Last week, Governor Cuomo signed into law a bill making it illegal to advertise short-term rentals in the state of New York and outlined extensive fines for the people doing so. As a result, Airbnb, the short-term rental $30 billion unicorn, has filed a federal lawsuit to stop the bill. At stake for Airbnb is its largest single domestic market in the US (over $1b in revenue annually) and possibly more. How has it come to this and what will happen next?
I’ve written extensively about Airbnb and what I see as the pros and cons to the service. It’s complicated to say the least. But I have no love for how the company has operated in New York. They set themselves up for such a dramatic (and expensive) loss.
The majority of business activity conducted on Airbnb has been illegal since 2010. That’s the basic premise to understand here, and what Airbnb knew from the get-go. You can argue if the state should care if you rent your apartment or room for under 30 days or not, but that’s what the law currently says. Airbnb chose to ignore that, to lobby to relax some of those regulations, and half-heartedly crack down on egregious bad actors on the platform.
They wanted to shoot first and ask questions later, much like Uber did initially, which was an obvious template as a business strategy to enter NYC. The thing is, Uber eventually came around and played ball with the state and the city. You have to be a TLC certified driver on Uber. That was a big, undesirable concession that Uber chose to make.
Airbnb didn’t seem to learn that lesson and continued to stonewall the state on data sharing even as Attorney General Schneiderman's 2014 report showed that 72% of listings were illegal. (Jared Meltzer, the NY public policy leader for the company, used to work for Schneiderman.)
So two years ago, Airbnb had a choice to make. They could make some concessions (such as voluntarily removing ‘professional’ hosts – people renting out multiple properties for extender periods of time - or share data and crack down on bad actors) or they could holdout and hope the tide turns in their favor. The basic economics were clear – the majority of the company’s revenue in the city came from such professional listings. They followed the money.
They also made political mistakes by ignoring legitimate concerns from housing advocates and local politicians. Their PR strategy was to demonize any resistance to Airbnb as being in the bag for the price-gouging hotel industry. The hotel lobby is a powerful and rather unsympathetic special interest group, one that certainly lobbies hard against Airbnb, but the company was wrong to dismiss the concerns many New Yorkers have about affordability in their neighborhoods.
As a result of this strategy, it became an all-or-nothing situation and they lost. Now, they have to turn to the courts with great uncertainty about the possible outcomes.
Airbnb stakes its legal defense on two points: first, under the Communications Decency Act, Internet companies can’t be held responsible for any content published on its site by its users and, second, the law also violates the company’s and its users’ First Amendment rights.
The problem for Airbnb is that the law doesn’t hold them responsible – it fines the hosts posting their listings. It doesn’t actually block anyone from using the platform; it just raises the stakes to use it illegally. A First Amendment case also falls into dubious grounds because the state isn’t blocking any form of communication for the company or users; it’s just preventing postings that violate other state laws.
The other challenge for Airbnb will be how to make the case that their business doesn’t rely on others violating other laws. If 72% of their NYC business was in fact illegal, it’s hard for a court to find an unfair hardship. Does Airbnb bring a separate case against the state on those occupancy laws? Doesn’t it kind of have to?
This isn’t an isolated case for Airbnb, either. They are under fire in several cities in the America, including their hometown, and in other countries. The stakes couldn’t be higher for the company. At some point they have to alter this model significantly and/or alter a lot of local laws.
It’s a shame that Airbnb resisted reasonable attempts at compromise with New York. When it seemed clear that Governor Cuomo was going to sign the bill into law, they made an 11th hour attempt to do so, but it was too little too late. They have not made enough friends on either side of the aisle in Albany.
They also assumed, incorrectly, that “average New Yorkers” would universally support the company. They clearly misread or ignored the impact the affordable housing crisis is having on those average New Yorkers. Whether Airbnb actually harms housing affordability is difficult to determine (short answer, yes, but only in a few neighborhoods) but even the perception of a company damaging the affordability of the city is enough to turn off a lot of New Yorkers. It was hubris not to understand that.
That’s not to say that the courts won’t find some middle ground for the company and the state/city to go back to the drawing board over. There clearly is some compelling argument for this type of economic activity for New Yorkers and there are enough New Yorkers who were using the platform legally that now might be thrown into legal limbo as a result. It's easy to see where the court would argue that the law is an overreach.
Whatever the result is, it won’t be good enough for Airbnb. Their entire business model is based on the revenue generated from the professionalization of their hosts. They need more of those hosts renting more rooms for more nights if they want to justify their investor’s expectations. That simply won’t happen if the company has to rely on hosts listing their spare room once or twice a year.
I’ve said before that I think Airbnb is a great small idea, but a terrible big idea. Someone renting out their kid’s bedroom now that they have moved out or a couple renting out their apartment for a weekend once a year hurts no one. But once you take giant amounts of venture capital and have to grow exponentially to justify it, you have to chase the bigger sources of revenue. You have to hope that neighborhoods turn into permanent hotels. So far, that seems to be a losing strategy.