Airbnb and the Internet Revolution

Despite the fact Airbnb1 is, along with Uber, the poster-child for the new sharing economy, the former seems to attract a lot less attention than the latter, particularly among the chattering class. I suspect a big part of this is the way people view drivers vis-à-vis sublessors: despite the fact drivers work for Uber by choice — and, as Uber is eager to point out, come and go as they please — while on the clock Uber controls their rates and revenue share. Not only does this raise the question as to whether or not drivers are employees,2 it also provides grist for countless anecdotal stories about how a company valued at tens of billions of dollars3 is taking advantage of drivers earning tens of dollars per hour at best.4

Airbnb, on the other hand, is generally thought to be much more of a win-win: sublessors make some more money, and sublessees get a more inexpensive place to stay than a hotel, or a more home-like environment in a different sort of neighborhood than they might otherwise; often it’s both. More importantly, both parties are clearly happy with the arrangement.

Of course the nature of the relationship between sublessors and sublessees differs depending on whom you ask: hotels, facing real disruption from Airbnb, accuse the startup of being a shadow hotelier focused on stealing their business. Airbnb, for its part, focuses on the idea of “home”. Last summer, while announcing their new branding and mission statement, Airbnb founder and CEO Brian Chesky wrote:

In 2007, Joe and I opened our home up to the first Airbnb guests. They booked a place to stay, but they ended up with something more than just an airbed at a slightly messy apartment. They learned our favorite places to grab coffee, ate the best tacos in the city, and had friends to hang out with whenever they wanted. They were thousands of miles from where they lived, and yet they felt right at home. What started as a way for a few friends to pay the rent has now transformed into something bigger and more meaningful than we ever imagined. And what we realized is that the Airbnb community has outgrown the original Airbnb brand. So Joe, Nate, and I did some soul-searching over the last year. We asked ourselves, “What is our mission? What is the big idea that truly defines Airbnb?” It turns out the answer was right in front of us. For so long, people thought Airbnb was about renting houses. But really, we’re about home. You see, a house is just a space, but a home is where you belong. And what makes this global community so special is that for the very first time, you can belong anywhere. That is the idea at the core of our company: belonging.

A not insignificant number of cities are equally concerned about “home,” but in their view Airbnb is destroying them by incentivizing landlords to remove residences from the rental market and instead offer them full-time on Airbnb. Paris, for example, which is Airbnb’s biggest market, has in recent weeks conducted raids on unauthorized Airbnb listings. As the Wall Street Journal reports:

Paris officials say there are some 30,000 tourist apartments available for rent in the city — about 2% of the total number of units — with as many as two-thirds operating illegally. Airbnb says that it is a fringe issue on its platform; just 17% of hosts in Paris say they rent out apartments other than their primary residences. It isn’t clear how many of those might be doing so without city authorizations.

Some hotel owners and other activists argue that full-time tourism apartments likely account for more than that in revenue terms, however. “You can’t call this a sharing economy anymore,” said Laurent Duc, president of the French Hotel Federation. “This is an underground shadow economy.”

It’s this last sentence that really gets at why the entire debate around the “sharing” economy is so stilted: at the risk of relying too heavily on my own anecdotal experience, it seems clear that at least a sizable portion of Airbnb’s business is made up of apartments and houses dedicated to Airbnb. In other words, no one staying in these professionally cleaned listings, complete with fresh sheets, towels, and complimentary toiletries, is joining their hosts for coffee or tacos or to simply hang out, no matter how delightful Airbnb’s founding myth may be. It is, as the president of the French Hotel Federation said, “an underground shadow economy.” Why, though, should it be underground?

The Industrial Revolution

I thought it fascinating that Chesky invoked the Industrial Revolution in his post:

We used to take belonging for granted. Cities used to be villages. Everyone knew each other, and everyone knew they had a place to call home. But after the mechanization and Industrial Revolution of the last century, those feelings of trust and belonging were displaced by mass-produced and impersonal travel experiences. We also stopped trusting each other. And in doing so, we lost something essential about what it means to be a community.

Chesky’s focus is on travel, but in reality no one actually did so.5 Nearly everyone lived on subsistence farming, more often than not working land owned by someone else; said landowners, along with the church, exercised nearly complete control, with the occasional merchant facilitating a bare minimum of trade primarily to the benefit of the ruling class. The Industrial Revolution — and the accompanying agricultural one — completely flipped this arrangement on its head. Thanks to the efficiencies afforded by technologies like the loom and mechanical power people were able to specialize and trade the outcomes of their labor for a much fuller and richer life experience than what they had previously.

I get that I’m putting an awfully neat bow on what was 150 years of wrenching change. After all, I just basically described soul-destroying — and often body-debilitating — work in 18th century sweatshops as “specialization”; it’s a bit like Uber’s insistence on calling its drivers “entrepreneurs.” And yet, when you consider how structurally the old taxi medallion system resembled the landowner-peasant relationship of old, why is everyone so eager to declare that the new boss is worse than the old boss?

Of course the rise of factories — and the truly awful conditions within them — eventually helped lead to the rise of the modern regulatory state. Child labor was banned, and eventually hours were capped and minimum workplace safety rules were instituted. More broadly, regulation was applied to the massive amounts of new trade being conducted both locally and across borders, and as cities rose up around those factories and trading centers, regulations covering day-to-day life rose up as well.

This was as necessary as it was inevitable: when Chesky writes that before the Industrial Revolution “everyone knew each other” the unspoken truth is that we simply didn’t know many people, and those we did know were governed by the same shared mores that govern any community. Regulation wasn’t necessary because we regulated ourselves and each other. However, the rise of factories and cities concentrated both power and people even as it magnified the number of interactions conducted by those people and influenced by that power; there were no shared mores because nothing was shared beyond the temporary need for a shared transaction governed by self-interest, making self-regulation a utopian fantasy. We needed regulation because we were incapable of regulating ourselves and each other.

