FINAL REPORT
Title: The “uberization” phenomenon and its application to Airbnb and the
hotel industry: Problems and soluti...
Page | 1
Contents
Introduction:..............................................................................................
Page | 2
Introduction:
The notion of “Uberization” refers to the Californian platform of cars with drivers
created in 2009...
Page | 3
I. The Uberization Trend Phenomena
A. Definitions
Uberization is derived from the company Uber Technology Inc. (“...
Page | 4
B. The Uber Style Business Model
The Uber style business model differentiates itself from existing competitors by...
Page | 5
Nowadays, the benefit of large corporations and economies of scale are being
challenged as the Internet and vario...
Page | 6
processes, the first reaction is always of disbelief, doubting its applicability and
probability of success. At f...
Page | 7
II. The specific case of Airbnb and the hotel industry
A. Description and history of Airbnb
Airbnb was created be...
Page | 8
Source: (Morgan Stanley Global Insight)
Source: (Morgan Stanley Global Insight)
55
33
31
25 24 23
17
6
0
20
40
60...
Page | 9
The market tends to view Airbnb as typically targeting Millennials with low
disposable income looking for both an...
Page | 10
Exhibit 3: Example of Airbnb property listing in Paris for the Week starting May 5th
Source: (Airbnb)
Page | 11
Exhibit 4: Example of the details of a typical property listing in Paris
Source: (Airbnb)
The platform is fairly...
Page | 12
for such transactions are minimal. This 9% to 15% fee load is lucrative for
Airbnb, given the low marginal cost ...
Page | 13
Source: (Koumelis)
Source: (Koumelis)
50
75
100
125
150
0
50
100
150
200
250
NYC
SF
Paris
Boston
London
LA
Sydne...
Page | 14
Airbnb has, through its business model, created a cost advantages. Airbnb has
been able to lower the average cos...
Page | 15
A recent study of the impact of Airbnb in the Austin (Texas) hotel market has
shown that the impact on hotel rev...
Page | 16
If the impact on occupancy level is minimal, then the reduction in hotel revenues
has to be driven by room rates...
Page | 17
III. Key problems and solutions for Airbnb and hotel operators to
co-exist
As presented in Daniel Guttentag rese...
Page | 18
wrote the following note on this topic: “We know we have more work to
do and this effort is just a first step. G...
Page | 19
3. The unlevelled paying field has led to a decreased competitiveness of
hotels, which in turn has resulted in h...
Page | 20
Vanessa Sinders is right in saying that: “They are simply illegal hotels. And
they should have to meet the regul...
Page | 21
A more constructive solution could be organized along the following four steps
regulatory framework:
 Step 1: E...
Page | 22
Valuation), and the number will rise in the future with the increased Airbnb
market share and penetration rate.
...
Page | 23
 Offering hotel food, beverage, cleaning services and other amenities to the
Airbnb customers taking accommodat...
Page | 24
Conclusion
The Uberization phenomenon is creating a new form of competition that is
challenging large, establish...
Page | 25
Bibliography
Airbnb. Airbnb Official Site. 2016. https://www.airbnb.fr/about/about-us. 23 04,
2016.
Alba, Davey....
Page | 26
McKinsey. The Future of Aibnb in Cities. 1 November, 2014.
http://www.mckinsey.com/industries/travel-transport-a...
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The “uberization” phenomenon and its application to Airbnb and the hotel industry Problems and solutions for co-existence and adaptation

  1. 1. FINAL REPORT Title: The “uberization” phenomenon and its application to Airbnb and the hotel industry: Problems and solutions for co-existence and adaptation Maxence de Poulpiquet Bocconi University May 10th, 2016
  2. 2. Page | 1 Contents Introduction:......................................................................................................................................2 I. The Uberization Trend Phenomena................................................................................3 A. Definitions .............................................................................................................................3 B. The Uber Style Business Model.....................................................................................4 C. History and Main Advantages of Uberization..........................................................4 D. Problems and Disruptions Created by the Uber model...................................5 II. The specific case of Airbnb and the hotel industry...................................................7 A. Description and history of Airbnb................................................................................7 B. Airbnb product offering and model.............................................................................9 1. The Product..................................................................................................................9 2. The economic model.............................................................................................. 11 3. The review mechanism......................................................................................... 12 C. Airbnb versus the hotel industry............................................................................... 12 D. Areas of direct competition between Airbnb and the hotel industry ..... 14 III. Key problems and solutions for Airbnb and hotel operators to co-exist ...... 17 A. The city argument............................................................................................................ 17 B. The hotel industry argument ...................................................................................... 18 C. The regulatory solution................................................................................................. 20 D. Potential longer term strategic solutions .......................................................... 22 1. Using Airbnb as a marketing, booking, and ancillary product offering tool 22 2. Changing product positioning and/or consolidation................................ 23 Conclusion ....................................................................................................................................... 24 Bibliography.................................................................................................................................... 25
  3. 3. Page | 2 Introduction: The notion of “Uberization” refers to the Californian platform of cars with drivers created in 2009. The Uber concept is based on to the creation of a network of independent driver, with their own cars and connect them to clients/end users via a web based application. Uber is in direct competition with a number of incumbent taxi companies and operators like Yellow Cab in the US, the G7 taxies in France or Taxi Blue in Italy that were created decades ago. Those incumbent operators have established large companies with significant fixed costs and large amount of capital investments, as they tend to own their cars, and treat drivers as employees. Similarly, Airbnb put together individuals that rent their own flats and/or houses for short term stays via the web. The product Airbnb offers is competing with large hotel chains and operators like Marriott, Accord, Starwood and many others. Although Airbnb was only created in 2008, it offers more rooms than a group like Accord, created in 1967. There are a number of other examples of Uberization like the advertising agency Eyeka, which allows creative independent advertisers to propose their service directly to companies and end-users at a fraction of the cost that an advertising agency would charge. Uber style companies can be found in several sectors of the economy like in banking, car rentals, legal services, and many other industries. In all these cases of “Uberization”, the concept is the same: The established incumbent operator, strong of its significant asset base, large number of employees and established brand, are being challenged by lean and flexible web based platforms that regroup independent individuals that own their working assets and that are continuously evaluated by recent users, providing a feedback loop on the quality of the service. These new platforms are creating significant disruptions in their respective industries. This paper has three main objectives. First, it will attempt to provide a general description of the “Uberization” trend/phenomenon. This section will provide definitions, description of the business model, advantages and issues generated by this new form of competition. Second, this paper will dive deeper into the specific example of Airbnb and the hotel industry, providing general description and history, differences of business models and area of direct competition. Finally, the case for and against Airbnb will be further analyzed from the perspective of cities and hotel operators. Specific proposal will be reviewed for the definition of potential regulatory changes and strategic solutions for the co- existence of incumbent hotel players with Airbnb.
