Airbnb in 2018 case study

Marketing Case Analysis On Airbnb

Read the case: Airbnb: What's Next? Prioritizing opportunities in Southern Europe (ATTACHED) and complete the case analysis.

Discuss the following:

1) briefly summarize the key marketing strategy issues in the case that are still relevant TODAY in addition to contemporary issues you find via research;

2) make thorough recommendations on how the issues should be handled;

3) provide a justification for the recommendations.

The case analysis should be approached as if you are a marketing manager that has been asked to present three long-term strategies to the board of directors of the brand/product in question. Based on your understanding of the case AND external research on the CURRENT situation, what are the three best strategies to revitalize this brand/product to the same target market and/or alternative markets? Please do not limit yourself to the specifics of the case when formulating your strategies. Think ‘BIG PICTURE’ (internal/external factors, complementary products/industries, sustainability, etc.).

Strategic recommendations should be measurable and broad enough to encompass the direction of the brand for at least 5 years. At the same time, the analysis should explain in detail the logic and process behind implementing such initiatives.

This case was prepared by Professor Mario Capizzani, and Tommy Kim and Stefan Obersriebnig, MBA 2015, as the basis for class discussion rather than to illustrate either effective or ineffective handling of an administrative situation. December 2015.

Copyright © 2015 IESE. To order copies contact IESE Publishing via www.iesep.com. Alternatively, write to iesep@iesep.com or call +34 932 536 558. No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means – electronic, mechanical, photocopying, recording, or otherwise – without the permission of IESE.

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Airbnb: What's Next? Prioritizing opportunities in Southern Europe

Introduction

It was a sunny Sunday morning in late November 2014 when Jeroen Merchiers, general manager of Airbnb for Northern, Eastern and Southern Europe, was jogging along the beach in the Barcelona neighborhood of La Barceloneta and reflecting about the future of his business.

Shortly before, Merchiers had been promoted from country manager of Airbnb for Spain and Portugal. He reflected on the region’s tremendous growth, how Barcelona had established itself quickly as one of Airbnb’s top five cities in the world based on the volume of annual travelers who used the company (about 900,000 since 2008), and on the city’s bright prospects for the future.

Despite all the success, Merchiers had some concerns. How could Airbnb sustain its recent success? The company had been valued most recently at $13 billion. Now the company needed to prove its potential and demonstrate its capacity to grow further. Brian Chesky, CEO of Airbnb, was considering several growth options: dedicating more resources to expansion in Asia; targeting the premium hospitality segment and focusing on creating “better travel experiences”; and possibly developing vacation rental properties. As someone whose opinion the CEO valued highly, Merchiers needed to be prepared to discuss these options in terms of what was best for Airbnb in Southern Europe as well as worldwide.

Besides weighing the different strategies that would help Airbnb to sustain its growth, Merchiers also needed to evaluate how to mitigate some key risks that had surfaced. Uber, a ride-sharing service platform founded in 2009, had been plagued by negative press coverage recently. As an example, Uber’s drivers, who by the company’s design operated as individuals, had begun grouping together in some cities to petition for higher wages. Given that Airbnb and Uber were both poster children for the “sharing economy,” Merchiers felt that

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it was important to think of how best to avoid or mitigate similar “unionization” problems and how best to ensure that both hosts and guests would remain happy endorsers of the platform. What would be the right measures to achieve that goal?

Lastly, much like in other countries, Airbnb Spain had been accused recently of failing to comply with the state’s regulatory framework, given that hosts were not officially regulated lodging providers (and hence were not paying any hospitality tax). He needed to prepare for how Airbnb Spain should position itself regarding these legal discussions and determine possible outcomes. Could he afford to ignore the pressure generated by the press or does he need to take action – and, if so, what action should he take first? The company had reached agreements to collect city taxes in Portland, Oregon, and in its hometown of San Francisco, California. Several other European cities, such as Paris, were considering similar agreements.

Company Background

Airbnb had become an alternative solution for short-term home renters and providers worldwide. Since its inception in 2008, Airbnb had become the leading marketplace offering a variety of accommodation around the world (see Exhibits 1 and 2 for Airbnb’s early user growth rates.) By the end of 2014 it had more than 25 million guests and more than 900,000 listings in 34,000 cities and 190 countries – almost every nation in the world except for the likes of North Korea, Iran, Syria, Cuba and the Vatican City State.

Airbnb was a pioneer in incorporating the burgeoning trend of “collaborative consumption” into its “peer-to-peer accommodation rental business model.” This innovative business model, powered by Web 2.0 technologies, was disrupting the traditional hospitality business sector and economy, and it showed strong worldwide adoption and potential growth opportunity. Exhibit 3 gives insight into the economic impact of Airbnb on major cities in the world (Barcelona, Paris, Berlin, Amsterdam, New York and San Francisco). Furthermore, as an example, Exhibits 4 and 5 provide demographic data on Airbnb’s hosts and travelers for Barcelona.

Company History

Airbnb was founded by Brian Chesky, Joe Gebbia and Nathan Blecharczyk in August 2008 in San Francisco. It was one of the first peer-to-peer platforms for accommodation. Unable to afford rent in the fall of 2007, Chesky and Gebbia offered to rent part of their lofts as accommodation for strangers to subsidize their rent. Once they saw the potential business opportunity, they got Gebbia’s former housemate Blecharczyk on board to develop the website to be used as a platform for peer-to-peer property rental.

