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Airbnb: Disruption and Adaptation – an incumbent survival primer

April 24, 2014 by Olivier Blanchard - 5 Comments

Building fences vs. building runways

Today, we’re going to talk about Airbnb, the hospitality industry, disruption, and adaptation.

Let’s start with this: a clever startup (Airbnb) created a business model that turned out to be pretty disruptive to the hospitality industry. We can argue about the legality of what Airbnb does until we’re blue in the face but that isn’t the real issue. The real issue is change, and whether businesses resist  it or adapt to it.

Note: Legality in instances like this is simply a matter of choice, as illustrated by what is happening in New York. (Recommended reading: David Streitfeld’s New York’s Case Against Airbnb Is Argued In Albany - New York Times.)

Streitfeld distills the problem (the cultural clash, if you will) thus:

“The stewards of the sharing economy think regulators should invent new rules to accommodate their innovative business practices. Regulators think these companies and their customers should accommodate themselves to the old laws.”

For another angle on disruptive models running into legal challenges, see what Uber is dealing with.

Resistance vs. adaptation. Building fences vs. building runways. Once you strip away the names, that is what we are really talking about.

While some cities and perhaps even countries will initially cave to the hospitality lobby and try to ban Airbnb’s model, most will choose a wiser course of action: tax/license Airbnb operators (though not at the same rate as hotel operators since it is a completely different business model). Why? Because 1) you can’t stop progress, and 2) money talks. (Hint: if you think that getting between the tax man and his money is a realistic long term business strategy, you might not be the smartest player at the table. France is a perfect example of the tax man’s interests ultimately trumping all. Compromise is inevitable.)

Now let’s get back to the names and the details of this particular chapter of “the wheel of progress goes round and round whether incumbents like it or not” – Airbnb’s model isn’t going away. Why? Two simple reasons: 1) People who use the service (hosts and guests) love it, and 2) it provides an alternative to increasingly expensive (and often disappointing) hotel stays.

Don’t blame the new guy for paying attention when you weren’t.

Also, say hello to free market dynamics: value wins. If your business model starts to slip into irrelevance, don’t sue the guy who came up with a better idea. If you want to stay competitive, then stay competitive.

Take a step back and look at what is really happening: there’s a reason you’re losing business to the young new challenger. As a matter of fact, there’s a reason why there’s a young new challenger in the first place: while you were counting your money, you started to let things slip. You stopped studying the market. You stopped trying to fix all the things that needed fixing and you stopped looking for new avenues of opportunity. It’s also pretty likely that you failed to understand what business you are really in. (We’ll come back to that.) What you did is you left the door open for someone to come in and build something you should have built yourself ten years ago.

Building fences around your business seems like a smart idea at first but then what? Where do you go from there?

Examples of staunch resistance to disruption litter the world’s business graveyards. Two of the most notable victims of this unfortunate response are Blockbuster Video (which refused to change its model when streaming on-demand video, Netflix and Red Box changed the rules of the game) and Circuit City (Best Buy’s boring “we’re okay getting Best Buy’s frustrated customers on busy Friday nights” competition, which ignored the writing on every wall it shuffled past along its self-inflicted journey into obsolescence).

Every time I see a solid company drown in its own stagnant pool of denial (and, sorry to say it but… arrogance), I get sad because it didn’t need to happen. It sucks for the company’s employees, it sucks for investors, and it sucks for customers. Nobody wins. And you know what? The more players you have in an industry, the healthier that ecosystem is. So every time a Blockbuster or a Circuit City or a Borders fails, everyone loses. It doesn’t have to happen, and if you understand how to deal with disruption, if your CEO, COO and CFO are made of the right stuff, market disruption can be a welcome game-changing opportunity instead of a death sentence for your business.

(Nice “for sale” sign on that pretty fence there bud.)

Obligatory fable: the oak and the reed

Real disruption scales, and when it does, it becomes a storm for incumbents. Ever heard the fable about about the oak and the reed? Long story short: There’s a field, and in that field are a huge oak and a little reed. One day, a pretty bad storm comes along. The oak looks down at the reed and goes: “Too bad you aren’t an oak too, little man. You would have huge roots that go deep in the ground. You could just stand here for ever and weather every storm instead of bending and shaking like you do. No wind is ever going to uproot me.” The reed looks up and basically goes “Meh.” Of course, the storm hits and the oak breaks in half. (I’m sorry… were you hoping for a happy ending?)

The oak’s little speech could just as easily have been “We’re a Fortune 500 company. We’ve been here 50+ years. Some little startup isn’t going to change that.” Okay, that’s nice, but how many of 2004′s Fortune 500 companies are still on the list today? And of those that aren’t on that list today, how many fell from it because they didn’t learn to adapt to change? (For more info on that, read this piece by Brian Solis in USA Today.)

“It won’t happen to us” is a nice sentiment, but… it isn’t rooted in reality. (See what I did there?)

Okay, so if you’re in the hotel business, what are your options?

1) If you can’t beat them, join them stand your ground and hope for the best?

When in doubt, flex your lobbying muscle. Example: Last week, this happened. You can also read about it here. (Nice test case if you want to see how things will shake out.)