  4. 4. Page | 3 I. The Uberization Trend Phenomena A. Definitions Uberization is derived from the company Uber Technology Inc. (“Uber”). Uber “is an American multinational online transportation network company headquartered in San Francisco, California. It develops markets and operates the Uber mobile app, which allows consumers with smartphones to submit a trip request which is then routed to Uber drivers who use their own cars. As of April 12, 2016, the service was available in over 70 countries and 416 cities worldwide. Since Uber's launch, several other companies have copied its business model, a trend that has come to be referred to as Uberification” (Wikipedia). In fact, the phenomenal growth experienced by Uber has led Maurice Levy, the President of Publicis, to create in 2014 the buzzword “Uberization” (Thomson). There are many ways to define the buzz word “Uberization” or “Uberizing”. Marion Maneker describes Uberization as “trapping a series of innovative processes – phone enabled geo-location, payments and driver management and distribution – into an app-accessible service” (Maneker). This definition is rather technical and focused on the process itself. On the other hand, Wiktionary provides for a much broader definition, focusing on the economic impact of the phenomenon: “To modify a market or economic model by the introduction of a cheap and efficient alternative” (Wiktionary). This definition is far more relevant in explaining the profound changes that Uberization is and will continue to generate over time. As the CEO of Publicis, Maurice Levy, said, “Everyone is starting to worry about being ubered … It’s the idea that you suddenly wake up to find your legacy business gone … clients have never been so confused or concerned about their business model.” (Thomson). Uberization affects a lot of industries and consumers around the world. There are many examples of Uberization and web based applications that are changing the structure of various industries, consumer behaviours, and the shape of the global economy. Facebook is today the global leader in terms of distribution of contents on the web, but it does not create any of it. Airbnb provides more than 550.000 beds per day and will soon become the first hotel group in the world, but does not own any of the rooms. Alibaba is a distribution company with the largest market cap in the world, but that does not have any stock. Blablacar in France is a start-up in France that has brought more passengers from Paris to Marseille than SNCF, the national railway company. Leboncoin in France has more job offers than Pole Emploi, the French National Employment Agency. The list goes on and on… The application of Uberization extends further to many industries like banking, grocery shopping, legal services, car rental services and many more.
  5. 5. Page | 4 B. The Uber Style Business Model The Uber style business model differentiates itself from existing competitors by being more efficient, flexible and adaptable, as well as by being less costly (Cramer and Krueger). In fact, Uber’s cost structure is quasi exclusively made of technology infrastructure, salaries of permanent employees, as well as launch and marketing events (Juggernaut). It has little variable costs and a significant global target market. Uber is a smartphone app which provides on-demand service to users. It connects willing passengers to taxi cab drivers. Taxi drivers use their own cars when providing taxi service and Uber gets 20% of the fare. The total process is very simple, registered Uber users asks for a taxi using the Uber app, an Uber driver is then dispatched to the passenger’s location and assist the passengers to reach his or her destination. The passenger’s credit card is used as the sole payment method. Uberized companies do not “employ” people, they merely create a pool of independent people with the skill set to accomplish the task at hand and act as the broker through a digital interface, charging a fee on each transaction. To improve the customer experience and monitor quality, a live review system is created to monitor and evaluate the performance of the service provider in order to rate the quality of the service for the benefit of the next customer. C. History and Main Advantages of Uberization As early as in 1937, The Nobel Prize winner, the British Economist Ronald Coase, wondered why the economy was not organized around single projects, around markets, instead of being organized around corporations that work on many different projects (Coase). The organization around projects has many advantages compared to large corporations. It is flexible, effective, transparent, and optimize the use of each person’s core competencies. The main advantage of project based organization is that you can match the perfect resources with the objective of the new project at hand. Its main drawback is that it is very costly to continuously identify, select and control the people working on each project. Each time a new project starts, you need to restart the selection process to apply the best resources to the required task. Therefore, the main deterrent of this type of organization has traditionally been its high transaction costs. Historically, many of the large scale constructions and works such as the building of castles or cathedrals, crop harvesting, the organization of naval shipping, and many others were organized as projects. The creation of corporations started at the renaissance and accelerated during the industrial revolution, as economies of scale became a key factor in driving down production costs. The flexibility of finding the best resources for single projects was far out-weighted by the reduction in transaction costs and economies of scale of creating large corporations (Frery).