In early 2009 they received $20,000 in funding from an angel investor, Paul Graham, the cofounder of Y Combinator, followed by a further $600,000 in seed investment from venture capitalists. In November 2010 the three cofounders raised $7.2 million in Series A and, in July 2011, the company received a further $112 million in venture funding and was reportedly valued behind the scenes at $1.3 billion.1 As of October 2014, after two more 1 http://www.telegraph.co.uk/technology/news/9525267/Airbnb-The-story-behind-the-1.3bn-room-letting-website.html.

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rounds of financing, the valuation was set to be $13 billion, up from its private $10 billion valuation in March of the same year (see Exhibit 6), as it discussed an employee stock sale, according to a report by the Wall Street Journal. 2 As Chesky posted on Twitter in January 2014: “Marriott wants to add 30,000 rooms this year. We will add that in the next 2 weeks.”

Toward the end of 2014, Airbnb forecast 2015 revenues of $850 million (i.e., more than three times the 2013 reported revenues of $250 million) and operating losses of $150 million. The company forecast revenues of $10 billion by 2020. By comparison, Marriott, which managed more than 4,000 hotels, had $13.8 billion in revenue in 20143 and a gross income of $1.84 billion. Business Model

Airbnb is a community marketplace where guests can book accommodation from a list of verified hosts. The company had traditionally identified itself as a technology platform that facilitated hospitality arrangements between hosts and guests. As such, it had been exempt from collecting tourist taxes, city taxes or personal income tax from hosts. Signing up to the website is free of charge and it costs nothing to post a listing. This has reduced the barrier for hosts to enter the market. Upon finding the listing that they want, would-be guests need to sign up to the website, which then provides information for contacting the host directly as well as for providing payment information for an accommodation request.

When the host accepts the request and the transaction is in place, Airbnb charges the guest a transaction fee of 6% to 12% and the host a fee of 3%. As the company is unlisted there is no precise information on its revenue, but there have been a lot of forecasts and assumptions in the industry. The investment bank Piper Jaffray estimated the overall transaction volume of Airbnb to be approximately $4 billion for the year 2014.4 By offering free membership and free access to accommodation lists, Airbnb quickly gained traction. Users were free to browse as they pleased and were prompted to pay a service charge only when making a reservation, which let Airbnb maximize the number of potential transactions.

Despite the free listings, sharing one’s own home continued to be a daunting decision for many would-be hosts, as a home was typically a person’s most cherished asset. Therefore, instilling trust in the platform was paramount for Airbnb in order to get people to share their homes and to ensure guests had pleasant travel experiences. To that end, Airbnb focused its efforts on customer service and satisfaction. Airbnb used the revenue from transaction fees to implement systems such as improved customer verification, $1 million theft/damage insurance, authentic guest reviews and social media connections. All these efforts contributed to positive word of mouth, which played a key role in generating up to 80% of the guest traffic.

All of these factors, designed with the specific purpose of building trust on both sides of the platform, helped Airbnb create a scalable business model that has led to promising financial returns. Exhibit 7 provides an overview of the average spending of an Airbnb traveler, compared with that of a hotel-staying traveler, for Barcelona and other leading global destinations. 2 http://www.reuters.com/article/2014/10/24/us-airbnb-financing-idUSKCN0ID03420141024. 3 http://fortune.com/2015/06/17/airbnb-valuation-revenue/.

4 http://skift.com/2015/03/25/airbnbs-revenues-will-cross-half-billion-mark-in-2015-analysts-estimate/.

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Online Hospitality Marketplace

The recession in 2012 had a negative effect on the growth prospects of Spain’s hotel and motel industry. However, more recently the industry turned around and showed a small but steady recovery. In the first 10 months of 2014, overnight stays increased by 3.1% compared with the same period the previous year.

The daily average invoiced amount per occupied room (average daily rate, or ADR) had been stable, going up slightly in 2012 to hit ¤70.50. The rate fell 3.6% to ¤67.90 in 2013 but later increased by 2.94% to reach ¤69.90. The daily average revenue per available room (RevPAR), which depends on the occupancy rate registered in hotel establishments, was also relatively stable until 2012, when there was a year-on-year fall of 0.8% to ¤38.60. However, RevPAR increased by 0.51% to reach ¤38.80 in 2013, followed by a substantial increase of 8.0% in 2014.5 Exhibit 8 shows the evolution of occupancy, ADR and RevPAR for Spain’s two most important city tourist destinations.

In Spain, the number of hotels increased, with a compound annual growth rate (CAGR) of 1.5% between 2009 and 2013, to reach a total of 19,550 hotels in 2013 (see Exhibit 9). The industry’s volume is expected to rise to 20,400 hotels by the end of 2018, representing a CAGR of 0.9% for the period from 2013 to 2018. Barcelona, Airbnb’s fourth most important city in the world, followed a similar trend. (See Exhibits 10 and 11.)

In Spain, the leisure segment was the industry’s most lucrative in 2013, with total revenues of $9.9 billion, equivalent to 89.4% of the industry’s overall value. The business segment contributed revenues of $1.2 billion in 2013, equating to 10.6% of the industry’s aggregate value. Even with the recent evidence of recovery in the market, there were still concerns over the uncertainty of the industry’s future growth. The Spanish hotel and motel industry had total revenues of $11.1 billion in 2013 (see Exhibit 12), representing a compound annual rate of change (CARC) of -2.6% between 2009 and 2013. In comparison, the French and German industries had a CAGR of 2.7% and 5.4% respectively over the same period, with respective values of $27.2 billion and $25.8 billion in 2013.6 Customer Segments

In the collaborative economy, also known as the sharing or peer economy, owners “share” and rent out idle capacity they are not using, such as a house, apartment, car or bicycle, to a stranger through peer-to-peer platforms. One of the largest and fastest-growing poster child companies of the collaborative economy, Airbnb has a two-sided platform that creates value by enabling direct interaction between two primary customer groups: lodging guests and hosts.

