Like so many Silicon Valley start-ups, Airbnb has an origin story that’s become part of lore.

Two San Francisco roommates were searching for a way to make rent one month and saw that local hotels were getting booked up for a conference in town.

Capitalizing on that opportunity, they advertised the availability of an air mattress and breakfast in their living room, found a few takers, and the Airbnb concept was born.

Officially founded in 2008, the company survived early challenges to become a home-sharing juggernaut that is valued at $31 billion and is expected to make a splash when it goes public in the second half of this year.

Those roommates, Brian Chesky and Joe Gebbia, are now the company’s CEO and chief product officer, respectively. And Airbnb now hosts more than 2 million people a night, and has hosted 400 million over its history.

Capturing the sharing economy

Along with Uber, Lyft, and companies such as TaskRabbit, Airbnb is a pioneer of the sharing economy, an industry that emerged by leveraging the power of mobile technology to unlock the value of underutilized assets. In Airbnb’s case, its business is connecting travelers with hosts renting space in their homes, generally on a short-term basis.

Though Airbnb is seen as a direct competitor to hotels, the experience it offers is often quite different. Airbnb guests have wide range of options and can choose to rent a shared or private room within a house with other occupants, or to rent an entire apartment or house. Going further to differentiate itself from the traditional hotel industry, Airbnb’s listings include offbeat options like castles, treehouses, boathouses, and yurts. The platform also gives travelers access to homes in neighborhoods or areas where hotels can be hard to find.

The company acts as an intermediary between hosts and guests, providing an online platform for listings and message exchanges, collecting and transferring payment, and mediating any disagreements or conflicts that arise. Airbnb’s platform also encourages hosts and guests to leave reviews of each other, giving guests better information about places to stay, and hosts information on the behavior of individual guests.

Like other online marketplace models, Airbnb’s has proven highly scalable and profitable. The company makes money by charging guests a commission between 0% and 20% for their stays, and charging hosts a 3% to 5% fee.

The model has been an overwhelming success. The company said it brought in “substantially more” than $1 billion in revenue in the third quarter of 2018, and was on track to report its second straight year of positive EBITDA (earnings before interest, taxes, depreciation, and amortization) in 2018. Though there are some indications that its growth is slowing in developed markets, Airbnb said in a memo that guest stays continue to surge in cities like Beijing, up 91% in the third quarter; Mexico City, up 79%; and even Birmingham, England, where stays jumped 70%.

The company has expanded its business to provide “experiences” from individual hosts, such as tours, classes, hikes, or food tastings. Rumors have even swirled that the company would move into flight-booking, though it has yet to do so. Still, Airbnb’s extension into experiences shows its ambitions of becoming a broader travel company that extends beyond just lodging.

Airbnb boasts more than 6 million listings around the world, giving the platform’s users more places to stay than the top five hotel chains in the world combined. Though Airbnb is an undeniable success story, the company’s rapid growth has stirred controversy and challenges along the way.

Regulatory issues

As it has grown, Airbnb has entered cities around the world with little regard for local regulations on lodging or short-term rentals. Many cities ban the kind of day-to-day rentals that make up the company’s core business, meaning that the company has operated in a legal gray area for much of its history.

Critics say Airbnb rentals are detrimental to the creation of affordable housing options, and laws have sprouted up in individual cities to prevent or limit how many days residences can be listed as a place to stay on the platform. With a patchwork of different regulations in the U.S and around the world, many hosts and guests are often confused as to the limits of Airbnb.

The company argues that its presence is a boon to cities, bringing in tourist dollars to less-traveled neighborhoods and giving homeowners and renters supplemental income. However, it has inspired protests by residents in many of the world’s most popular tourist destinations, including Paris, Barcelona, New York, and New Orleans; the protesters say the home-sharing service is contributing to rising housing costs, bringing in noisy, unruly guests who don’t follow building or city rules, and even destroying the local character of neighborhoods by overloading residential districts with tourists. Airbnb hosts have also been fined in a number of cities, and the company has been on the receiving end of several lawsuits.

Local politicians have criticized Airbnb as well, blaming the company for rising rents or a lack of affordable housing. In passing a law to crack down on Airbnb rentals, New York City Council Speaker Corey Johnson said: “We’re in an affordable housing crisis. We’re in a homelessness crisis.” In 2015, Barcelona Mayor Ada Colau vowed to limit the number of tourists coming to the city, in part due to the influx brought in by Airbnb.

Airbnb’s initial public offering is likely to put more of a spotlight on such issues, as the company reveals details about the impact it has on tourism and local communities, in addition to its growth. If cities don’t like what they see, Airbnb could be subject to more lawsuits, regulations, or taxes.

The company already has a formidable public relations operation led by Chris Lehane, who held multiple roles in the Clinton White House, but it may be forced to spend more to fight efforts to curtail its expansion. Airbnb often responds to criticism and proposed restrictions with its own media and advertising blitzes, complete with testimonials and protests from advocates, including hosts who count on the service to make rent so they can retain their homes.

The competition responds

The home-sharing site has plenty of competitors, including brands like VRBO (Vacation Rentals by Owner) and Homeaway, Expedia-owned properties that specialize in vacation rentals. Online travel agencies like Booking Holdings, Expedia,, and Trivago have also sought to counteract the Airbnb threat by adding home rental listings, showing that the travel industry is absorbing Airbnb’s disruption and shifting to what consumers want. Some hotel chains, meanwhile, have made efforts to provide more of an Airbnb-like experience, adding unique touches to rooms to make them feel less corporate, or making kitchens available.

According to web analytics service SimilarWeb, Airbnb dominates the home-sharing industry with 522 million U.S. web visits in 2018, compared to 181.8 million for VRBO and 66.7 million for Homeaway. Globally, Airbnb’s lead is even larger.

Though Airbnb doesn’t reveal its total gross bookings, that figure might be higher than revenue at Marriott (NASDAQ:MAR), the world’s largest hotel chain by sales, which brought in $20.8 billion in revenue last year. Airbnb claims more than 2 million people stay with its hosts every night, while on average, Marriott filled about 1 million of its 1.3 million rooms each night last year. Those numbers help illustrate the degree to which Airbnb is impacting the broader hotel industry as it continues to take market share from traditional hotels.

Airbnb has even moved directly into hotels, courting unique spaces like boutique hotels to list on its platform, and it now has more than 15,000 such listings on its site. According to Second Measure, a data analytics company, Airbnb had approximately 19% of the combined U.S. home-sharing and hotel lodging market, up from just 3% in 2013.

The company has kept its financial results close to the vest thus far, but we’ll learn more as it prepares to file for an IPO expected later in 2019. With Airbnb’s unique and profitable model, fast growth, and a dominant market share in home-sharing, its stock should be in high demand when it finally hits the public markets.

— Jeremy Bowman

Where to Invest $99 [sponsor]
Motley Fool Stock Advisor's average stock pick is up over 350%*, beating the market by an incredible 4-1 margin. Here’s what you get if you join up with us today: Two new stock recommendations each month. A short list of Best Buys Now. Stocks we feel present the most timely buying opportunity, so you know what to focus on today. There's so much more, including a membership-fee-back guarantee. New members can join today for only $99/year.

Source: The Motley Fool