  6. 6. Page | 5 Nowadays, the benefit of large corporations and economies of scale are being challenged as the Internet and various new web based technologies are driving down transaction and market costs: the cost of accessing products and competencies in the market. The main change occurred in 2006, when web based technologies went from what is known as Web 1.0 to Web 2.0 (Krishnanmurthy). From 1996 until 2006, the period commonly known as Web 1.0, the web was used to gather information from scholars and researchers who were “content creators”. From 2006, the period commonly called Web 2.0, which corresponds to the creation of Facebook, content creators became the web users themselves. Therefore, the amount of content and the global reach of the web grew exponentially. The access to any kind of markets and information became available at the speed and cost of a click! We now potentially have the entire human knowledge on our IPhones or android tablets. Web 2.0 has challenged the Ronald Coase logic: corporation costs are now higher than the transaction costs, or the cost of accessing market and information. Web based companies are becoming more competitive as they have the following advantages:  Direct/instant access to markets  unlimited access to human resources and information  No, or very limited fixed employee costs  No (or limited) fixed investments, leading to quicker breakeven point  Flexibility and immediate adaptability  Continuous service feedback and friendly interface. Reputation systems are key to build trust in online transactions These characteristics are providing web based company with significant competitive advantages versus incumbent operators. In particular, it allows those companies to provide for a more cost effective offering together with a more flexible and enjoyable experience to end-users. D. Problems and Disruptions Created by the Uber model In 2014, Brian Carney said: “Today, Uber has turned the smart phone into a tool for dynamically pricing and allocating car rides in real time, throwing the traditional taxi business into turmoil. It’s also given rise to a buzzword – Uberization – that is driving venture-capital investment and pundits to look for the next big business ripe for uber-style disruption” (Carney). Uber is still a private company. It is therefore difficult to access its detailed financials. Many estimates have been published based either on leaks and/or on data coming from various recent capital raises. For Example, Mucker Capital has estimated that Uber monthly net revenue has grown from $10MM in April 2013 to $33MM in April 2014, to $100MM in April 2015, and stood at $180MM for December 2015 (Mucker Capital). As these exponential revenue growth figures show, the growth of Uberization has challenged long established players and created bubbling market valuations. As always with innovative products and
  7. 7. Page | 6 processes, the first reaction is always of disbelief, doubting its applicability and probability of success. At first, incumbent operators were not taking the threat seriously. However, with its rapid growth and spread to various industries, it is now generating shock and violent protest, like the one we have experienced in the street of Paris with taxi drivers riots and vandalisms. The main threat of Uberization is that it challenges the existence of long established incumbent operators. These operators are generally both significant employers and have large amount of fixed assets. The risk is therefore easy to understand and sizeable. These incumbent operators are facing significant losses of market share and revenues. With their high fixed cost investments, it could lead to significant layoffs and restructurings, with looming risks of bankruptcies in certain instances. One of the main characteristic of industries targeted by Uber style companies is their reliance on economies of scale, and industrialization of processes. These incumbent operators generally incurred significant fixed costs upfront. For example, Taxi companies have invested significant capital in building large fleets of cars; hotel operators have incurred significant upfront capital expenditure to buy, build and/or renovate large numbers of hotels. Scale was then essential in reducing their marginal cost and created high barrier to entries. With the creation and mass marketing/access of a number of innovations (Internet, Mobile phones, …). Access to customers has become a new form of economies of scale, significantly reducing cost and pricing for customers/end-users. In summary, while the Uberization phenomenon is an innovative, efficient and effective way of creating web based markets, it could potentially pose major threat to the economy, and in particular incumbent operators through:  Potential significant losses of employment, as large incumbent operators tend to be labour intensive and will face decrease revenue and profitability  Reduction in fixed asset and capital expenditure investments, as incumbent operators restructure their operations to improve/restore profitability  Loss of tax revenues from reduced incumbent operators’ profitability, which will be difficult to replace as the sharing economy is more challenging to monitor and tax  Loss of customer protection due to the regulation gap/void that currently exist
  8. 8. Page | 7 II. The specific case of Airbnb and the hotel industry A. Description and history of Airbnb Airbnb was created between 2007 and 2008, by two recent university graduates that rented three air mattresses on the floor of their San Francisco flat. With the International Design Conference coming to San Francisco, all hotels in town were reaching full occupancy. Brian Chesky and Joe Gebbia needed some money and had an idea. They simply advertised these three air mattresses in their flat as short term accommodation through the web as an “Air Bed & Breakfast”. Their target was conference delegates failing to find hotel accommodation or simply unwilling to pay the high hotel prices driven by fully occupied hotel accommodations. From this simple original idea less than nine years ago, Airbnb has registered a significant growth. The “about us” page of Airbnb.com site states that it has grown to offer more than 2 MM accommodations in 34.000 cities in 191 countries to more than 60 MM travellers (Airbnb). Airbnb is not publicly quoted, so no formal market valuation is currently available. However, according to various researches its valuation could range from $10bn (Zervas, Prosperio and Byers) to more than $25bn. In fact, the closest and potentially most reliable information on Airbnb valuation came in the summer of 2015, at the time Airbnb filed with the Security and Exchange Commission (SEC) documentation on $1.5bn growth financing. This New round of financing seemed to imply that the total value of Airbnb amounted to $25.5bn. This valuation would place Airbnb as the third most valuable privately held start-up just behind Uber (obviously), valued at $62.5bn and Xiaomi, valued at $46bn (Alba). Note that like most internet start-ups, it is difficult to know whether Airbnb is currently profitable. The entire valuation is based on future growth assumptions. Airbnb is commonly viewed as a vacation-rental company that rents out rooms, apartments, condos houses or other spaces, pitching its lodging as more welcoming and personalized than a hotel and a great way to feel like a local. Airbnb describe itself as “a trusted community marketplace for people to list, discover, and book unique accommodations around the world” (Airbnb) . As shown in Exhibit 1 and 2 below, Airbnb tends to attract both leisure and business customers driven mainly by price considerations. Given the nature of the current Airbnb product offering, it seems to generate a higher interest by cost sensitive leisure customers.
