Airbnb: The Future of Experience

Profile

Airbnb, Inc operates a platform for stays and experiences to guests worldwide. Simply put, the company connects people looking for experiences to those who can accommodate those experiences.

Product Mix

Despite the cut and dry business model, Airbnb offers more products than you might think.

• Airbnb Stays
• Airbnb Experiences
  • Launched in 2016, Experiences is Airbnb’s first venture in supporting tours and events on the platform
• Airbnb Plus & Beyond
  • Airbnb expanded its stays to include homes vetted and verified for quality of services, comfort and design. Similarly, they launched Beyond, for luxury vacation rentals
• HotelTonight
  • As airbnb scales its end-to-end travel platform with the goal of serving every guest, HotelTonight was an easy target to acquire last minute guests which airbnb’s platform struggles to accomplish. The acquisition cost totalled $450 million
• Natiivo
  • In 2019, Airbnb launched Natiivo in Miami and Austin. The brand caters to travelers looking for a blend of Airbnb and hotel. Natiivo condos include features like 24-hour concierge, co-work spaces, valet parking, etc
• Airbnb Adventures
  • Airbnb expanded its Experiences platform to include adventures in 2019. These adventures consist of multi-day or overnight all-inclusive trips hosted by locals. Motivated by the global adventure tourism market of $586 billion in 2018, this expansion was a no-brainer for Airbnb. By 2026, this market is projected to reach $1.6 trillion, representing a CAGR of 13.3%
• Airbnb Online Experiences
  • When COVID-19 grinded travel to a halt, the Airbnb team reacted quickly and launched “online experiences'' in April 2020. Similar to Airbnb Experiences, Online Experiences is a play on the gig economy, but from home. Today, almost a full year since the initial launch, there are thousands of users selling every kind of online experience imaginable

Founding

When Joe Gebbia and Brian Chesky decided to move into a San Francisco apartment together, Brian had just quit his former job in LA and needed money to cover rent. Since they were both designers, they knew of a design conference taking place in SF the following weekend which created demand for lodging. They figured they could rent out the extra space in their apartment as a temporary Bed & Breakfast during the conference. There was no bed in the extra room, but Brian had an air mattress which prompted the launch of their first website; Air Bed & Breakfast. Surprisingly, they were able to acquire three guests within a couple days: Kat, Michael, and Amol. They showed their guests around the city, went to the conference together, and ultimately became friends. Apparently so much so that the man from India, Amol, invited the group to his wedding two years later. Despite the success of their first launch, there was a temporary lull. A few months later, Nathan Blecharczyk joined the team and they prepped for launch #2. The second launch was a spin off their original idea, where locals could post their contact information if they had a space to rent near an upcoming event. The launch proved to be unsuccessful after a mere two bookings for their first launch at SXSW. At this point, they were broke and couldn’t attract investors. The next event they had on their radar was the 2008 Democratic National Convention. This led to their product launch of “Obama O’s” and “Cap’n McCains”. At a price tag of $40/box, the launch yielded them $30,000 in financing. The successful launch was followed by a metting with Paul Graham where they were able to acquire their first round of funding ($20,000 from Y combinator). In the following months, Airbnb began to gain momentum as the team shifted their focus from shared spaces to all types of accommodation. By March 2009 (when they changed their domain to Airbnb.com), the company reached 2500 listings, nearly 10,000 users, and grew exponentially from thereon out.

Disrupt

eBay’s global online marketplace launch in 1995 enabled the sharing economy we know so well today. Despite eBay’s success in connecting individual buyers and sellers without additional retailers in the middle of each transaction, their business model wasn’t replicated with success for years. However, after its few unsuccessful launches, Airbnb became one of the first companies to incorporate the genius of eBay’s business model to disrupt an entirely new industry.

Airbnb’s disruption of the hospitality industry rendered a similar reaction from competitors than that of most transformative technology: Denial, vilify, then ultimately participate.

For many years, both Airbnb and hotel chain founders claimed they were serving different markets. However, as Airbnb continued to grow exponentially, traditional hotels could no longer deny Airbnb’s impact on the hospitality market. The response from hotel owners was to attack Airbnb with the help of the American Hotel & Lodging Association and lobbying governments to impose taxes and regulations on home sharing. Inevitably, a floodgate of legal obstacles surfaced for Airbnb. This led to the rise of new home sharing regulations all over the world. Ultimately, competitors' efforts in trying to make Airbnb disappear in a sea of legal barriers proved unsuccessful. The final stage of disruption involves competition integration. This has led to traditional hotel chains reinventing their wheel of products to include more affordable home sharing-like experiences. For example, Accor’s new hotel brand, Jo&Joe, is nearly a copy-paste of Brian and Joe’s initial idea and a sign of the competition to come.

Grow

So, how did Airbnb grow to the behemoth it is today? There was no single silver bullet. Airbnb’s growth was a byproduct of the synergy between eccentric vision and incessant execution. Let’s go over some examples of Airbnb’s history of growth hacking.

In 2010, if you needed a place to stay and for whatever reason weren’t interested in staying at a hotel, you were on Craigslist. Despite Airbnb’s focus on differentiating themselves from Craigslist, they needed a way to tap into Craigslist’s massive user base. First, they offered hosts who listed on Airbnb the option to duplicate their listing to Craigslist. To do so, Airbnb wrote a script that automatically swiped a Craigslist unique URL, input the Airbnb listing info, and forwarded the URL to the host for publishing (shown below).