Guests – Taking Catalonia, one of Spain’s most important travel destinations, as an example, 85% of Airbnb guests visiting there had a bachelor’s or master’s degree7 and 61% were

5 http://www.ine.es/en/daco/daco42/prechote/cth1014_en.pdf.

http://www.cbre.eu/portal/pls/portal/res_rep.show_report?report_id=2801.

6 MarketLine, Hotels & Motels in Spain, April 2014.

7 Airbnb’s internal market research data.

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visiting Barcelona for the first time.8 Guests using Airbnb could be segmented in several ways. The most general hospitality customer segmentation splits guests by purpose of travel, such as business or leisure. With this categorization, Airbnb’s stronghold lies in the upper right quadrant of Exhibit, where guests typically travel for leisure either as solo travelers or up to the size of a family.

In the case of Airbnb’s minority customer group of business travelers, the company recently teamed up with Concur Technologies Inc., a leading provider of corporate travel and expense management services, to develop apps geared toward business trips.9 Nevertheless, Airbnb’s leading position was clearly in the leisure traveler category. With its commitment to providing guests with unique, local experiences (96% of guests travelling to Spain have indicated that they want to “live like locals”10), it was important to segment guests further by the type of experience sought. The type of trip experience could be divided by the type of destination (urban vs. rural; within vs. outside main hotel districts) or by point of origin (international vs. regional vs. local travelers).

Hosts – Airbnb hosts are diverse in age and many are in the middle income bracket. Some 75% of the hosts in Catalonia have annual incomes at or below the regional average of ¤26,411.11 Most Airbnb hosts rent out the home in which they live – their primary residence. For the hosts, the additional income generated from Airbnb rentals forms a modest but important source of income (on average ¤221 per month in Catalonia), with 53% of hosts in Catalonia citing that the income enabled them to stay in their homes.12

Interestingly, data collected for San Francisco, which is perhaps not typical of the cities where Airbnb operates, show that the top 10 hosts by total number of listings, accounting for 5.2% of all lodgings listed in the city, include property managers, hostels and even hotels.13

In terms of occupation, one third of hosts in Catalonia were classed as self-employed, working as freelancers or entrepreneurs.14

Additionally, personality may play a factor in how willing a person will be to list their property on Airbnb. Individuals who enjoyed meeting new people were naturally better candidates to become Airbnb hosts.

Competitors

Market competition in peer-to-peer renting services had increased significantly in the previous few years. This fact defied the logic of marketplaces such as Airbnb becoming a “winner-take-all” type of market. Although the core business model was similar in the

8 Airbnb’s internal market research data.

9 https://www.concur.com/blog/en-us/concur-airbnb-sharing-economy.

10 Airbnb’s internal market research data.

11 Airbnb’s internal market research data.

12 Airbnb’s internal market research data.

13 http://www.sfgate.com/business/item/Window-into-Airbnb-s-hidden-impact-on-S-F-30110.php.

14 Airbnb’s internal market research data.

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different companies, each firm had its own operating policy in order to remain competitive in the market. Some of the key competitors were the following:

HomeAway

HomeAway is a vacation rental marketplace with more than a million vacation rental listings in 190 countries. The United States-based company is one of the market leaders with a strong brand portfolio in the industry. Founded in February 2005 and headquartered in Austin, Texas, the company went public in 2011. Travelers can search HomeAway.com for free to find a vacation rental and homeowners can pay to advertise their property.15 The group also owns global brands such as VacationsRentals.com, VRBO (a popular vacation rental site in the United States) and smaller ones such as Toprural.es in Spain, specializing in renting country homes.

Wimdu

Wimdu is a peer-to-peer property rental platform for both vacations and short-term rentals. Founded in Germany in 2011, Wimdu had 39 different domains in its respective languages and currencies as of 2014 and it had more than 300,000 properties in more than 100 countries.16

The concept of Wimdu has been depicted as a copycat of its very similar direct competitor, Airbnb. However, Wimdu has a unique approach to the market it shares with Airbnb, based on the Wimdu policy of treating “different countries, different cultures, in different ways.” Wimdu was the fastest-growing social accommodation website in Europe in 2012. While initially heavily based in Europe, it later expanded to different markets including China, the Philippines and the United States.

Booking.com

Booking.com is a booking website that started as a small start-up in Enschede in the Netherlands in 1996. Based in Amsterdam, it has been owned and operated since 2005 by the United States- based Priceline Group Inc., a provider of online travel and travel-related reservation and search services with revenues of $8.4 billion and a market capitalization of close to $60 billion at the end of 2014. Through its online travel agent (OTA) services, the company connects consumers wishing to make travel reservations with providers of travel services across the world. The company’s brands include Booking.com, KAYAK, Agoda.com, Rentalcars.com and OpenTable.