  9. 9. Page | 8 Source: (Morgan Stanley Global Insight) Source: (Morgan Stanley Global Insight) 55 33 31 25 24 23 17 6 0 20 40 60 Lower Price Location Authentic Experience Own Kitchen Uniqueness of Unit Easy to Book Large Party Other Exhibit 1: Price is Top Airbnb Driver Survey Data: Factors behind choosing Airbnb % 12 16 12 18 0 5 10 15 20 TTM NTM TTM NTM Corporate Travel Leisure Travel Exhibit 2: Higher Airbnb Interest From Leisure Travelers Survey Data: Have/Plan to Book on Airbnb in Prev/Next 12 Months %
  10. 10. Page | 9 The market tends to view Airbnb as typically targeting Millennials with low disposable income looking for both an experience and an affordable accommodation. This segmentation explain why Airbnb has had significant successes in certain key cities in the word like Paris, New York, San Francisco, Tokyo or other key worldwide gateway cities versus other touristic destinations like Phoenix, Arizona. To take Phoenix as an example, “Arizona’s average visitor isn’t the type that generally leans toward Airbnb. According to the Office of Tourism, the average age of an Arizona tourist coming into the state is 45 years old and will spend $767 in trip expenditure. It is a disconnect with the typical millennial Airbnb user who is much younger and with less disposable income” (Clark). The future of Airbnb is not only to capitalize on its exiting budget vacation segment, but to also make inroad into the more exclusive vacation and business traveller segment. In Brian Chesky own words: “Airbnb started as a way for travellers to find a budget way to vacation in a city. But now we are starting to see people who are not on a budget. They want a much more high-end experience” (McKinsey). B. Airbnb product offering and model 1. The Product The Airbnb product offering ranges from a sofa bed or a futon in a living room to a bedroom, or an entire flat to a full island rental. The most common product is a bedroom or an entire flat or house. The “host” is the equivalent of the short stay landlord, while the “guest” is effectively the short stay tenant. Exhibit 3 below shows an example of a typical Airbnb property search web site page, while Exhibit 4 below provides an example of the details of a typical accommodation. The organization of the website is effectively a listing of all accommodations available organised by country, cities, dates, and providing pictures, prices and descriptions of each properties available.
  11. 11. Page | 10 Exhibit 3: Example of Airbnb property listing in Paris for the Week starting May 5th Source: (Airbnb)
  12. 12. Page | 11 Exhibit 4: Example of the details of a typical property listing in Paris Source: (Airbnb) The platform is fairly simple and all booking and payments are made online through credit cards. As previously mentioned, the main differentiation of the Airbnb product is its cost competitiveness. However, it also offers in many cases a different experience. It offers the feeling of staying at home, and not in a hotel. Hosts often provide useful local advice and access to many of the home like amenities (full kitchen, washer and dryer, list of local restaurants, bars and attractions, …). It offers the experience of living like a local. 2. The economic model Airbnb charges a 6% to 12% fee to the guest and a 3% to the host (Guttentag). Airbnb fixed assets investment is limited to technological infrastructure, salaries to permanent employees and marketing events (Juggernaut). Given that all information on the site is entered by the hosts themselves and all communication occurs directly between hosts and guests, Airbnb marginal costs
  13. 13. Page | 12 for such transactions are minimal. This 9% to 15% fee load is lucrative for Airbnb, given the low marginal cost of any transaction and the relatively low amount of fixed cost that is needed to be covered. In addition, it is generally viewed as competitive compared to fee charged by online travel agencies, which typically charge smaller independent hotels between 15% to 30% (AlphaWise). 3. The review mechanism In order to build trust in the product, Airbnb has created a direct review system. Guests use a star system to rate the quality of their stay with regards to cleanliness, location, and communication. Hosts and guests are also encouraged to post feedback and reviews of each other on the Airbnb platform. This system allows both guests and hosts to evaluate each other and provides direct feedback, so as to ensure a direct evaluation of the service is provided to the next customers. This review mechanism has the following two main goals:  It establishes trust between hosts and guests; and  It serves as a tool to incentivise them to behave properly and in accordance with Airbnb service standards and code of conduct This review system is very similar to the one found in the online hotel booking agencies like trip advisors. “Online reviews have been found to influence hotel booking intentions, particularly in lesser known properties” (Guttentag), which is the case for all products on Airbnb. C. Airbnb versus the hotel industry Airbnb has grown to be a significant player in the tourism industry. It already offers more accommodations/rooms that the largest hotel group in the world like the InterContinental Hotel Group or Marriott International. To be able to compare the Airbnb offering versus the Hotel industry, one needs to first analyse the difference in price offering. Exhibit 5 below shows that Airbnb average daily rates in 22 global cities range from a 47% discount to Hotel ADRs (in Paris) to a 42% premium (San Diego). Looking closer at the data, one can see that 16 of the 22 cities Airbnb offerings are at an average discount, and only five are at a premium. Furthermore, when analysing the pricing discount of Airbnb versus hotels in various cities and matching it with hotel occupancies (see Exhibit 6 below) and average daily rates, it becomes obvious that Airbnb is becoming a real alternative to hotels in cities where hotel occupancy is high, enabling hotels to drive up their rates, creating a real need for product such as Airbnb.
