June 18, 2014

Airbnb Disrupts Traditional Hotel Industry, Confounds Lawmakers

By: Emma Elliott Freire

Illuminated Parisian hotel sign taken at dusk

Airbnb.com is catching on like wildfire. The site, which allows people to rent overnight accommodation, now has listings in over 34,000 cities in 190 countries. Lawmakers across the globe are starting to respond, some negatively and some positively. Airbnb defies traditional tax and legal categories, and lawmakers are struggling to apply their powers to this new phenomenon.

Airbnb.com was founded in 2008 by two roommates in San Francisco. They needed money to pay their rent so they had the idea to charge visitors $70 per night to sleep on air mattresses in their apartment during a major conference when hotels were fully booked. They even offered a home-cooked breakfast. The success of this initial venture inspired them to launch Airbed & Breakfast. The name was subsequently shortened to Airbnb.

Today, users, who are called “guests,” can rent anything from space on a sofa to an entire property from other users, who are called “hosts.” Guests must send hosts a message to request approval before they can book a stay. Hosts have the right to decline any guest. Since April 2013, Airbnb has required guests and hosts to go through a 3-layered verification process. They must provide a phone number, government-issued ID and a social media account. Hosts and guests both leave reviews of each other after the stay.

Despite the precautions, there have been occasional problems. For instance, in 2011, a host reported being burglarized by a guest. In 2014, a host discovered his apartment has been used for an orgy, causing extensive damage. However, such incidents are vanishingly rare. By October 2013, Airbnb had hosted over 9 million guests. Hosts and guests are overwhelmingly positive about their experiences.

Income from renting out spare rooms has been a lifeline for some homeowners facing foreclosure. Airbnb says it has received over 300 emails from hosts who say they are facing the prospect of losing their homes. Bloomberg News interviewed various home owners who lost their jobs and faced the prospect of missing mortgage payments. Income from hosting guests via Airbnb helps them make ends meet.

Jeremy Warner, a financial journalist with The Telegraph, wrote about his own positive experience when he needed to spend a summer in New York. “Through Airbnb, I’ve been able to book a seemingly great little apartment in precisely the area I want to be at very reasonable cost,” he said. “The host has gone somewhere else for the summer and is delighted to find someone to cover the rent. It also enables me to rent out my own property in London for the duration of my stay in New York, thereby hopefully making it near cost neutral.” He points out that both he and the apartment owner in New York were able to maximize the economic use of their properties. He believes Airbnb is a “truly transformational” business.

It is also a very profitable business. In April of this year, Airbnb was valued at $10 billion. It makes most of its money from the fees it charges guests and hosts.

Airbnb’s success is starting to draw less welcome attention. The traditional hotel industry is understandably concerned about the competition. Airbnb accommodation is often far less expensive than traditional hotel rooms. In response, many hotel associations have turned to government, pressuring lawmakers to restrict Airbnb’s activities or ban it altogether. Some governments, concerned that they are missing out on hotel-tax revenue, are happy to oblige.

Airbnb has met its fiercest opposition in New York City, where the average hotel room costs $267 per night. In 2010, New York’s legislature passed a law banning the subletting of residential properties for less than 30 days. In 2013, New York attorney general Eric Schneiderman subpoenaed information on 15,000 New York-area Airbnb, claiming he wished to determine if they were paying hotel taxes. Airbnb fought the subpoena, and the New York Supreme Court recently ruled that Scheiderman’s request was too broad. Airbnb has made a deal to only hand over the data of users who are hosting guests on a semi-professional scale, but not those who use the service as a sideline for some extra income.

Airbnb has offered to start paying hotel taxes in New York City – a move that would bring an estimated $21 million to the city’s coffers. However, the chairman of the Hotel Association, Geoffrey Mills accused Airbnb of “just trying to legitimize what we see as an illegal business.”

Airbnb has enjoyed more success with lawmakers in London, even though it was initially frowned upon there. When Londoners tried to rent out their homes during the 2012 Summer Olympics, some were threatened with fines of over $30,000 and criminal records. Current laws, which were enacted 40 years ago, require Londoners who rent out their homes for less than 3 months to apply for planning permission. However, those laws are likely to soon be scrapped.

“The internet is changing the way we work and live, and the law needs to catch up,” said Eric Pickles, the UK government’s Communities Secretary. “It’s time to change the outdated, impractical and restrictive laws from the 1970s, open up London’s homes to visitors and allow Londoners to make some extra cash.”

It’s unclear how much difference the update to the law will make. Despite the threat of prosecution, London was already one of Airbnb’s most popular markets. The site continues to gain more users. Lawmakers’ attempts to keep up and stay relevant are unlikely to slow its growth.

Follow Emma Elliot Freire on Twitter. Image courtesy of Big Stock Photo.