Booking.com offers consumers online accommodation reservations, including hotels, bed-and- breakfasts, hostels, apartments, vacation rentals and other properties. It has claimed to have more than 700,000 properties globally under contract, to deal with more than 900,000 room night reservations per day, to have more than 60 million verified reviews and to operate in more than 40 languages. In 2013, Booking.com accounted for more than two-thirds of Priceline’s revenue.17

Booking.com does not charge customers a booking fee but charges accommodation partners a

15 http://www.homeaway.com/.

16 http://www.wimdu.com.

17 Ari Levy, “Booking.com Challenging Parent Priceline in U.S. Travel,” January 22, 2013, http://www.bloomberg.com/news/articles/2013- 01-22/booking-com-challenging-parent-priceline-in-u-s-travel, Bloomberg, February 23, 2014.

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commission on bookings. Booking.com was Google’s most important advertiser in the world, representing approximately $1.5 billion in revenue for the search engine in 2014.18 Finally, another potential would-be competitor was Expedia, Inc., a United States-based parent company of several online travel brands including Expedia.com, Hotels.com, Hotwire.com, Trivago, Travelocity, CarRentals.com and TripAdvisor. Besides the above listed competitors, several other smaller or niche competitors existed operating slightly different business models.

Value Proposition

Airbnb management believed that travelers chose its service, among other reasons, because it was the best-known site among peer-to-peer rental platforms and because, since its launch, it had built a reputation in the market for being trustworthy. Reviews by both guests and hosts were of the essence in building that trust, yet for hotels it was estimated that only about 2% of all travelers wrote reviews. Nevertheless, high-quality services based on trust (such as double evaluation systems, the elimination of anonymous reviews, professional photography and 24-7 customer services) have helped Airbnb build a strong reputation in the industry and have led the company to stand out from its competitors.

Additionally, Airbnb’s first-mover advantage helped to build brand awareness and reliability throughout its service and product offerings. Airbnb created market needs for hosts and international travelers and has been receiving positive feedback and reviews from users. All these actions helped Airbnb to build a reputation in the market for being very reliable, which provides assurance to travelers when it comes to booking their trips.

Airbnb further facilitated the process of listing and booking a space by handling all financial transactions. Thus, payments are timely and secure. This adds extra security, since a host is paid via Airbnb. A small processing fee is charged only when a place is booked. This was another major advantage of Airbnb compared with competitors such as HomeAway, one of the market leaders. That site puts guests in contact with owners or property managers. However, the transaction is not facilitated and thus tenants and owners are responsible for processing their own payments.

Airbnb has a balanced and authentic review system that has been changed through the years, but which allows only those who have exchanged services to review one another. HomeAway, in contrast, does not facilitate the transaction, so it cannot determine the accuracy of reviews left by travelers.

Airbnb provides a variety of choices for the types of room (entire place, private or shared room) and prices (minimum to maximum). These various product offerings and the price range provide travelers with greater flexibility when planning trips, which creates value for different segments of travelers.

18 http://www.wsj.com/articles/SB10001424052702304819004579487931119016044.

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Industry Trends

The current landscape of the hospitality industry has been broadened with the flourishing peer-to-peer marketplaces within the sharing economy, which coexist with traditional accommodation such as hotels and hostels.

The sharing economy is a relatively new socioeconomic model built around the sharing of human and physical resources. It includes the shared creation, production, distribution, trade and consumption of goods and services by different people and organizations.

According to Neelie Kroes, former European commissioner for the digital agenda,

“The old way of creating services and regulations around producers doesn’t work anymore. They must have a voice, but if you design systems around producers it means more rules and laws (that people say they don’t want) and those laws become quickly out of date, and privilege the groups that were the best political lobbyists when the law was written. That is old-fashioned compared to a system that helps all of us as consumers and encourages entrepreneurs. We need both those elements in our economy. […] the disruptive force of technology is a good thing overall. It eliminates some jobs and it changes others. But it improves most jobs and it creates new ones as well.”19

The peer-to-peer marketplaces that appeared within the sharing economy have been accelerated, enabled by Web 2.0 technologies, which have allowed for the rise of a variation of the conventional peer-to-peer model. Here, individuals can interact with each other on a two-sided marketplace platform, which is maintained by a third party. The growth of these disintermediation platforms was not a phenomenon specific to the travel accommodation business. Other platforms – such as Wallapop (classified ads), BlaBlaCar (transportation), Trip4real (tours and activities), Kantox (foreign exchange) and Zoppa (lending and loans) – were also gaining considerable traction in diverse sectors of the economy.

Four different drivers contributed to shaping the evolution of this industry: political, economic, social and technology drivers.20

The political drivers were government operations, legal systems and taxation, as well as licensing and certification regulations. In Spain, these political drivers largely were the competence of each region separately, and there was no common political approach for dealing with emerging situations arising from the surge in the sharing economy.21,22

The social drivers included population density, the sustainability mindset, lifestyle trends among youth, as well as independent lifestyles. The growing population density and, especially, urban density favor the network effect of this new model. The sustainability

19 Neelie Kroes, “My View on Today’s Taxi Protests and What It Means for the Sharing Economy,” June 11, 2014, http://ec.europa.eu/archives/commission_2010-2014/kroes/en/blog/my-view-todays-taxi-protests-and-what-it-means-sharing- economy.html.

20 http://www.web-strategist.com/blog/.

21 http://www.web-strategist.com/blog/. 22 http://www.lavanguardia.com/local/barcelona/20141112/54419228797/el-parlament-crea-una-comision-de-economia-colaborativa- tras-el-impacto-de-uber-y-airbnb.html.