  14. 14. Page | 13 Source: (Koumelis) Source: (Koumelis) 50 75 100 125 150 0 50 100 150 200 250 NYC SF Paris Boston London LA Sydney DC SanDiego NewOrleans Chicago Vancouver Toronto Montreal AMS BCN Athens Dublin Brussels Vienna Madrid Berlin Airbnb rate Hotel rate Airbnb premium Exhibit 5: Average Daily Rates Airbnb Listings vs Hotels ADR, € Airbnb as % of Hotel 0 20 40 60 80 100 Sydney NYC SF London Dublin LA Amsterdam Boston Paris SanDiego Berlin Barcelona Vancouver Vienna Toronto DC Montreal Chicago Brussels NewOrleans Madrid Athens Hotel All Airbnb Listings Freq Available Airbnb Listings Exhibit 6: Annual Occupancy Airbnb Listings vs Hotels Nights Sold per Year, %
  15. 15. Page | 14 Airbnb has, through its business model, created a cost advantages. Airbnb has been able to lower the average costs of accommodations through a unique platform, structure and logistic, thereby potentially taking market share from hotel operators. That being said Airbnb is not always viewed or used as a pure alternative to Hotels. The survey data in Exhibit 7 below shows that, although Airbnb is the number one substitute product for hotels, less than half of respondents (42%) who have stayed in Airbnb indicated their stay was in substitution to hotels. Bed and Breakfast was the next category with 36%. Source: (Morgan Stanley Global Insight) The data could be viewed both ways, but when you combine the two categories, it still does represent an impressive 78% substitution to what is probably the cheaper end of hotels and all beds & breakfasts, which does suggest that Airbnb is competing directly with certain segments of the hotel industry and that hotel operators should not dismiss or ignore its relevance. D. Areas of direct competition between Airbnb and the hotel industry Although Airbnb is increasingly trying to target higher end customers and diversify its product offering to provide more of an experience, it is clear from various researches and from the Exhibit above that the lower end of the hotel product offering is where there is more competitive friction with Airbnb. Exhibit 7: Less Than Half of Airbnb Stays Substitute for Hotels Survey Respondents who used/plan to use Airbnb Substituted from… %, as of November 2015 42 36 31 30 22 19 19 5 4 0 5 10 15 20 25 30 35 40 45 Hotel Bed & Breakfast Friends / Family Extended Stay Hotel Other Vacation Rental Corporate Apartment VRBO, Other Rental Site Other Vacation Rental Took Trip Only b/c of Airbnb
  16. 16. Page | 15 A recent study of the impact of Airbnb in the Austin (Texas) hotel market has shown that the impact on hotel revenues is in the 8% to 10% range, with cheaper hotels and leisure hotels being the most impacted (Zervas, Prosperio and Byers). This only one example of such studies, therefore, one need to understand what is driving this decrease on negative impact on revenues. Hotel revenue is driven by the following formula: ADR X Occupancy % X Number of available rooms = Total Hotel Room Revenue Where ADR is the average daily rate that the Hotel charge on any given day For a given hotel, unaffected by any renovation work, the number of room available should be constant. Therefore, the two main drivers of revenues are hotel occupancy level and average daily rates. The result of a recent Morgan Stanley Research estimates that Airbnb will only have very limited impact on average occupancy levels across Europe and the US. Exhibit 8 below shows occupancy levels have seen and will continue to see minimal impact from Airbnb and the increase in room supply. Morgan Stanley estimates that the downside occupancy level by 2020 is around 68.2%, while the upside is around 69%, with the base case being at around 68.5%. Although this research estimates that occupancy level will reach cyclical peak in 2017/2018, it shows that the impact on occupancy level form Airbnb seems to be limited. Source: (Morgan Stanley Global Insight) 2,796 2,866 2,926 2,982 3,044 3,115 3,189 31 64 95 123 148 168 183 65.0 65.5 66.0 66.5 67.0 67.5 68.0 68.5 69.0 69.5 0 500 1,000 1,500 2,000 2,500 3,000 3,500 4,000 2014 2015 2016 2017 2018 2019 2020 Hotel Demand Airbnb Exhibit 8: Airbnb’s Potential Impact to Hotel Demand US and Europe Room Nights Hotel Occu MM
  17. 17. Page | 16 If the impact on occupancy level is minimal, then the reduction in hotel revenues has to be driven by room rates. Airbnb supply accommodations are highly elastic and respond quickly to increase in tourist arrivals in any given city and, therefore, to increase in average daily rates (“ADRs”). That high level of elasticity of supply appears to negatively affect hotels’ pricing power during peak periods: the so called compression night, when occupancy reaches 95% and more. There are many ways of segmenting the hotel industry. The first layer of segmentation is by price point. The following five main segments are commonly used in the hotel industry to segment hotel positioning by pricing and quality levels:  Budget  Economy  Mid-price  Upscale  Luxury The second commonly used segmentation criterion is whether the hotel is mainly targeted to business customers versus leisure customers. The offering of conference facilities, business centres and meeting rooms is generally a good proxy on whether a hotel is catered to business customers or not. Finally, the last commonly used segmentation in the industry is whether a hotel is part of a branded chain or is independent. A study run by two scholars at Boston University confirmed that the following segments are more likely to be negatively impacted by Airbnb (Zervas, Prosperio and Byers):  Budget and economy hotel, as they compete on price and, therefore, within the main criteria of sensitivity of Airbnb’s customers (recall Exhibit 1)  Hotels without conference/business facilities catering more to the leisure market, as business travellers are less price sensitive (tend to benefit for corporate cost reimbursements and/or tax deductions/benefits) and require facilities and amenities that are rarely offered by Airbnb accommodations  Unbranded/independent hotels, as larger hotel chains have significant marketing budgets, stronger brand recognitions and better predictability and product consistency Although all hotel operators and companies should prepare strategies to compete with Airbnb, the above segments should be particularly worried by this “disruptive” new entrant.
