property owners (that have extra place that

want to rent) and renters (Travelers that are searching for a good experience with a reasonable

price). Every user must create a personal account (linked to a social network media) where it

provides detailed personal information. Details shown in profiles are reviews and shared social

connections that build reputation and trust among users (Van Grove, 2011). Moreover, property

owners (Hosts) create listing where they publish pictures of the place offered and details concerning

prices per period and rules. Users after connecting and communicating their needs and intentions,

travelers (Guests) book the place via the website and conclude the transaction.

1.2. Distribution Channels:

The Online website, mobile application (Android & IOS), social networks (Facebook, twitter,

YouTube) and blog are the channels of distribution that the company uses to provide services to

customer. The collaborative market lays on the internet usage because it is considered a cheap

communication network that is available to everyone (Personal global connection); it gives a wide

access to public network (Social sharing); it provides standardized communication protocols and a

great user interface (Mcnurlin et al, 2008).

1.3. Number of employees and length of time:

Since august 2008, Airbnb has been operating as an actor of the collaborative consumption. It has

been growing through the year and raising funds in order to satisfy in an accurate way its target

market. The company, one year after its creation, had 15 employees that were working in San

Francisco office. Nowadays, the company counts 12 offices all around the world with a number of

employees that reached 1.324 (Crunchbase, 2014).

1.4. Competitors and Acquisitions:

Airbnb competitors can be divided in two categories: Websites promoting the hotels bookings or the

websites operating in the same field. For the first category, Expedia is the major competitor in the

market as long as it offers a range of hotel offers that compete against the one of Airbnb. For the

second category, Airbnb is obviously the leader in the peer-to peer rentals, followed by 9flats that

has also some popularity (Bryant, 2012). The market also knows the presence of a huge number of

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websites that offers the same service like CouchSurfing, Homeaway, HouseTrip, Luxorbnb, Kozaza,

Castlecave.com, stopsleepgo and ratedapartments. (Chubbybrain, 2014)

Since the website started to be more popular by travelers, Airbnb started its international expansion

by acquiring number of competitors around the world, such the example of Accoleo in Hamburg,

CrashPadder in London, NabeWise and Localmind. Because the company has no boundaries

through its e-business activity, the acquisitions has strengthened its presence internationally, and

provided more services to the international travelers (Crunchbase, 2014).

2. Engagement in E-business and Internet Business Models

2.1. Engagement in E-business :

According to Afuah & Tucci (2003) that had studied the internet business models and strategies

through creating a scheme of e-business development, Airbnb is considered to be a firm using only

digital channels by operating all its transactions and customer services online. Since it started its

activity, the percentage of revenue contributed by the online activity represents a 100% because the

core activity of the company relies on the technology and internet, which classify it in the Pure-play

businesses.

The E-business stages described by Chaffey (2007), Bocij et al. (2005) and Turban et al. (2006) do

not apply for Airbnb because the company is a Pure-play business, which started its activity as an

online platform. The revenues of the firm are all generated from the online activity based on

commissions for achieved rentals.

2.2. Internet Business models :

The internet business model is defined to be the way by which a firm can manage to sustain itself by

considering the advantage of using internet McNurlin (2006). It can focus on different

approaches like the revenue generation or the costs savings, but it also has different

categories. In the case of Airbnb, the business Model is concentrated on Brokerage and

community models.

a) Brokerage

Airbnb’s website works as a broker meeting hosts and guests together, creating instead a virtual

marketplace and facilitating transactions (Rappa, 2010). The revenues of the company are made

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from the commissions on bookings going from 6% to 12%, all depending on the price (Bly, 2012).

Also the firm charges 3% fees taken from the host’s revenue due to the credit processing system

(Couts, 2012). Airbnb revenues are only extracted from these commissions, but also protect both

hosts and guests from undesirable situations such as damages or non-respect of conditions that

could affect the guest journey, by holding the transaction and not completing it until both parties are

satisfied (Normally after the check-in by 24 hours) (Bly, 2012).

b) Community Model:

The community model relies on user’s loyalty and heavily on the network effect (Rappa, 2010).

Hosts are the main contributors listing the properties on the website, but also the guests saw a

particular relationship with the Hosts. After achieving the transaction between the host and guest,

both parties are required to leave reviews and grades, in a way to build a reputation that would

impact positively or negatively the property’s owner. The reputation enhances the chance to have a

network that could increase the demands, but also it is considered as references for future users.

However, the startup did not make any changes over time related to its e-business model.

3. Impact on the competitive strategies and Challenges posed by E-

business activities :

3.1. Impact on the competitive strategies

Internet is a tool that most companies use, not only as a mirror that reflects their brand image, but

also for profitable operations that generate revenues. Michael Porter (2001) in his article “strategy

and the internet” discussed the impact of the internet on the competitive strategies of a firm. The

bargaining power of buyers become high because the users find themselves with more choices for

product and services, more informations are given about the service, but also more transparency

concerning the prices (Porter, 2001). The switching cost reduces because the users have more

information about the offers, and they can benchmark the market to find the best quality /price

report. However, the case does not apply for Airbnb because they tend more to lower the switching

costs by increasing the networking effect of the users. More the users get reputation and have a

good grade, more they become loyal to the website, and forget about switching to website. The

threat of substitute products increases because the existing products become obsolete, new digital

services and products are created such as the disruptive product and services (Porter, 2001). The

barriers of entry are almost eliminated due to the fact that internet does not require any big

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investments in physical assets, any sales force that represent the company or any proper channels

of distribution (Porter, 2001). The internet applications also starts to be difficult to preserve because

there is a mass of entrepreneurs that follows the trends and copy the concept, which results in a

flood of new entrants in industries (Porter, 2001). The bargaining power of suppliers decreases

because the level of competition becomes higher, due to the fact that small and big firms become

the same (Porter, 2001). As a result, the rivalry among existing firms increases because making

differences between the products become difficult, beside the fact that there is resemblance of offers

(Porter, 2001).