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mindset focuses on economic conservation and long-term thinking, encouraging meaningful interaction and trust. Among youth with limited resources, the “sharing mindset” has become common. Additionally, many Airbnb hosts find this new income source empowering to maintain their independent lifestyle.

Key economic drivers included an excess of idle inventory, the inaccessibility of luxury and the influx of venture capitalist funding. The first economic driver aligned with the social drivers, mentioned above, makes use of the idle capacity of the hosts’ homes, which can be shared and monetized. Access is more important than ownership, and those who could not afford a luxury home can now rent it. Regarding the third economic driver, venture capitalists had already invested more than $695 million in Airbnb by the middle of 2014 in five rounds of investment.23

The technology drivers were social networking technologies, mobile technologies and the payment systems. The social networking technologies provide three key features: first, social profiles and reputation tracking; second, social graphics that enable people to connect; and, third, the transfer of information between hosts and guests. Mobile technologies provide access to the people interacting, and this new marketplace requires payment systems to complete the transactions. This leads to on-demand and cost-effective services with a lower administrative overhead cost.

Airbnb’s value proposition in this new environment within the sharing economy model is to offer multiple lodging options, cost savings, locations off the tourist trail, new friends in new places, easy-to-use and personal profiles, and reviews. While Airbnb was the best-known example of this phenomenon, over the previous four years at least 100 companies sprouted up to offer owners a tiny income stream out of dozens of types of physical assets, without needing to buy anything themselves. “The sharing economy is a real trend. I don’t think this is some small blip,” stated Joe Kraus, a general partner at Google Ventures.24

Online Marketing Strategies

Most of Airbnb’s growth can be attributed to its heavy investment in marketing and infrastructure. In the United States, Airbnb took off by implementing a digital marketing strategy involving two digital marketing giants: Craigslist and Google. Partnering with Google was a clear no-brainer but Airbnb was clever to leverage Craigslist, a widely used classified advertisement website in the United States. Airbnb found that Craigslist was already being used as a platform for people to offer and look for short-term housing. In order to attract customers from Craigslist to Airbnb, it reverse-engineered Airbnb’s platform to fit

with Craigslist and made the two platforms compatible so that anyone listing on Airbnb could create a posting on Craigslist automatically.

Through a partnership with Google, Airbnb was able to not only expand its reach but also target audiences geographically. Airbnb’s strategy with Google went beyond the traditional

23 https://angel.co/airbnb

24 Tomio Geron, “Airbnb and the Unstoppable Rise of the Share Economy,” January 23, 2013, www.forbes.com/sites/tomiogeron/2013/01/23/airbnb-and-the-unstoppable-rise-of-the-share-economy/.

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search engine marketing (SEM). As the Airbnb website was not optimized for transactions and direct conversations but rather to inspire trust, Airbnb devoted more resources to Google’s display advertising network, the Google Display Network, with compelling banner ad campaigns that included images from actual housing being offered. This allowed Airbnb to introduce its services as an entirely new way to travel the world, as an attempt to inspire a change in travel habits from searching (I want to go to X) to discovering (new travel destinations are uncovered).

In July 2014, Airbnb revealed a major rebranding campaign, including a brand new logo. According to Brian Chesky, “This new branding changes the whole identity and expression of the company.” The new logo would also help the company move toward its target of making Airbnb as ubiquitous offline as it was online; in essence, to make it a universal symbol for sharing that would pave the way for expanding its sharing economy service offering in the future, perhaps even to include cleaning services or ride sharing. “Imagine one day you’re walking down the street and you see the Airbnb symbol in a window – you’ll know that it’s an Airbnb and a place that can be shared,” Chesky said.

As part of its rebranding, Airbnb also introduced a tool called Create, which allowed hosts and guests alike to access a basic Photoshop-style service to personalize the Airbnb logo. In the United States, Airbnb also partnered with Zazzle, an online retailer that allowed users to upload images to create their own merchandise. Hosts and guests were encouraged to create tangible items, such as mugs and apparel, with their uniquely personalized Airbnb logo, which they could subsequently share as mementos of their stay, thereby creating an experience worth remembering.

“Airbnb is one of the world’s largest story-doing platforms,” said Jonathan Mildenhall, chief marketing officer at Airbnb. His statement was consistent with Airbnb’s extensive use of content marketing, crowdsourcing user-generated content and focusing on storytelling as a key tool to connect with its users.

Economic Impact of the Sharing Economy

Various reports sponsored by peer-to-peer platforms and third parties showed that companies based on the sharing economy model have had a positive impact on and created social value for local economies. One example is Uber, a company in the transport industry based on the sharing economy model. Founded in 2009, the company provides a ride-sharing service that uses a smartphone application to arrange rides between riders and drivers. Uber has claimed that:

Some 20,000 jobs are created on the Uber platform every month.

The Uber platform generates $2.8 billion per year for the U.S. economy and is growing.

Uber’s presence in a city reduces impaired driving.

“In 2013, the convenience and efficiency of Uber’s technology created as many as 25,000 additional rides in the city of Chicago than the transportation market would

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have provided without Uber – these are incremental rides – that otherwise wouldn’t have happened.”25

Airbnb also showed through its own research its economic impact on the main cities where it operates. For example, its reports concluded that ¤135 million in economic activity was created in 2013 in Barcelona, ¤185 million in Paris, ¤100 million in Berlin, $632 million in New York, and $469 million in San Francisco.26 Course of Action

Airbnb was in an enviable position with continued growth and a highly profitable business – on a global basis as well as on a regional basis. However, it faced two main challenges:

1) How could it maintain its high growth rates without sacrificing service levels and quality standards? In particular, with demand outstripping supply, how should the growing community (hosts and guests) be integrated into the existing model? And 2) how should Airbnb position itself with regard to regulatory concerns and the established hotel and hospitality lobby?