  18. 18. Page | 17 III. Key problems and solutions for Airbnb and hotel operators to co-exist As presented in Daniel Guttentag research, Airbnb could be described as a “disruptive innovation”. After a few years of limited popularity, Airbnb has experienced exponential growth and has now entered the “mainstream market”. Airbnb is providing a cheaper, simpler, more convenient and adaptable product. It has started to both cannibalize existing hotels and created a new market for different type of accommodation. It has shaken the tourism industry (Guttentag). Unlike Uber, Airbnb has not yet provoked violent debates such as the one experience by Uber in France. In fact, many of the executives of large publicly traded hotel company have been dismissing the threat by arguing that Airbnb is a niche player not in direct completion with their business segment. However, much has been said and written about its negative impact and the need to control and regulate it. We will first review the main concerns against Airbnb that have been voiced by cities/city officials and by hotel industry representatives. We will then review potential regulatory solutions and broader strategic solutions. A. The city argument In most cities and countries around the world, short stay accommodations are either illegal or require specific and often cumbersome approvals. When legal, such short stay accommodations are approved on the basis of specific city zoning plans and require a number of safety, health, insurance and other administrative approvals and are limited to true sharing of living space for a pre-defined period of time. it is normal than cities should regulate and control such type of accommodations, as they need to comply with a number of health, fire protection, security and safety requirements and could have an impact on the development and social make up of entire city areas. Airbnb future growth and continued increased acceptance is threatened by these legal issues, as in many cases Airbnb accommodations are technically illegal. This has provoked much debate amongst city officials. Essentially, Cities have been arguing the following key themes:  Airbnb does not follow the city zoning plan and in many cases short lettings negatively impact the social make up of certain city districts, which changes from quiet residential areas to touristic attractions. Recently, social networks are recording increasing number of complaints by local neighbours. This has driven recent rumours that Airbnb may be launching a new tool to enable neighbouring communities to lodge complaints directly with the company (Weldon).  For a given amount of residential accommodations stock, the increase in short term lettings is by nature coming at the expense of long term rentals. The re-purposing of long term residential real estate into short term letting is driving significant increases in rents for local residents (that among other are voters in their districts and cities). Airbnb itself
  19. 19. Page | 18 wrote the following note on this topic: “We know we have more work to do and this effort is just a first step. Going forward, we will examine our broader community – including hosts with only one listing – and continue to develop more tools so we can help hosts share the home in which they live, not homes that would otherwise be on the long term rental market” (Carson).  Short letting leads to the conversion of social housing into tourist accommodations, therefore negatively impacting the supply of affordable social housing. For example, certain organizations in San Francisco claim that “10.000 to 12.000 units of housing have been converted into full-time tourist accommodations … at a time where the city is suffering through one of the worst affordable housing crises in history” (Clark).  Airbnb is avoiding full tax obligation that leads to a significant reduction in city tax revenues. This is obviously a very relevant argument for city officials and resident alike. This forgone tax revenues could be used to improve city capital expenditures that create both jobs and better living conditions for all residents. Alternatively, it could be used to reduce the already significant tax burden of local residents. B. The hotel industry argument Many of the hotel industry arguments stems from similar roots as the ones used by city officials. In essence, the hotel industry argues that Airbnb has led to the creation of an informal tourism accommodation sector that does not follow the same rules as the highly regulated hotel sector. They claim that the lack of regulations and oversights of this informal tourism accommodation sector has created an unlevelled playing field. Here are some of their main claims they make against Airbnb: 1. Lack of security, safety regulations and insurance requirements, compounded by no planned enforcement systems and mechanisms to ensure basic compliance with the law: “In New York, Attorney General Eric Schneiderman said 72% of the New York listings on Airbnb violated zoning codes or the state’s Multiple Dwelling Law” (Clark). Airbnb has also been criticised for not upholding the required standard of safety and well-being that the hotel industry is forced to comply with. 2. Different tax burden: Given the difficulty to tax Airbnb accommodation providers, and the high tax burden placed on hotel operators, the difference in taxation has both created a significant losses in city tax revenues, and a disproportionately high tax burden for hotel companies that make them less competitive. An HVS report submitted to the Hotel Association of New York City in October of last year estimated that the tax loss for the city of New York was approximately $226MM for the past 12 months, due to the effect of Airbnb (HVS Consulting & Valuation).
  20. 20. Page | 19 3. The unlevelled paying field has led to a decreased competitiveness of hotels, which in turn has resulted in hotel losing market share and a significant portion of their revenues. These losses have and will continue to negatively impact both the job market, and the current and future prospects for new hotel developments. The same report mentioned above studied the impact of Airbnb on the City of New York overall economic activity. This report estimated that between (i) the direct losses of room revenues, (ii)the ancillary revenue losses, mainly food and beverage, (iii) the lost construction activity, and (iv) the tax revenue losses, Airbnb cost the New York City economy about $2.1bn of lost activity (HVS Consulting & Valuation). The HVS consulting report seems obviously a “little” biased, as it omits to integrate at least two of Airbnb’s key arguments. First, travellers using Airbnb still do spend money on food and beverage and other activities in the local economy. Moreover, they often tend to spend more on ancillary activities as they have saved on their accommodation bills. Second, Airbnb argues that “its service merely complements hotels by attracting a different type of tourist, thereby making the pie bigger rather than taking a slice of the pie” (Guttentag). The concept here is that by increasing the supply of rooms with new types of accommodations, it should increase the number of visitation and therefore increase economic activity. Whatever the point of view or side one wants to take, the most pertinent argument made by the hotel industry is that a number of hosts are actually creating “under cover” hotel operations, avoiding regulations and taxes and creating an unfair competition to hotels. The basic philosophy behind the concept of the sharing economy, as applied to Airbnb is as follows:  to enable a host to make some extra money to help him or her to “pay the bills”,  by sharing his or her own accommodation with a temporary user,  who benefits from both a cheaper stay and a more “friendly” experience. That concept/philosophy is very commendable. However, the reality is in many cases very different from that “commendable” description. Vanessa Sinders said at a Federal Trade workshop: “Host are not mom and pops, these are individuals or companies operating multiple properties as a business” (Clark). This is a particular area of concerns that the market generally refers to as “Bad Actors” or people that do not rent their own living accommodations, but buy and rent flats on the Airbnb platform for a living, and are running “under cover” hotel operations. We are far away from a sharing economy model that helps lower income individuals by either generating additional revenues from renting a room in their flat or decreasing their hotel bill while travelling. If this is the case, then