Airbnb’s benefit from this integration is immeasurable now, but undoubtedly significant. The aesthetic and care for detail of Airbnb listings far surpassed that of Craigslist (spam filled, poor photos, lackluster descriptions, etc.). This led Airbnb listings to stand out on any Craigslist feed which ultimately drove huge amounts of referral traffic to Airbnb. Due to the immediate success of the integration, Airbnb thought of new ways to poach Craigslist users. They came up with a questionable but effective way of spreading the word. When a user posted a home-sharing listing on Craigslist, Airbnb scripted spam emails from “an excited Airbnb user” to encourage Craigslist users to check out Airbnb (shown below).

While examples of growth hacking can be noticed throughout Airbnb’s history, these early examples were especially instrumental as the company built out its user base.

As the platform’s performance metrics continued to grow exponentially, the Airbnb team was already preparing for the next stage: implementing bookable services and Airbnb Experiences into the software. This marked the beginning of Airbnb's journey to monetize a traveler's entire experience (greatly increasing their total addressable market). Chesky explained in early 2014, "Our business isn't [renting] the house—our business is the entire trip.”  

Monetize

Like most sharing economy companies, Airbnb’s revenue is primarily derived from fees. Airbnb charges fees on both sides of each booking: Guests pay ~13% fee (a more expensive reservation yields a lower fee percentage) while all hosts are charged a flat 3% service charge. Unlike the overnight stay fee structure, Airbnb Experiences guests don’t pay fees while hosts are charged a 20% service fee. As a whole, Airbnb’s 2021 take rate lies at ~16%. Expect the take rate to expand as the moat is built.

Financials

Now that the business model is understood, let's dive into Airbnb's financials!

While COVID-19 was detrimental to Airbnb’s 2020 revenue growth, the black swan event will likely accelerate growth of future bookings as consumer preferences for lodging have shifted. By comparing Airbnb’s year over year revenue decline from 2019 to 2020 with competitors, it appears the shift in consumer preference is already being reflected. Year over year, Marriott’s revenue declined 60%, Hilton’s revenue contracted by 58%, Booking Holdings’ revenue is down 55%, and Expedia’s revenue dropped 57%. In comparison, Airbnb’s 30% revenue slump during the worst year in tourism history is pretty impressive. Actually, really impressive. For reference, the World Tourism Organization (UNWTO) found that 2020’s travel collapse resulted in estimated losses of $1.3 trillion for the global tourism market (more than 11x the loss recorded during the 2009 global economic crisis).

Due to the varying nature of lockdowns around the world in 2020, I used 2019 data to reflect revenue breakdown by region. While North America led the pack at $2 billion, the Europe, Middle East, and Africa (EMEA) region followed very close at $1.9 billion. Though North America and the EMEA region brings in most of Airbnb’s revenue, Latin America actually took the lead in average number of nights booked by region in 2019 and could prove to be a high growth demographic. Going forward, Airbnb’s success is dependent on international market penetration. Personally, I’ll be keeping a close eye on Airbnb’s market penetration of the Asia-Pacific region, their largest addressable market.

Airbnb and OTAs don’t just gather more data than hotels, they make a much larger return on every dollar earned. As the youngest company in the lineup, we should expect Airbnb’s gross margins to expand as they try to cut back on spend and gain leverage on cost of goods sold. As a result, I anticipate Airbnb to materialize 80% gross margins in 5-10 years.

Potential Risks

Airbnb’s business is still highly susceptible to regulation across the globe. The risk of future regulations could materially impact the business’ operations.

Where to

Based on 2020 data, it’s evident that travelers feel more comfortable staying at an Airbnb as opposed to traditional hotels for the time being. I expect this trend to continue until a full tourism recovery in 2023. These next two years, bridging the gap from pandemic to post pandemic living, should be a tremendous catalyst for Airbnb. With nearly 200 million active users, Airbnb is well positioned for the coming travel boom.

Medium term, similar to how most millennials in tech are living now, I see a large remote work force in the years to come. I envision a world where many Gen Z and millennials travel the world working remotely, from one Airbnb to the next.

I also predict Airbnb to develop a social media aspect to their platform. Users can post photos of homes and videos of experiences to share with friends. Your friends can add your stays/experiences to their wishlist. I expect it to be a Pinterest-like platform for travel and experience inspiration. You’ll be able to search destinations to find thousands of posts from other Airbnb users who’ve already visited. Planning your first trip to Paris? “Your friend, Josh, visited last summer, check out their trip deck for inspiration or send him a private message for Paris travel tips." Additionally, this could open the door for people who aren’t interested in hosting to strangers to begin “hosting to friends” where only a user’s friends can book a stay at their home.

Longterm, I see a blindingly bright future for Airbnb. Why? I expect this company to monetize nearly every aspect of your future travels: air travel, car rentals, overnight stays, dining out, tourist guides/tours, working out at the closest gym to your Airbnb, cleaning services, events, etc. Think of how much you spend on travel related expenses each year. Think about how much your friend group spends on travel related expenses. Think bigger. For example, in my city, San Francisco residents spend $6.6 billion on travel annually ($2.2 billion on air fares, $1.8 billion on lodging, $1.6 billion on food and beverages, $620 million on out-of-town entertainment, etc). While Airbnb’s lodging take rate is 15%, you should expect much lower fees for everything else. Let’s say 5% of total. That’s $330 million in annual Airbnb fees from my city alone. I’m not insinuating that Airbnb will take over the entire market share, or even close to it, but rather trying to represent the magnitude of their fee structure at scale.

Since its founding, Airbnb has defied home-sharing expectations by creating a platform built on trust, community, and customer experience. Based on my analysis of Airbnb and my knowledge of the hospitality industry, I hold high conviction that Airbnb will be a profitable longterm investment.

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