Further Growth

Having enjoyed enviable growth rates throughout the previous few years, Airbnb started looking into further opportunities for growth, as Airbnb CEO Brian Chesky explained:

“We want travelers to be able to book homes anywhere. Anywhere includes Asia. Asia’s a nascent market for us. Number two, we’re also looking at other use cases. Airbnb started as a way for travelers to find a budget way to vacation in a city. But now we’re starting to see people who aren’t on a budget. They want a much more high-end experience. And the third is that, at the end of the day, if you’re traveling to Tokyo, you’re not traveling to Tokyo to stay in a home or a hotel. You’re traveling to Tokyo – if you’re on vacation – because you want to have an experience. And we’d love to do more to make that experience special and memorable.”27

Looking into these options, Jeroen Merchiers wondered whether Airbnb in Spain would be able attract the right hosts to enter the high-end segment or to offer, in addition to a room, experiences such as city tours. Was Airbnb equipped with the right people and capabilities to expand into any of those new segments and, if so, how should it prioritize them?

25 http://blog.uber.com/ChiEconStudy / http://blog.uber.com/uberimpact.

26 http://blog.airbnb.com/economic-impact-airbnb/.

27 Brian Chesky, “The Future of Airbnb in Cities,” interview by Rik Kirkland, November 2014, www.mckinsey.com/insights/travel_transportation/the_future_of_airbnb_in_cities.

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Integration of the Community

The sharing economy was the darling of the moment when Airbnb was launched and several other business models based on the idea of sharing private assets or services with other people emerged at around the same time.

Uber and Airbnb in particular generated a lot of public attention due to their rapid growth rates, extremely high valuations, the disruptive character of their business models and the industries in which they operated. But there were differences between the two companies’ approach to gaining community acceptance. Uber was increasingly seen as untrustworthy due to its cutthroat handling of pricing, drivers (fees, phone commissions and platform deactivation), passengers, etc. 28 , 29 For example, Uber experienced a strong unionization movement among its drivers, with calls for action directly against Uber, including a protest at the company’s headquarters in Santa Monica, Los Angeles (see Exhibit 14).

Airbnb aspired to become an unparalleled branded service experience. Looking to avoid a similar fate, Merchiers often thought about what measures Airbnb should take and what role it should play in the community, especially as more service providers (check-in services, cleaning services, hotel rooms, etc.) were being incorporated into the platform. Could similar problems affect Airbnb as well? What might the right mitigation strategies be? Or could these problems be solved before they emerged? For example, could Airbnb guide the behavior of would-be suppliers of services appropriately? Could it define and shape the culture on its platform?

Legal Concerns

According to the latest press coverage, there were contradictory opinions about the need to regulate the business models in peer-to-peer marketplaces, such as Airbnb and Uber. Airbnb’s internal market research on the hospitality industry in Spain suggested that the industry had grown since Airbnb’s inception, indicating a net positive impact. However, Juan Molas, the president of the Spanish Confederation of Hotels and Tourist Accommodation (CEHAT), argued that, “along with driving down rates, proliferating private tourist accommodations deprive the government of taxes, increase illegal employment, violate consumer rights concerning security and quality, and can harm the image and reputation of Spain’s tourist destinations.” 30 Hotel lobbyists, furthermore, pressed regulators on the amount of unregistered accommodation, which basically led to tax and health and safety issues, both mandatory requirements for hotels. These issues have been acknowledged publicly in some countries and, as a result, some countries have considered banning Airbnb in their markets.31

28 http://recode.net/2014/11/21/the-difference-between-uber-and-airbnb/. 29 https://hbr.org/2014/11/what-airbnb-gets-about-culture-that-uber-doesnt.

30 Benjamin Jones, “Spain’s Hoteliers Urge Action Against Airbnb,” Hotel News Now, July 10, 2014, www.hotelnewsnow.com/Article/14036/Spains-hoteliers-urge-action-against-Airbnb.

31 Jim Edwards, “Why Hotel Industry Lobbyists Want a Global Crackdown on Airbnb,” Business Insider, May 27, 2013, www.businessinsider.com/why-hotel-industry-lobbyists-want-a-global-crackdown-on-airbnb-2013-5.

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The main question concerning most Airbnb country managers was how Airbnb should react to this situation. Should Airbnb react at all? Or should it make attack the best defense and lobby against the traditional hospitality industry? The efforts of the hotel lobby had borne fruit in certain communities such as Madrid, where a city decree laid out restrictions on Airbnb operations although the decree had not yet been enforced. However, Spain’s National Markets and Competition Commission (CNMC) objected to that ruling in July 2014 on the basis that it would restrict competition and adversely affect consumers.