Airbnb and Trust

In the interest of full disclosure, I’m actually writing this post while sitting in an apartment rented through Airbnb. The pictures were ok, but the plethora of reviews were effusive in their praise of this surprisingly large one-bedroom apartment with easy access to the train, so I took the plunge. Indeed, the reviews were spot-on: the apartment is beautiful, and I couldn’t be happier with my choice. One more thing — my family and I are working really hard to keep the place as pristine as it was when we moved in. After all, while I trusted the ratings over the pictures, future Airbnb sublessors will surely care greatly about my rating as well.

There isn’t the sort of community that Chesky promised; I haven’t met our sublessor in person, and likely never will. I don’t know his favorite coffee shops or taco places (or ramen joints for that matter), and I very much feel not at home.6 But despite that fact, some of the most important trappings of community do exist: the shared mores, and common accountability. My sublessor is incentivized to provide a great place, and I’m incentivized to keep it that way, and that more than anything is what makes Airbnb work. And, by extension, one of the big advantages of hotels — the trust instilled first by the concept and reinforced by the brand — begins to erode.

The commoditization of trust is far more injurious to hotels than you might think: it’s not simply that Airbnb is more competitive on one particular vector; rather, the “trust” vector was by far the biggest priority for both travelers and hosts. Hotels could be infinitely more inconvenient, expensive, or sterile relative to your typical homestay and it wouldn’t matter. In the pre-Airbnb days travelers — and sublessors — justifiably prioritized trust above all else. In other words, the implication of Airbnb building a platform of trust is not that a homestay is now more trustworthy than a hotel; rather, it’s that the trust advantage of a hotel has been neutralized, allowing homestays to compete on new vectors, including convenience, cost, and environmental factors. It turns out homestays are quite competitive indeed: to return to my personal anecdote, I am living in a beautiful, remodeled one bedroom apartment in one of the best neighborhoods in this city, and paying a fraction of the cost of a mid-tier hotel for the privilege.

Here’s the kicker though: without Airbnb I wouldn’t even be making this trip. Staying in a hotel would not only be too expensive, it would also deny me the opportunity to at least get a taste of what it’s like to live day-to-day in a different country and culture — something you don’t get at your typical branded hotel. And that’s why the calculation for cities is more complicated than the president of the French Hotel Federation would have you believe: yes, the apartment I’m living in is off the market, but to what extent is one less rental unit made up for by the amount I will spend over the several weeks I am here?

All of these considerations apply to Uber, and many of the other sharing economy startups: what makes them work is not simply mobile access to the Internet, location data, and all the rest; equally important is the systematization, and by extension commodification, of trust. To be sure the latter isn’t a new concept: Ebay deserves special credit for pioneering the fundamental mechanic as applied to Internet businesses. The addition of mobile, though, made this mechanic exponentially more powerful: we went from a vision of apps that let you book last minute hotels to apps that made every house in every city in the world a potential place to stay.

The Internet Revolution

It has been a consistent thesis of mine that the Internet Revolution, which I believe has only just begun, will prove to be in the long run just as transformative as the Industrial Revolution. In other words, it’s not only that we would become more productive; it’s that society as we know it would be fundamentally changed. How, though, hasn’t been entirely clear: if the industrial revolution moved us from subsistence farming in the countryside to factories in cities, where might we go next?

I increasingly believe that it is the sharing economy that is beginning to reveal the answer: a world of commodified trust has significantly less need for much of the infrastructure of modern society, including inefficient sectors like hotels whose primary differentiator is trust, along with the regulatory state dedicated to enforcing that trust. On the other hand, this brave new world has brand new holes through which people can fall: those who have lost trust, or do not have the means to build it. I’m no crazy libertarian; quite the opposite in fact: we need a significantly stronger safety net and a judicial system predicated on arbitration.

The nature of assets changes as well, and not just hotels: as more houses — and rooms — are offered as a service, the definition of ownership begins to shift. This will clearly first play out in automobiles: the long-run promise of Uber is a world where few own cars and few cars sit idle. This will impact not just auto-makers but insurers, dealers, repair shops, and more. More profoundly, it will affect people. We will be less tied down, more willing to move, especially if our work becomes just as transactional as our possessions. And that, ultimately, will change the way we relate to each other, just as the shift from the small knit community in the countryside to the chaos of the city upended everything we thought we knew about how individuals, communities, and governments interacted.

Just because the future is coming into focus, though, doesn’t mean the road there will be smooth. Once again it is Paris giving us a glimpse of the convulsions along the way: taxi drivers upending cars, setting them on fire, terrifying passengers, all in the pursuit of a world as it was. And for now it seems they have won the battle: the French government is taking action to curtail UberPop. The war, though, is only just beginning, and one desperately hopes said reference to war — in contrast to the climax of the Industrial Revolution — remains figurative.

  1. The company just raised $1.5 billion at a $25.5 billion valuation; by the way, that article is worth a click for the chart comparing hospitality companies: it captures very neatly how valuation is based on revenue and growth (along with profit margins and addressable markets, of course) []
  2. The California Labor Commission ruled that one driver was; other courts have held that drivers are not []
  3. $40 billion now, $50 billion soon []
  4. Few of these stories consider what these drivers ought to do otherwise, or why Uber should feel compelled to pay more beyond the insinuation that they can, an assessment that belies the fact that that valuation is predicated on Uber returning the billions invested in the company at a multiple. []
  5. And the Industrial Revolution didn’t happen “last century” []
  6. That, of course, is the point in coming []