  21. 21. Page | 20 Vanessa Sinders is right in saying that: “They are simply illegal hotels. And they should have to meet the regulatory obligations of the jurisdictions in which they operate, as hotels do, to protect the health, safety and well-being of their guests.” (Clark). Airbnb itself is starting to recognize the issue and is beginning to implement corrective actions. A recent example is in San Francisco: “Data recently released by the Company shows 20% of San Francisco listings, or 1 in 5 rentals on the site, are entire homes controlled by a host who lists multiple homes on the site … Airbnb said it has already removed 218 listing since June 2015, including 100 listing in January after the city of San Francisco pleaded the company to help it enforce short-term rentals regulations” (Carson). C. The regulatory solution There are many counter arguments to the ones above made by city officials and the hotel industry. In Particular, Airbnb would argue that:  Short term rentals fosters tourism, thereby creating revenues and jobs  Short term rentals helps create additional revenues for locals, creating wealth for the city  Short term rentals, if legalized, could create additional tax revenues for the city This last point is obviously a central point of the overall debate. Airbnb and the sharing economy at large is a relatively new phenomenon. As such, there is a complete regulatory void in this field. Brian Chesky, in a McKinsey interview, argued that regulation is essential for this new industry, and that ultimately the sharing economy will create real jobs, although difficult to account for. He said that the sharing economy “means that people all over a city, in 60 seconds, can become micro-entrepreneurs…. Laws were written many decades ago …. Suddenly these laws feels a little bid outdated. They are really 20th-century laws, and we are in a 21st-century economy… Whereas historically, to create opportunities, cities would need massive projects and investments, these jobs only require the internet. Now what they need is to navigate the legal framework, which is typically outdated” (McKinsey). However, certain cities/countries may agree with the need for regulation, but not in an Airbnb friendly manner. For example, in Japan, one of Airbnb fastest growing market, things are starting to change. Prime Minister Shinzo Abe’s Government has recently released national guidelines, for Japanese cities to enact, to limit the competitive field between hotels and Airbnb accommodations. These guidelines, called “minpaku” in Japanese, would make Airbnb listings illegal if not for stays of one week or longer (Nakamura and Takahashi). This would obviously be a significant blow to Airbnb in the country. The result of these “minpaku” would be to either force Airbnb to enforce their host to comply with rules, regulations and taxations, or would significantly limit its applicability to longer stay.
  22. 22. Page | 21 A more constructive solution could be organized along the following four steps regulatory framework:  Step 1: Establish an easy and straight forward city approval process for short term rentals. Enacting easier health, safety and fire protection standard, more applicable to single unit’s rentals (as opposed to large hotel accommodations) . The key for the success of this procedure would be to cut any red tape and achieve an approval and on-site inspection within a few days (thereby creating new jobs).  Step 2: Establish a periodical review process for automatic re-approval . Such process should not be cumbersome, but should ensure enforcement of the rule. Again here, this process would be beneficial as it would create both transparency and jobs.  Step 3: Force Airbnb to only include in its listing approved accommodations under the procedure described above. Although this would slow the on-boarding process of new accommodation onto the Airbnb platform, it would significantly improve the customer trust and reliability of accommodation offerings. Therefore, it would also benefit Airbnb and the ultimate customer.  Step 4: Force Airbnb to collect on each transaction it processes a certain amount of city tax that is currently forgone buy the city. Since all Airbnb booking are paid through the Airbnb platform. The company controls and monitors every transaction. It is therefore easy to collect such tax that could then be transferred back to the city. The collection and administration cost could easily be deducted from the collected amount not to adversely impact any of the parties. As we will discuss in the conclusion of this report, another issue is the hosts’ income tax. This system could also solve that issue by taxing at source and using Airbnb as a tax collector. This above four steps regulatory framework is only one example of ways to solve the current regulatory and city tax debate and void. Whatever the system, it is essential that new regulations be enacted quickly for the benefit of all parties involved. A regulated sector would solve the “illegality” and uncertainty that Airbnb faces, while at the same time offering a better and safer service and environment to both hosts and guests. In addition, it would enable cities to cash much needed additional lodging taxes that Airbnb do not charge currently. In the USA city lodging taxes are around 15% of the total accommodation charge. For example, New York City charges 14.75% in taxes (8.875% in sales taxes and 5.875% in occupancy tax) plus an additional $3.5 in nightly fees, and in San Francisco taxes are between 15% and 15.5% depending on the area of the city (Guttentag). According to an HVS study, over a 12 month rolling period from September 2104 to August 2015, the city of New York itself has forgone $76.5MM of lodging taxes due to Airbnb accommodations (HVS Consulting &
  23. 23. Page | 22 Valuation), and the number will rise in the future with the increased Airbnb market share and penetration rate. D. Potential longer term strategic solutions The key to mapping out alternative competitive solutions is to look at Airbnb from a constructive angle. Since Airbnb and the Uberization trend in general are there to stay, it is essential to use it in order to survive and potentially benefit from it. Solving the regulation void and ensuring a level playing field are certainly an essential part of any competitive response. However, hotel operators will have to identify and implement strategies that incorporate the Uberization phenomenon and also use it to their benefit. Two main guidelines seem appropriate to provide a strategic response/direction to the Airbnb threat:  Using Airbnb as a tool for marketing and for expanding food, beverage and ancillary revenues, or  Adapting the product positioning thru capital expenditure programs to improve the quality and consistency of their product and/or growing through mergers and acquisitions 1. Using Airbnb as a marketing, booking, and ancillary product offering tool The hotel industry and in particular hotels competing head to head with Airbnb, could use the famous saying: “keep your friend close and your enemies closer”. Hotels and hotel companies competing in the Airbnb “sweet spot”, the leisure and economy segment, should identify ways to collaborate with Airbnb. Reaching a commercial agreement with Airbnb to post certain of their hotel rooms on the Airbnb website could have the following benefits to Hotel operators and Airbnb alike:  Adding an additional channel of marketing and distribution for hotel companies, which in turns could drive occupancy and/or ADRs. At the same time, it would provide Airbnb with an even larger source of accommodations for their customers to choose from, thereby leading to higher revenues and increased customer satisfaction.  Reducing transaction costs for hotel companies. Online travel Agencies (“OTAs”) charge higher transaction fees than Airbnb. In fact, OTAs tend to charge between 12% to 18% transaction fee to large hotel chains and between 15% to as much as 30% to smaller independent hotels (AlphaWise). As Airbnb charges 9% to 15% all in, the saving for hotels could be material. In addition, Airbnb could significantly expand its business model and improve both its offering and revenues. As Morgan Stanley states in one of its recent research: “over time, Airbnb is well positioned to bring hotels onto its platform …” (AlphaWise).
