Every great empire in the history of mankind eventually disintegrated and fragmented into smaller states. Some of those states became empires of their own, sometimes larger than the predecessors.
This is equally true in the business world. Airbnb is a well-known Silicon Valley unicorn and it makes $2.9B in revenue. It's most famous for turning the hotel industry upside down as it opened up an entirely new class of accommodation previously unavailable on the market.
But few people know that Airbnb is an example of a much larger and more significant process: unbundling of online platforms. Airbnb is an offspring of Craigslist, often dubbed "the most universal answer to all problems of humanity". Craigslist has been unbundled in many platforms (Airbnb being one of them, as an unbundler of the short-term rental market), whose combined revenue is now almost 20 times bigger than Craigslist itself.
These challenger platforms, however, are no way secured from being unbundled themselves. One of them, Le Bijou, captures 80% of the revenue, while Airbnb commission is only 6%, which makes it particularly interesting. Another one, Sonder, targets long-term stays, which makes its business streams more stable and predictable.
Will the grandchildren of Craigslist, Airbnb rebellious offspring grow even bigger than the last disruptor?
Why you should care about unbundling
Investors who understand the process of unbundling well, like Andreessen Horowitz, taught themselves to spot promising ventures at a very early stage, long before their merits become widely recognized. Such a skill gives those investors a competitive edge. Imagine what wealth would you amass if you recognized the unbundling of Craigslist early on and managed to invest at least 100K into Airbnb, Uber, Zillow or Indeed in the first year of their existence, becoming a major shareholder.
So what is Unbundling?
Unbundling describes the process of fragmentation of an existing market into many smaller and independent components. The main dominant market player is thus under assault from an inflow of newcomers who specialise in sometimes completely new sub-segments. The key to entry and success is often technological in nature.
The newspaper industry is a good example. Before the advent of personal computers (and more specifically tablets and smartphones), the newspaper was the primary medium for information exchange. But the sudden emergence of the Internet completely changed everything.
The newspaper’s role as an information exchange terminal was completely replaced by a variety of different and specialised tools (see below). As a result, many papers were shut and the surviving ones had to compete for a much smaller audience. The industry as a whole remains on a trajectory of decline.
In almost all cases of unbundling, technology has played a prominent role. The reason why newspapers enjoyed such a long era of dominance is due to the high barrier of entry, erected by the high professional network (a pool of journalists and reporters covering a multitude of topics across the world) and distribution (getting the paper into as many households as possible across the country) costs.
The Internet completely changed this by dramatically lowering the cost of both. Many journalists, including foreign reporters, work as freelancers and can be recruited easily on a per-project basis without having to be employed full-time. More importantly, the cost of distributing content in front of viewers has practically fallen to zero as news (and, in its broader form, social media information) is now accessed via smart devices.
Unbundling of newspaper industry [1]
The lesson of the story is that unbundling can happen to any player in any industry, so companies and investors need to be constantly alert for emerging threats to their market (which incidentally usually comes from out of the market).
The new class of hospitality business
Airbnb massively disrupted a stuffy, conservative hotel industry that had not changed in decades. Their software lets users of vacant properties (or rooms) with travelers who need one. It essentially brings two related issues together and solves them in a single stroke:
The supply of hotel rooms in any given city is limited and travelers are forced to pay a premium on short-stay accommodation
Many existing property owners have spare rooms/properties that are under-utilized and under-monetized.
This is a classic case of matching demand with supply and taking a commission from each transaction. Airbnb is now the go-to platform for short-term travelers with a huge market value of $35 billion.
How is Airbnb being unbundled?
Of course Airbnb is not immune to unbundling, in fact it began quite some time ago already. So the real question is how do you unbundle a multibillion-dollar unicorn?
Just like most of the blue-chip juggernauts of the past, Airbnb was always going to be ripe for unbundling. It typically takes place when a dominant company overlooks an emerging market segment (usually inadvertently due to their sizes or deliberately as a result of their strategies) which is then served by a new enterprise that quickly satisfies pent-up demand.
Here are three growing market segments Airbnb isn’t catering for.
Challengers in the luxury short-term rentals segment
Airbnb dominates the mass market for short-term rentals and its target audience is the budget-conscious traveler. However, it is unable to cater for the high-end luxury travel segment because it lacks qualitative value in three core areas: security, brand, and service.
Firstly, Airbnb is a technology platform rather than an accommodation provider. It relies on the owner of properties (hosts) to complete the final-mile service delivery. As a result, it has very little direct influence on the quality of service. There have been numerous incidents where guests’ financial and even physical securities were compromised by disreputable hosts. This is clearly a no-go for the luxury segment.
Secondly, due to the mass-market nature of Airbnb, the brand is considered generic and rather low-end. To mention one is staying in an Airbnb property is like admitting that you fly with Ryanair. This is a particular turn-off for the luxury market.
Lastly, most Airbnb hosts simply offer accommodation and do not provide any bespoke services (e.g. concierge, gourmet meals). Consequently, Airbnb is never going to penetrate this meaty new market of high-net-worth travelers who demand elegance and luxury in private apartment-style accommodation, without sacrificing any of the high-end services and features they could previously only find in 5-star hotels.