3.2. The challenges posed by the e-Business activities:

Shaping a platform that delivers new services to internet users is challenging because the company

does not know how the feedback is going to be. Overcoming the e-business activities came by

shaping a platform that provides interaction leverage (Hagel et al, 2008). This type of platform

reduces the costs and efforts required for a diverse array of participants by coordinating their

activities (Hagel et al, 2008). Airbnb designed this website by distinguishing between guests and

hosts, and even from different kind of allocations that are provided in its website. Moreover, the key

value lies on the set of protocols and practices designed to facilitate interaction between users

(Hagel et al, 2008). Airbnb make possible the communication between the users by creating a chat

section where both parties build trust between each other, but also coordinate for a better

comprehension of the rules and pre-requisites. The website also asks users to allow the

implementation of cookies in their browser in order to detect their special need directly and place the

appropriate posting. Also, the company focuses on taking professional photographs of the

accommodation in order to improve the design of its posting and make them more enjoyable.

Airbnb online platform provides powerful leverage for both shaper and participants. From the users

perspective, this platform increases functionality by allowing them to rent out or find place without

significant waste of time; it decreases adoption costs because it is easy for every person to follow

the protocols (because they are standardized); and generate revenues for hosts or good quality

price report for guests- those effect amplified as users grows (Hagel et al, 2008). From shaper´s

perspective, the platform helps in concentrating the flow of knowledge as the activity is engaged with

more users (Hagel et al, 2008). Winter Olympics in Sochi were the perfect example of a functional

website, when journalists could not find hotels with good infrastructure. Airbnb replied to the tweets

by giving them the opportunity to be hosted by Russian, avoiding then a possible disaster for the

organizers (greve, 2014).Airbnb acts also in cases like natural disasters by uncharging the fees for

refugees and people in need for location.

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4. Carr´s writing :

Carr (2003) in his article “IT doesn´t matter” discusses a number of issues related to IT and the

internet. He declared that internet and digitalization used to be considered as a competitive

advantage for the companies when they adopt it in the early stages of their life cycle. He assumed

that using internet remains an expensive and risky way to invest, especially that it lays on

uncertainty (Carr, 2003). Companies started implementing IT departments in order to follow the

trend and acquire significative market shares. Carr (2003) argued that competitive advantage

happens when only few companies adopt or use a resource in order to differentiate from others.

Also, he advanced that strategic advantage occurs when there is an innovation or the use of a

scarce resource such as a patent or unique business processes. However, he indicated that once

the internet will be available and cheaper to everyone it will become a commodity accessible to

everybody (Carr, 2003). Carr (2003) also claimed that the IT functions became more like a

commodity, and companies investing on it are wasting their budget, and tend to be unprofitable. He

recommended to companies using IT functions a number of points that turns around managing the

risks and focusing only on vulnerabilities and not opportunities, keeping the costs low (especially

when it is subject of getting the last version of a software, while the ones that the firm has work

correctly), and be a fast follower because the company applications are duplicable, but creating

them are very expensive (Carr, 2003).

Talking about Airbnb, Carr´s argument about technological companies seems to be wrong. The firm

has only 5 years old and could operate on the international level within 2 years, with less fixed costs

and considerable profits. It has multiple offices around the world, and still continues its expansion

due to the interest of the population to the collaborative consumption that offers several advantages.

Airbnb is considered one of the first movers to this trend, and developed its IT functions in order to

satisfy number of worldwide users. Nowadays, internet became a source of information and is

indispensable for daily users, it is cheaper than what it was in 2003, and offers a number of

opportunities. However, Carr argument about vulnerabilities has a part of truth, because Airbnb is

focusing on both vulnerabilities and opportunities. Because in this kind of activity, incontrollable

incidents can occur such as the stolen items and damages done by guests, in this case Airbnb had

to overcome the situation by setting a contract with insurance companies going to refund an amount

until a million dollars. The opportunities rely on detecting the need of launching a new product

satisfying a new niche of customer for example.

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5. Future competitive environment for Airbnb:

The collaborative consumption is a new trend that helps people sharing experiences and assets that

are not used in appropriate way. Airbnb understood that the internet activities move rapidly and

faster than the traditional one, and started acquiring numbers of competitors in the international

market to keep on following the trend, gaining more market share, and specialize massively in its

industry (Bryant, 2012). The future competitive environment will stand for the corporations that are

carrying about the security of the users; Airbnb already understood this concept and made some

actions regarding the consequences that resulted by contracting with insurance companies, and

guarantying an automatic refund for damages. The legislation aspect is the one that the firm should

observe constantly because the activity is not yet regulated and taxed. Innovation and looking for

specific products for another niche of consumer is another point that Airbnb should think about.

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