Finally, tax issues were a key concern for Airbnb because a significant number of government officials in cities believed that hosts regularly cheated on their income tax declarations. Both New York State and New York City imposed a number of taxes that might apply to Airbnb hosts, such as New York City’s hotel room occupancy tax of 5.875%. And yet, because hosts were not officially operating as hotels, they were not paying such taxes.32 To address such issues and appease regulators, Airbnb had been thinking about behaving more like hotels by collecting and remitting taxes to city authorities. In several cities across the United States and Europe, the company was working on deals to make it easier for host and guests to pay tourist and other administrative city taxes. For example, in Paris, Airbnb’s premier world destination with more than 50,000 listings, those charges would amount to ¤0.83 per person per night but, in Amsterdam, they would be 5% of the listing fees plus cleaning fees.

Vacation Rental Market in the Pyrenees

Since its inception in Spain, Airbnb’s focus had clearly been the development of stays in the main cities that concentrated a large volume of the tourism industry. To expand Airbnb’s footprint in Spain, Merchiers had been considering the viability of a business plan to exploit the vacation rental property market outside cities. One of the most prominent vacation rental destinations for Spaniards was the Pyrenees. Specifically, Andorra and the five Catalan regions of Vall d’Aran, Cerdanya, Berguedà, Ripollès and Garrotxa made up the lion’s share of all the vacation rental properties in the Pyrenees. Those geographical areas had 115,000 residences available for rent, 70% of which were primary residences and the rest secondary residences (see Exhibit 15). A significant percentage of the primary residents, between 10% and 15%, were vacant.

It was estimated that a significant percentage of vacation rental properties, and especially secondary residences, were not directly rented by owners but by professional or semiprofessional real estate businesses that managed multiple properties.

Andorra, with a population of fewer than 80,000 people, had steady demand for roughly seven million individual visitor nights a year, with roughly five million of those concentrated in hotels and the rest in apartment hotels, apartments, campsites, etc. Spanish citizens accounted for half of the visitors to Andorra, and French tourists made up another 40%. The aforementioned Catalan areas had demand for an additional 1.5 million individual visitor nights per year with 700,000 in hotels and another 600,000 in campsites. Spanish tourists

32 http://www.engadget.com/2014/11/11/airbnb-legal-explainer.

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constituted roughly 80% of the highly seasonal demand (see Exhibit 16). Roughly 50% of the demand for Andorra was concentrated in the winter months and approximately 50% of the demand for the Spanish Pyrenees was concentrated in the summer months.

A further consideration for Merchiers was the company’s would-be competitors, since Airbnb would clearly not be the first one exploiting this market. For example, Booking.com had a list of more than 600 hotels in the Catalan Pyrenees and more than 150 in Andorra. Similarly it had listings for nearly 200 other properties (campsites, apartments, houses and bungalows) at each of those locations. Villas.com (a vacation rental site owned by Booking.com) had over 500 listings in the Catalan Pyrenees and Andorra. Niumba, a Spanish site owned by TripAdvisor, had over 600 listings in the Spanish Pyrenees and approximately 100 in Andorra. Finally, HomeAway had a list of close to 800 in the Spanish Pyrenees and 200 in Andorra. There were at least 10 other rental sites with properties listed in the Pyrenees, but with a significantly smaller presence.

The Way Forward

After Merchiers returned from his run on the beach and the sun was high in the sky, he knew it was time to make some decisions. He had a video conference with Airbnb headquarters coming up in a couple of days and as the recently promoted general manager for Northern, Eastern and Southern Europe, he wanted to decide on a clear road map before handing over the Iberian peninsula to a new general manager. There is a saying that “you cannot kill an idea whose time has come.” And he felt that Airbnb’s time had come.

He took a pen and a piece of paper and started reviewing his options.

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Exhibit 1 Evolution of Airbnb

Source: Airbnb.

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Exhibit 2 Airbnb Growth (Globally)

Source: VatorNews, http://vator.tv/n/2d70.

Exhibit 3 Airbnb Value Creation in Major Cities in the World

City/ time period of

analysis

Barcelona 2012-13

Paris 2012-13

Berlin 2012-13

Amsterdam 2012-13

New York** 2012-13

San Francisco 2011-12

# of local hosts 4,000 10,000 5,600 2,400 ? 5,000 # of guests visited 170,000 223,000 63,000 62,000 416,000 43,000 Average stay (Airbnb)

5.1 nights 5.2 nights 6.3 nights 3.9 nights 6.4 nights 5.5 nights

Average spend* (Airbnb)

€ 842 € 865 € 845 € 792 $880 $1,045

Average stay (hotel)***

2.1 nights 2.3 nights 2.3 nights 1.9 nights 3.9 nights 3.5 nights

Average spend (hotel)

€ 374 € 439 € 471 € 521 $690 $840

* Includes average daily spending on lodging plus all other average daily spending per guest (except for New York city). For example, in Barcelona the split was ¤28 and ¤137 respectively.

** For New York city, spending refers only to local businesses and does not include payments to hosts.

*** Includes three to five-star hotels only.

Source: Airbnb (blog.airbnb.com) and HR&A Advisors, Airbnb: Economic Impacts in San Francisco and Its Neighborhoods, November 2012, http://www.deperslijst.com/persbericht/econ_impact_Final_Report_1_.pdf.

JANUARY 2013

JUNE 2012

JANUARY 2012

JUNE 2011

JANUARY 2011

JUNE 2010JUNE 2009JUNE 2008

JANUARY 2010JANUARY 2009

4,000,000

3,500,000

3,000,000

2,500,000

2,000,000

1,500,000

1,000,000

500,000

0

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Exhibit 4 Age Distribution and Average Income of Hosts in Barcelona (2012)

40

2 %

8 %

4 7

%

2 6

%

1 5

%

2 %

< 25

25-29

30-39

40-49

Age

Hosts’ average age 50-64

65+

Source: Airbnb. Host income data from survey of 566 Airbnb hosts in Barcelona who hosted August 2012-July 2013; 2011 median household income from the Statistical Institute of Catalonia.

