Before Airbnb, it was almost inconceivable to have a stranger sleep in your home. However, with the rise of sharing economies and the platform business model, the short-term rental company has managed to turn the hospitality industry on its head.
What is Airbnb?
Airbnb, also known as ‘Air Bed & Breakfast’, is an online marketplace for homeowners to lease out their homes and private spaces as vacation rentals. With humble beginnings as the founders sold cereal boxes to fund the small start-up in 2008, the company is now worth $3.4billion as of its last valuation according to Business Of Apps. With more than 150 million users worldwide, Airbnb is now the leading contributor to the global online hospitality market. The benefits of Airbnb’s model are clear; homeowners can earn a second, lucrative source of income and the increased tourism gives back to the wider community (Van Dyke et al., 2018). Additionally, when hotel prices skyrocket during peak seasons in popular cities, Airbnb offers travelers a more affordable alternative to booked out, expensive hotels (Gerderman, 2018). However, the popularity of Airbnb comes at a price; namely to the housing market and the hospitality industry.
Sharing Economies and the Platform Business Model
The term ‘Sharing Economies’ is one that is being constantly used in the modern-day digital age. A sharing economy refers to a capitalist society in which individuals share resources, and this is typically facilitated via the internet. The basic principle of the sharing economy is to increase convenience and reduce associated costs of the transaction (Martens, 2016). Sharing economies have particularly risen to popularity with the aftermath of the 2008 GFC, in which new ways to create economic value have come to light.
The rise of the sharing economy goes hand-in-hand with the Platform Business Model, which has seen a great surge over recent years, with companies such as Facebook, Uber, and Airbnb all employing the strategy. By definition, a platform business is one that “enables and supports transactions between independent supply and demand-side participants” (Täuscher et al., 2018). Essentially, platform businesses do not produce, but instead, connect the product with the consumer as an intermediary. This is the case with Airbnb, as their basic model provides the platform to connect the traveler or ‘visitor’ with the home-owner or ‘host’. As per the diagram below which illustrates the company’s business model, Airbnb enables access to the market for both sides, however, the contact and product are solely communicated between the host and the visitor.
The platform business model has been a great success for Airbnb. Often, the company is “considered as a sharing economy exemplar”, as it allows the middle-class to gain a lucrative source of income, and “retain a foothold in expensive housing markets” (Crommelin et al., 2018). Additionally, the platform is able to capitalise largely due to the popularity of the sharing economy; they own virtually no real estate and do not have to pay for physical labor to the same extent as hotels (Van Dijke et al., 2018), instead, the company is able to exist as somewhat of a marketplace for these transactions to occur between private individuals.
The “Airbnb Effect” on housing markets and hospitality
“The invasion of online platforms in the hospitality sector is just one example of the many battlegrounds in a society where social and economic interaction increasingly happens through a digital infrastructure that is global and highly interconnected” – Van Dijke et al., 2018
The rise of Airbnb has brought tremendous benefits to cities and travelers all over the world. According to a report by Airbnb in 2017, three-quarters of listings are outside traditional tourist locations bringing traction to communities often overlooked, and travelers brought in an extra $6.5billion to restaurants in 44 cities. Furthermore, the Airbnb experience offers visitors a more affordable option to hotels, as well as a more local and personal experience.
However, with the continuous rise of the platform comes the ‘Airbnb Effect,’ a term coined to illustrate the societal influence of the platform, and unfortunately, the growing popularity of Airbnb has made it difficult for regulators to keep up.
An article published by Forbes states that the Airbnb Effect is remarkably similar to the process of gentrification, in which long-term, indigenous residents are pushed to the outer limits of a city due to increasing prices. As more and more homeowners decide to short-term lease their properties to travelers via Airbnb, rental options for residents of the city become scarce, which in some cases has caused a drastic rental shortage. In the US alone, 1 in 8 potential homes is being listed as short-term Airbnbs, instead of permanent rentals, shortening the supply of available rentals for long-term residents to a great degree. Furthermore, as the supply of rentals goes down, the demand increases and pushes the price up even further, particularly in heavily populated cities. This is seen to be the case in the city of Amsterdam, in which the demand for permanent rentals has increased, however, the supply has decreased to create a housing shortage (Martens, 2016). In response, the City of Amsterdam introduced a permit required to holiday-let on Airbnb and similar platforms, as well as a rental limit of 30 nights per year.
Additionally, the hotel industry has been disrupted to a large degree with the rising popularity of Airbnb. Research has found that as Airbnb’s supply continues to grow, hotel revenues are decreasing, as well as hotel room prices and overall occupancy. It has been estimated that hotels lose approximately $450million in revenue each year due to Airbnb’s competitiveness. Airbnb offers a wide variety of homes, locations, and prices to greatly rival the product of the hotel industry, and consumers are presented with a more localized feel as opposed to a somewhat ‘cookie-cutter’ hotel experience. Because of these drastic disruptions, the hotel industry has called for regulatory intervention, including the imposition of taxes to even out the playing field.
To conclude
Airbnb as a platform business has become a stand-out player in the sharing economy landscape. The company has brought various benefits to cities and individuals through its digital service, by providing a marketplace for hosts and travelers to communicate. However, the platform has largely avoided regulation and has also brought numerous challenges such as housing shortages and loss of hotel revenue. Thus, the combination of the platform business model and influence of the sharing economy utilised by Airbnb has allowed the company to drastically alter the housing and hospitality sectors as we know them.
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