Here are a few of the challenger brands in the ultra-high-end travel accommodation market that are looking to unbundle Airbnb.
Sonder is a Silicon Valley company that takes on multi-year leases on prime properties in many of the major cities of the developed world. It converts them according to their own unique specification and provides travelers with high-end hotel-style services. Remote customer support is available 24/7 and amenities are freely available to ensure the comfort of guests. "Given that there was such a movement from traditional hospitality to alternative hospitality, we saw that there would be an opportunity at a really massive scale to provide a customer experience that essentially resolves the two problems of consistency for the sharing economy and authenticity and uniqueness that is lacked in the traditional hotel model," says Davidson, Sonder’s CEO. The investors valued the company at $1B.
Le Bijou is a Swiss property technology business with a valuation north of $900M that disrupts the travel industry. By taking on long-term leases on luxury properties across major Swiss cities and refurbishing them according to its precise specification, it controls the end-to-end customer experience. It uses cutting-edge technology (e.g. virtual assistant James, a combination of artificial intelligence and human-powered assistance) and ensures the security and privacy of the guests with zero human contact, something that Airbnb reportedly misses out on. According to Moonshot, a Hong Kong-based investment firm, “Le Bijou, with its perfect product-market fit and a powerful entry barrier (scale, brand, and technology), is well-positioned to reap high profitability and deliver a significant return for investors.” No wonder it has a large fan base that includes Steve Wozniak, John Sculley, a couple of royal families and even Jordan Belfort. Unlike most early-stage companies, it is open for private investors.
Luxuryretreats is a market leader in the global ultra-luxury travel sector. By matching some of the world’s most stunning villas with high-end travelers, it solves the property under-utilization problem for homeowners and provides high-end property accessibility for travelers. With a 24/7 concierge service, it is hard to go wrong. It is therefore hardly a surprise that Airbnb decided to acquire this company for over $200 million back in 2017.
Challengers in the camping segment
Long gone are the days when the only camping adventures you could have involved lugging around tons of heavy gear. Welcome to the new era of glamorous camping. Every year millions of people go on camping holidays where they can relax and enjoy getting immersed with nature again. Yet the Airbnb platform is ill-suited for the needs of campers (due to its property-centric business model). Fear not, there are now many superior alternatives ready to fill its place.
A Paris-based company started by a group of friends who love camping. It is a platform that matches landowners with campers (and thus taking a commission in the middle). It operates predominantly in Western Europe and aims to provide a seamless, private and yet intimate experience for campers to enjoy nature whilst taking the hassle out of camping.
If Gamping is the entry-level land-matching service, then Hipcamp is the premium offering that brings campers close to nature without compromising on comfort. A predominantly US-based platform, it contains thousands of luxury camping accommodations (huts, yurts, tents, RVs) in some of the most stunning locations in the world. A true getaway portal to immerse yourself deep in nature and find inner peace.
A highly specialized niche for matching mobile camping van (e.g. RVs, caravans) owners with renters. It provides a useful portal for road trippers who do not wish to fork out on expensive equipment whilst still enjoying the freedom of being on the road.
Challengers in the medium to long-term rentals segment
The rental market is ripe for disruption. Millions of tenancies globally still take over a month to sign, with tons of paperwork and even the need to witness signatures, even though almost all of these tasks can be performed digitally. Airbnb, being a short-term property sharing platform, therefore won’t be of much assistance. But these contenders might help.
A platform that covers most large cities in the US and Europe, it provides a digital experience for tenants who wish to apply for tenancy. Instead of preparing tons of paperwork to prove identity and income, this process can now all be done digitally (including signature) in the comfort of one’s home. This saves time and cost for both landlords and tenants.
Predominantly a European operation (however there are a few selected cities in the US), HousingAnywhere markets itself as having a premium pool of prospective tenants. As well as automating the tenancy application and payment process, it taps into a market ill-addressed by many players, namely mid-term renting (i.e. between 1 and 11 months).
Nestpick is a property amalgamation platform that aggregates listings on major property platforms (e.g. Airbnb, Spotahome) and presents users with a uniform view. It has a global reach and directs users to the relevant platform once selected. It does not hold any listing inventories by itself.
The narrow opportunity window
Unbundling is a natural course of action as a company expands and the industry mature. It is perhaps ironic that Airbnb itself started off as a result of unbundling and now it is subject to the same onslaught from challengers in areas it neglected. Consequently, smart investors are always on the lookout for assets that have proven profitability and delivers excellent ROI, as well as being future proof. The challenge is to enter the market just at the right time - when you already can recognize the future market-makers, but before it appears on the radar of big venture firms and spoiled with cheap money. In a world where the cash is trash, entering the market before it’s too late becomes harder and harder.
Sources
Andreessen Horowitz fund - https://a16z.com/
Crypto is financial unbundling - https://haseebq.com/crypto-is-financial-unbundling/
Crypto is financial unbundling - https://haseebq.com/crypto-is-financial-unbundling/