12% 17%

23%

17%

18%

13%

>35 001 €

25 001 – 35 000 €

19 001-25 000 €

14 001-19 000 €

9001-14 000 €

< 9000 €

Annual Income of the family unit

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Exhibit 5 Age Distribution, Average Income and Origin of Travelers in Barcelona (2012)

Source: Airbnb. Survey of 852 Airbnb guests who visited Barcelona August 2012-July 2013.

26% North America

3% South America

52% Rest of Europe

5% Spain

13% Asia Pacific

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Exhibit 6 Valuations of Selected Global Hotel Companies (March 2014)

Source: Information of FactSet, last access March 2014.

Exhibit 7 Average Spending per Visitor

Source: Airbnb. Estadistiques de Turisme a Barcelona, 2011; survey of 852 Airbnb guests who visited Barcelona August 2012-July 2013; Airbnb booking data.

374 € Total spend per guest

107 € + 71€ total spend per Spend daily on Visitor & day Hotel

accomodation per guest

x 2,1 nights Average stay

Hotel guests

Airbnb guests

842 € Total spend per guest

137 € + 28 € Total spend per Spend daily on Guest & day Airbnb

accomodation per guest

x 5,1 nights Average stay

Hilton Worldwide

Marriot

Host Hotels and Resots

Starwood Hotels

Accor

Airbnb

Wyndam Hotel Group

Hyatt Corp

InterContinental

Extended Stay Hotels

Valuation

$21.8 bln

15.9 15

15

11.8

10

9.3

8.4 8

4.8

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Exhibit 8 Occupancy and Revenue per Room for Barcelona and Madrid (2010-2015 Forecast)

BARCELONA MADRID

Year Occupancy (%) ADR1 (€) RevPAR2 (€) Occupancy (%) ADR1 (€) RevPAR2 (€) 2010 67.6 110.3 74.6 64.0 88.3 56.5 2011 70.5 112.6 79.4 66.3 87.9 58.3 2012 71.3 113.5 81 64.0 85.6 54.8 2013 71.7 116.9 83.9 61.4 82.4 50.6 2014 F 71.9 118.2 84.9 61.9 79.4 49.2 2015 F 72.1 119.7 86.3 62.6 77.2 48.4

Notes: 1. ADR = average daily rate; 2. RevPAR = revenue per available room (≈ occupancy × ADR).

Source: Data from STR Global, forecasts from PwC 2014, Room to Grow: European Cities Hotel Forecast for 2014 and 2015, March 2014.

Exhibit 9 Hotel and Motel Market in Spain (Units), 2009-2013

Year units % Growth

2009 18.387

2010 18.635 1.3%

2011 19.262 3.4%

2012 19.532 1.4%

2013 19.550 0.1%

CAGR: 2009-13 1.5%

Source: Información de MarketLine, last access March 2014.

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Exhibit 10 Number of Hotels in Barcelona

31/12/1990 31/12/2000 31/12/2010 31/12/2012 31/12/2013 >2013

H5* 9 6 21 24 26 31

H4* 30 56 130 142 153 169

H3* 45 70 111 119 116 118

H2* 14 28 34 34 36 36

H1* 20 27 32 33 34 35

A determinar - - - - - 5

Total 118 187 328 352 365 394

Source: BarcelonaTurisme, http://professional.barcelonaturisme.com.

Exhibit 11 Evolution of Numbers of Hotel Rooms in Barcelona

Source: Turisme de Barcelona and BRIC Consulting (“Informe del Mercado de Hoteles de Barcelona”). Barcelona city data. Forecast.

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Exhibit 12 Hotel and Motel Market in Spain (Value)

Year $billion €billion % Growth

2009 12.3 9.3

2010 12.6 9.5 1.9%

2011 12.3 9.2 (2.4%)

2012 11.6 8.7 (5.5%)

2013 11.1 8.4 (4.4%)

CAGR: 2009-13 (2.6%)

Source: Information of MarketLine, last access March 2014.

Exhibit 13 Customer Segmentation

Source: Prepared by the authors.

Individuals / Prefer Smaller

Properties

Occasional Frequent Long-stay

Solo Travellers Backpackers

Couples Friends Families

Weddings Festivals

Tour Groups

Conventions Team Building

Business / Proximity to Destination

Groups / Prefer Larger

Properties

Leisure /

Experiential

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Exhibit 14 Call for Unity of Uber Drivers

Source: Fast Company, October 2014.

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Exhibit 15 Pyrenees Vacation Rental Residences in Andorra and Five Comarca Areas of Catalonia

Source: Spain’s National Statistics Institute (INE), March 2014.

Currently Registered as Tourism(2)

0

25.000

50.000

75.000

100.000

125.000

Total Dwellings

SPAIN &

ANDORRA

Primary 58%

Secondary 29%

Vacant 13%

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Exhibit 16 Pyrenees Vacation Rental: Nights per Month and Average Stay

Spanish Pyrenees (nights per month)

Andorra (nights per month)

Spanish Pyrenees (Avg. nights per stay)

Andorra (Avg. nights per stay)

Source: Developped by the authors based on data of Spain’s National Statistics Institute (INE).

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