Nice strategy, the hammer. Expensive though, and not always super effective. Instead of investing in ways to increase your value and relevance to consumers, instead of making it easier and more pleasant to do business with you, you’re investing in trying to keep an increasingly popular new product from stealing your customers. Okay. Because if history has taught us anything, it’s that prohibition always works really well in the long term, especially when everyone loves the product you are trying to ban. (How much money are you planning to throw at this for the next ten years? Can you really hope to put the genie back in the bottle? And given the ultimate effectiveness of that strategy, what else could you be doing with all that cash?)

Just a thought, but there might be smarter areas of investment for your money and better ways of competing against the Airbnbs of the world. Short term and long term. We’re getting to that in about 45 seconds, but first, here’s a pretty valuable business tip: if you’re spending a ton of money trying to stop evolution from taking place in your industry, you’re investing in the wrong damn thing. Your money should be going into where the industry will be ten years from now, not where it was ten years ago.

2) If you can’t beat them, join them copy them and get better at it than they are.

So we finally get to the point of this post: you’re a hotel chain and you want to stop Airbnb from taking 2% of your business this year? 5% next year? 12% the year after that? 1) Don’t stick your head in the sand. Don’t ignore it. It isn’t going away. 2) Don’t spend billions trying to fight it. Spend your money on ways to steal Aribnb’s customers by giving them what they were looking for when they opted into Airbnb’s model to begin with. Offer them the same product – either better or cheaper. (Your call.) Brand it. Make it part of your offering. And be so good or so affordable that Airbnb becomes 4th or 5th or 10th in the category.

Note: (Some small hotels are already taking advantage of the service, though not in the way that I suggestCheck out #5 on this list.)

If that sounds like pie in the sky BS, here’s the part where I tell you what the real play is here: Do you know what Airbnb’s biggest challenge is right now? Trust. For a deeper dive into that insight, let me point you to this piece in the Wall Street Journal, and this piece from Triple Pundit. You know what brands like Westin and Hilton have that Airbnb doesn’t have with the majority of the market yet? Trust. The expectation that hosts and guests will be properly vetted, that quality will meet minimum standards. Don’t get me wrong, it isn’t that Airbnb isn’t doing everything it needs to do to build that trust, but established brands have an advantage there in terms of velocity and scale. Short window of opportunity, by the way. (Check out this piece in Wired.)  Use it or lose it.

Here’s another thought: you might not be in the business you thought you were in five years ago.

Remember when Apple still thought it was a computer company? And do you remember what happened when Apple realized it wasn’t actually a computer company? How about when Amazon realized it wasn’t really just an online book retailer? Or when Dunkin Donuts realized it wasn’t just about the doughnuts?

In ten years, the question I will be asking you is this: Remember when hotel chains thought they were just in the hotel room rental (and please stay here for dinner and drinks) business? And do you remember what happened when they realized that rooms didn’t just have to be inside their own big boxes? When they realized they were actually in the “people need a place to stay for the night” business?

Hotel chains have been trying to find the next hot idea, the next game-changing product, for decades. Automobile manufacturers figured out their next plays: fuel efficiency, habitat design, safety features, GPS, device synchronization, voice-activated commands, and so on. Device manufacturers have figured out theirs: screen resolution, app compatibility, processor speed, and so on. Hotels have been experimenting with technology and design, but there hasn’t really been any real innovation in some time. The boutique hotel concept sort of worked, but it can only go so far. The $59=$99/night + free breakfast muffin Inn concept worked okay too. But then what? Well, Airbnb just handed every hotel chain the answer to that question on a silver platter.

Look at it this way: The market research is done. The business model is built. The proof of concept phase is over. (Airbnb just raised $450M, in case you had any doubts.) Every bit of the groundwork for this new model has been laid. Hotel chains couldn’t have worked this thing out better if they had paid Airbnb to run a market test for them. So now what? Fight it? No. Why would you do that? Take advantage of it! Every hotel chain exec should be thanking Airbnb for coming up with this idea and spending so much time and energy building the model for them, free of charge.

If you’re SVP of Business Development at a major hotel chain, you should already be playing with the numbers. Here’s an exercise for you: imagine you’ve acquired Airbnb. It’s your company now. Put the potential loss of revenue from hotel guests to your Airbnb offering up against the potential gain through Airbnb of customers who would have never booked a room at your other properties in the first place. (Yes, there is some overlap, but this is a different market altogether.) Where’s the sweet spot? Is it in the margins or in the nets? What volume should you be shooting for? What markets should you focus on first? (See, now you’re starting to ask the right questions. Runways, not fences.)

Or you could just fight it and hope that your advertising dollars will take care of the rest. Who needs double-digit growth anyway, right?

In other words, don’t just reject disruptive ideas because they scare you or threaten your old model. Study them. Understand them. Look at them as opportunities to evolve your business, and if it makes sense (either out of a desire to survive or out of a desire to grow), incorporate them into your model as fast as you can. If you won’t learn that essential business lesson from companies like Apple, Dunkin Donuts and QT, learn it from companies like Blockbuster, Circuit City and Borders.

Okay, that’s it for today. Go forth and build something. And remember: runways, not fences.

 Cheers,

Olivier

PS: if you want to learn more about what makes Airbnb and other ‘crowd company’ models work so well, you should probably check out what Jeremiah Owyang has been working on this past year. Here is his blog and here is his new project. Also look for an interview with Jeremiah right here in a few weeks because I want to dig a little deeper into this as well. (Details soon.)

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