When AirBnb first came out in 2008, they had to fight local governments for their right to exist.
Renting rooms from random strangers!
Are we trying to make a horror movie!?
No thank you.
Cities doubted it could work safely, so they figured it was better to let other people try it first. In those days, the company’s survival hinged on finding cities willing to open-up. And the bigger cities mattered more, because they had a higher density of customers and would influence the smaller cities.
So if the headline below had been written in the early days – instead of a few months ago – AirBnb might be out of business.
For AirBnb, this news in New York probably stings, but they don’t live or die based on the decisions of one city anymore. They are in 220 countries. They have bigger fish to fry.
It’s the same principle as one of my favorite metaphors.
Imagine you have a bag at work with weights in it, where each weight is a responsibility. First and foremost, you have that big project (a heavy weight). Then, you have the small side projects you’re helping on (light weights). In totality, this is a heavy bag. You’ve gotten used to the weight… and you can manage it… but it’s heavy.
So one day, your boss adds another big project to your bag. To them, it’s as light as a feather, but you can hardly pick the bag up to leave their office. Over time, you get stronger, and the weights seem lighter.
For AirBnb, this NYC news is a light weight. So instead, I want to talk about the biggest weights they (and CEO Brian Chesky) are carrying, and how they are doing it.
Weight #1 – Core Experience
First, AirBnb is carrying the weight of unaddressed customer feedback. The core experience – short term rentals – has a backlog of customer complaints that haven’t been meaningfully addressed. In May, I wrote about Chesky’s attempt to change that, including the 50 first fixes AirBnb tackled to improve the product. Here’s a quote from Chesky about those fixes:
“So I’ve also been getting a lot of feedback on Twitter and social media and millions of customers support calls, and I always wondered, like, imagine if a cable company CEO, like, actually got in the details of their customer service or, or as a CEO of a public company, just went down and just mobilized the entire company to go through every single thing people are complaining about and trying to knock them out one by one.”
Among those 50 fixes were:
Pricing transparency – so hosts can’t hide cleaning fees
Re-vamped “AirBnb Rooms” – so guests can stay in cheaper, shared rentals
2-minute responses – so guests get quick replies from AirBnb support while travelling
Anecdotally, I’ve loved these changes. I booked AirBnb’s in Spain over the summer, including a few in shared “Rooms”. The prices were a hell of a lot cheaper, and I appreciated getting to see the all-in price from the beginning, rather than a bait-and-switch with a high cleaning fee.
But it’s not just me – in Q3, bookings on AirBnb were up 14% from the prior year, and prices globally were only up 1% (10% for hotels). So prices are essentially holding steady while demand is increasing.
To continue the positive momentum, Chesky announced another slew of product improvements on November 8th. Most of these are geared towards improving what Chesky terms “reliability”, which he sees as the major reason customers choose hotels 9x more often than an AirBnb. And he defines reliability as: a/ the experience being consistent between AirBnbs, and b/ the quality matching what the reviews and pictures indicate.
Reflections:
It’s hard for us (random, external observers) to track the impact that these product improvements are having in more detail, but I think AirBnb is carrying this weight pretty well. There’s more work to do, and it’s manageable.
Weight #2 – Growth Pressure
So they are growing bookings, improving the platform, and generally crushing it. The stock must be way up, right? Wrong.
Here’s a chart of AirBnb’s stock since their December 2020 IPO.
Despite AirBnb’s bookings growth, there has been huge pressure from investors. Why? They want more earnings growth and higher returns for shareholders (in the form of dividends and share buybacks). Like many other tech firms, AirBnb doesn’t do dividends, but buybacks are fair game. In Q3 of 2022, they did their first buybacks, totaling $1B, and they’ve done $500M every quarter since then.
That hasn’t been enough. Here’s an analyst on the most recent earnings call asking Chesky about growth potential:
“We've seen a lot of other online travel models sort of hit this low-teens to high-single digit growth rate and decelerate from there or not be able to reaccelerate their businesses in a meaningful way. Can you … help us better understand how you… can perhaps sustain sort of that double-digit revenue cadence over a longer period of time than what we're used to in the market?”
And this is just one investor, but the market as a whole seems to have the same skepticism. AirBnb’s stock basically mirrors a basket of travel stocks, lagging the broader stock market, as you can see here:
In response to the haters, Chesky points to three vectors of growth:
Growing the core platform. He explains that making improvements (as discussed earlier) makes it more likely that customers will choose AirBnb’s over hotels.
Expanding internationally. 220 countries is impressive, but they don’t have huge businesses in each of those. Chesky wants to change that, and he points to Brazil and Korea as good examples of “running the growth playbook”. In Brazil, they’ve doubled bookings since before the pandemic, and Korea is up 54% in a similar period.
Moving beyond short-term rentals. Chesky has talked in the past about “Experiences” (events and tourism to add-on to stays) and “Monthly Bookings” (pretty self-explanatory!) as non-core revenue streams to build on. Both of those already exist, but haven’t been a big focus for AirBnb. And one other idea Chesky has dangled without details is an “AI travel agent”. But for now, he’s being tight-lipped about anything else.
Reflections:
#1 and #2 are good ideas… but they aren’t a departure from travel. I’m confused how Chesky thinks those will break AirBnb out of the travel industry growth narrative.
#3 is the only answer I think will actually work, and even there we need to discuss some nuance:
The experiences product might be too closely correlated to travel to have much of an impact on investors at all.
Monthly bookings, on the other hand, is a more enticing product. As everyone knows from We Work, people freak out when you combine real estate and tech, and longer leases are a step in that direction.
I want to hate the AI travel agent idea, because I think everyone is too enamored with AI right now, but it’s actually a good one. AI could conceivably help you research multiple trip options, choose the best place to stay, and add some fun experiences on top… all with an extremely high margin AI model… my point is – it’s not an entirely random and farfetched use case for AirBnb.
This is a heavy weight. And I think Chesky could do more to convince investors he knows how to carry it –working on the right non-travel categories. He’s pretty regimented about this twice-a-year product release plan now, so we won’t know more specifics until May 2024, but he better come packing heat.
Bonus Bullets
Quote of the Week:
When something is important enough, you do it even if the odds are not in your favor.
— Elon Musk
Quick News Reactions:
Spotify’s free audiobook gamble – they need to drive revenue streams that don’t have huge, hulking incumbents (cough, music). So giving away free audiobooks to build some traction makes sense, at least as an experiment. Curious to see if it works.
Most popular vehicles by state – I’ve been living in big cities the last 9 years, so that’s probably why I’m shocked to see trucks dominating in this dataset. The Chevy Silverado and the Ford F-Series are the top vehicle in a combined 30 states.
X shenanigans continue – the only company more desperate than Spotify for new revenue streams is X, who has started working on a marketplace to purchase unused account handles. Some have a flat fee of $50K.
Freeexpensive speech platform.Measuring hallucination – Vectara evaluated the major models and found that OpenAI’s models were the least likely to make things up (3%). One of Google’s models hallucinated a whopping 27% of the time. Yikes.
Tech Jobs Update:
Here are a few things I’m paying attention to this week:
Big Tech Job Posts: LinkedIn has 9,177 (+17.1% WoW) US-based jobs for a group of 20 large firms (the ones I typically write about — Google, Apple, Netflix, etc.).
Graph: Layoffs since covid (Source: Layoffs.FYI). Note that this is showing in-progress Q4 numbers.
