Airbnb has been valued at over $35 billion privately. As it starts to think about going public, a key question investors should ask is how strong Airbnb's marketplace is. After going down the marketplace checklist, Airbnb's strategic strength is impressive.
A couple weeks ago I looked at the strength of Uber's marketplace by going through my marketplace checklist. While Airbnb might not be going public until later this year or even next year, it is top of mind for many investors as an attractive marketplace worth watching. Thus, I'll look at the same checklist for Airbnb to see how it compares.
A quick refresher on what a marketplace is: a service that creates a two-sided network to connect supply and demand, and in the world of smartphones, that can often be done with a tap on the screen.
Marketplace checklist, applied to Airbnb:
- Which side of the network values the other side more?
Currently Airbnb charges a higher fee to guests (demand) than hosts (supply). This would seem to indicate that the guests value the hosts more. It is true that as Airbnb was first scaling up the service and as they enter new markets, demand will follow supply, and unless they sign up hosts, the service isn't valuable. However, as they reach critical mass of supply in their more mature markets, the balance of power might shift to guests who are faced with a multitude of options for properties to book. In that case, much like hotels who fear vacancies, the hosts might value the guests more, and Airbnb might have to reconsider its fee structure for guests vs hosts based on that--more on that below.
- Is there an effective and proprietary method for distribution to each side of the marketplace, especially the more highly valued side?
Airbnb has found partnerships to acquire guests and has listed directly on OTAs like Booking.com or Expedia. However, that isn't particularly proprietary. What is really proprietary for Airbnb on both the guest and host side is their brand. They were fast to move on becoming the reliable brand that users think of when looking for an alternative outside of a hotel, and somehow leapfrogged Homeaway, which is often associated in users' minds as for longer term (e.g. weekly) stays that happen less frequently. Airbnb's brand allows it to acquire nearly 70% of its users organically, which is a distinct advantage over paying to acquire users.
- How strong are cross-side network effects?
The cross-side side network effects for Airbnb are very strong, because Airbnb becomes much more valuable to its users if there are many properties to choose from instead of very thin inventory. As a user, if I'm going to book on Airbnb instead of looking at something like Booking.com and trying to find a hotel, I need many options to choose from to fit my budget, preferences, and desired location. That said, the way an Airbnb user values the supply is different than Uber. With Uber, the supply is very homogenous. Ultimately, users don't distinguish very much between their drivers as long as they have a high enough rating, and maybe there is some minimal selection between UberX, UberBlack, and the handful of other service levels. However, there is not nearly as much choice, or value, in the variety of supply of drivers. This cuts both ways: Airbnb gets more valuable with more diverse supply, but at the same time, once an Airbnb user finds a property they like at one destination, they don't get marginal value for added supply if they are happy to keep going back to that property. An Uber user, on the other hand, gets more and more value as drivers are added to the network and wait times get slower with more coverage consistently across their city. They don't mind getting a new driver each time.
- What are switching costs for each side?
Switching costs are not that high for an Airbnb user. A user can, and often will, compare against hotels and perhaps even Homeaway or other options when looking at a destination. Since those sites allow searching without even logging in, it's even easier for a demand-side user to switch apps than in the ride sharing market. Switching costs for a host on Airbnb are a little higher. Once a host is on Airbnb, it shouldn't be that hard to also sign up for Homeaway or other listings sites. It is more painful though, requiring uploading pictures again, putting in the house description, and there are calendar/availability synchronization issues across the platforms once users start booking dates. Also, the Airbnb host can't carry their positive reputation with them off platform, which is much more important on the supply side than the demand side. So there are some switching costs, and on the supply side, perhaps slightly higher than in Uber's case.
- What does liquidity look like, and how do you measure it (e.g. average amount of time from supply being posted to fulfilled/met with demand)?
Liquidity is measured for a host on how quickly they can rent out their property, and how often it is filled. For a user, liquidity can be measured by how many quickly they can find a convenient place to stay for their trip. For example, the South by Southwest conference famously would try the capacity of the downtown Austin area where it was hosted. I had tried one year to find a suitable Airbnb there, but none were available, so at that peak travel time, liquidity was limited. However, I've been very impressed with Airbnb's liquidity across nearly every travel destination I've looked at in the last few years. I still might choose a hotel based on the kind of amenities we want for a trip (if we want a pool or room service), but Airbnb has an impressive amount of coverage.
- What is frequency of use (transactions per month) for demand and supply side?
Frequency is a challenge area for Airbnb relative to Uber and some other marketplaces. While an impressive 2 million guests stay at Airbnbs every night, the average American only travels for leisure about 4 to 5 times a year. Airbnb does have some business travelers--in 2017 business travel was 15% of bookings--but the brand is still mostly aligned with the leisure traveler who makes up the vast majority of their usage. Even if they got 100% of a user's trips on Airbnb vs a hotel, staying with a friend, or some other alternative, a marketplace that you only return to once a quarter has much lower frequency than a marketplace like Uber where many people transact daily, and a large portion of revenue comes from users who do multiple transactions per month. Airbnb hosts who do well will have high frequency on the marketplace, although many rentals go vacant for long periods of time, and some have never even booked. Uber drivers in any populated area, on the other hand, will almost always find a fare quickly.
- What is average transaction size for demand and supply side?
What Airbnb lacks in frequency of use, it makes up for in transaction size. The average San Francisco Airbnb guest, for example, visits for 5.5 days and spends $1,045--more than the average for a hotel. Uber needs a much higher frequency of transactions to make up for the much smaller average fare.
- What is the marketplace take rate or monetization model, and what is the the sustainable take rate over time and why?
Airbnb charges hosts 3%, which is basically just passing on the credit card processing fee, and then charges guests anywhere from 0 to 20%. However, previously this number had been cited as 6-12%, so presumably it is more often in that range. Overall this take rate is reasonable and in line with other marketplaces, but the real question is whether guests or hosts should pay it. In theory, hosts could just raise their rates if they take rate went up, and the effect would be the same, but psychologically, host rates would look higher than comparable hotels, and so it might actually be the hosts that would bear the cost of a shift in take rate to them.
- Does it get easier to acquire incremental supply and incremental demand as this marketplace grows?
It should continue get easier for Airbnb to acquire new guests and hosts as the marketplace grows. Airbnb. Guests continue to value more options of where to stay, and hosts are more likely to use the service if they think they can easily rent their property.
- How fragmented is supply side?
The supply side of Airbnb's network is extremely fragmented. Airbnb doesn't have to worry about a concentrated source of supply exerting influence over them, which is an advantage.
You can come up with your own conclusion based on the answers above, but like Uber, this marketplace ranks very favorably on the questions above. Its main achilles heels are frequency of use and low switching costs for guests, but these are more than made up for by all the other positive factors. Airbnb has a strong strategic position to rely on whenever it enters the public markets. It also doesn't have a strong rival competitor, as Uber does with Lyft, which makes Airbnb even more interesting.
This article is part of my marketplace checklist series. Read the related articles here:
*Disclosure: I own many tech company stocks, including Uber mentioned this article, and will probably buy Airbnb stock in the future.