  24. 24. Page | 23  Offering hotel food, beverage, cleaning services and other amenities to the Airbnb customers taking accommodations nearby hotels with the “commercial agreement” with Airbnb. This last but not least strategy, which does not appears to have been envisaged yet, could help drive significant additional F&B and ancillary revenues to hotels. In addition, it could have a major impact on the image, consistency and quality of the services that Airbnb offers. Just imagine a new advertising slogan: “the pleasure and comfort of being at home with the quality of the hotel services…”, or maybe we should use “Shopify”, another peer to peer website to find a better slogan… 2. Changing product positioning and/or consolidation Another strategic response that Hotel operators can and should consider is to adjust the positioning of their products. As Airbnb targets cost conscious consumers, hotel operators can position their product either on the higher-end of the scale: toward the Upscale and/or luxury segments in the leisure industry or as hotels more catered to the business segment in the Mid-range, Upscale or Luxury segments. This would limit the competitive friction with Airbnb, assuming that Airbnb fails or is slow to attract higher end customers. The final and more likely response that Hotel operators are likely to put in place is consolidation. As reviewed in this report, one of the key competitive advantage that hotel may have is brand recognition. This brand recognition offers customers exactly what Airbnb currently struggle with: certification of quality, security conformance with the law and consistency. Branding generally comes with economy of scale allowing hotel operators to invest into capital expenditure to offer consistency and quality across their network of hotel. To achieve that economy of scale, it will become critical to expand their global reach and size. Increased size will also lead to higher marketing budgets, leading to further enhancement of brand recognition. Consolidation has in fact accelerated over the recent years in the hotel industry. The most recent takeover has made the headline with Marriott International winning the bid to acquire Starwood Hotels & Resorts Worldwide, after a long and heated takeover battle against the Chinese Insurance Company, Anbang. The total consideration for the takeover was a staggering $13.6bn (Bloomberg). This acquisition and subsequent merger, will create the largest hotel company in the world. “The combined company will have 1.1 MM Rooms in more than 5,500 hotels, spanning the globe in over 100 countries. The 30 leading brands will provide guests unmatched choices” (Marriott). It is not impossible to state that this consolidation is driven by Airbnb competitive considerations. However, it is pretty clear that this new hotel chain does have now much better argument in the competitive battle with Airbnb and other hotel operators.
  25. 25. Page | 24 Conclusion The Uberization phenomenon is creating a new form of competition that is challenging large, established incumbent operators in many industries. In the hotel industry, Airbnb is arguing that its product is purely generating incremental economic activities and is helping hosts to generate additional income while offering guests a different experience at better value for their money. This argument is only true to only to a certain extent. The analysis throughout this report clearly showed that Airbnb is having an increasingly significant impact on consumption patterns. Airbnb offers a much more price effective service, as it has a significantly more flexible and innovative business model with very little fixed cost, and a high degree of transparency and adaptability. Airbnb has a near zero marginal cost on adding new supply. It can add new accommodations at the speed of a “click”, whereas the hotel industry would take years to get approvals, financings, and build new hotels. This new model is challenging the mere existence of large established industries and companies that use to be protected by high barrier to entries. The question to this older/incumbent company is whether they will fight these new comers thru lobbying and regulatory challenges only, or through adapting their business model or both. These changes that have been created through the emergence of the web and new communication systems are irreversible. Therefore, adapt or die is becoming the new name of the game. As always with innovation, the first reaction is always of disbelief, then shock and outrage. Once that period is over, it generally gives way to a period of adaptation and produces new business models. In the hotel industry, the level playing field argument and the request for increased regulation is not much of a strategic response, as the Airbnb model will always be faster, more flexible and cost effective. The Hotel Industry will, and is, therefore adapting to survive. However, many other leisure industry players will have to also adapt and adopt new strategic visions. Airbnb itself will eventually have to adapt and find ways to work with the hotel industry in order to respond to new comers like:  Couch Surfing which is already competing with Airbnb  Night Swapping is a free Airbnb, offer free beds giving right to a point system offering free beds… Ultimately, Airbnb could face itself competing more directly with the online travel agencies like Expedia or others. They will also adapt, change their strategies and will challenge Airbnb. Like in any industry and life cycles, you need to embrace changes and adapt or die. Jack welch, the former GE CEO used to say: “change before you have to”… (BrainyQuote).
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