Cities Forcing Airbnb to Shift Strategy

Floods of the frat variety (nytimes/williamwidmer)

Floods of the frat variety (nytimes/williamwidmer)

Stepping away from the Carson-at-HUD controversy for a moment, Airbnb has quietly signaled a significant tactical change in its approach to working with city governments. The Silicon Valley company, which currently has an estimated $30 billion value, has gained a reputation for stonewalling local governments as it expands across the globe.  This has included actively flouting local laws, refusing to share data (or sharing cherry-picked data) and ignoring local housing advocates and neighborhood groups. As a result of this behavior, the company is experiencing a severe backlash - whether it’s losing lawsuits or being completely banned.  It appears they are finally abandoning their ‘shoot first’ growth strategy.

The biggest recent news concerning the company came from right here in NYC.  The state passed a potentially crippling law making it illegal to advertise short-term renting in the state, which could jeopardize Airbnb’s biggest single domestic market.  The law stems from several years of the state unsuccessfully attempting to work with Airbnb to come to terms with existing occupancy laws. The company adopted a hard-nosed strategy (similar to Uber’s strategy against the TLC, which it ultimately abandoned as well) that made a lot of enemies in NYC and Albany (Governor Cuomo signed the law in October). 

Whereas many New Yorkers agreed with Uber about how awful the TLC was and welcomed the catch-me-if-you-can strategy, Airbnb was mistaken to assume that New Yorkers felt the same way about the hotel lobby.  New Yorkers simply don’t feel the pain of an expensive hotel room as much as they feel the pain for not getting a cab when they need it.  They do feel the pain when tourists overrun their building or neighborhood.  Misunderstanding that nuance proved costly.

As Airbnb has done in the past (including in its home city of San Francisco) it decided to sue.  The legal argument is somewhat convoluted, but the basic hope of the company was to clarify its liability with the new law (they wanted to make sure only a host could be found guilty and not the company.) The strategy also clearly was to put popular pressure on the city and state and to use its deep war chest to force both to make a better deal with the company.

Once it became clear that the company would not be found liable under the new law (and that there was no political pressure to cave to the company,) Airbnb quickly settled (separately with the city and state) and has accepted the ruling that will come into effect next year.  This was a big win for opponents of Airbnb (and a big loss for potential hosts) but the move was likely a tactical retreat for the company rather than a total surrender. How the new law will impact Airbnb’s revenue will be clear relatively quickly and will likely dictate the scope of a future legal counter-strike.

Having apparently learned its lesson over the last few years in NYC, this week the company demonstrated a radically different approach with New Orleans – it struck a deal with the city government and local groups before a prolonged legal fight.

The deal outlines an agreement between the company and the city to share its list of registered hosts, to ban any hosts in the French Quarter, and to crack down on ‘party houses’ that have negatively impacted local neighborhoods.  This was seen as a major concession to the city, the hotel lobby, and local residents – three groups the company has all but ignored or dismissed previously whether in New Orleans or other cities.

Though New Orleans is a dramatically smaller market than New York, the company has clearly signaled that it no longer sees fighting these groups as the fastest growth strategy. Though it remains to be seen if this will be the new model for the company in other cities, the backlash has clearly spooked the company’s investors enough to shift gears. 

To be clear, growth is still the driving force of Airbnb (just as it is with any company) and there doesn’t appear to be any cultural shift within the company.  Any company that takes that type of capital and hits that type of valuation is under tremendous pressure to increase growth to justify such lofty expectations.  But as cities and residents become more aware of the pros and cons of the company, they are starting to organize in a way that threatens the established pace of growth.  The company has exhausted its “shoot first” growth strategy and has to recalibrate in a more informed marketplace. It took too long for them to recognize this, but perhaps they have now.

Understanding this makes anticipating what happens next in NYC and New Orleans relatively easy. Airbnb has made concessions that will no doubt harm short-term revenues in these markets, but it has bought valuable time to let the political heat subside (while continuing to expand to other friendlier markets.)  During this period they can evaluate how vigilant these cities are on enforcing the new agreements and how much of a price (literally or figuratively) the company would pay for dragging its feet. They have already been accused of this in several international markets.

If either city’s policies appear to be manageable, they will have helpful case studies for other eventual conflicts and move on.  However, if NYC or New Orleans significantly damage the company’s revenue, Airbnb will most certainly sue in federal court.  The company’s investors will leave them no choice.  How those scenarios form and play out is just speculation at this point, but you can bet their legal team is preparing for all of them.

Airbnb likely expected some of this backlash and hoped for a delaying-action as it continued to expand.  Now it must recognize that in more mature markets, it must make concessions to local interests.  This may or may not harm growth in these markets or new markets, but a new strategy is inevitable now.  The pressure to continue to grow – and to justify its evaluation – will not subside, however.  Playing nice with cities is one way to keep growth going. Another is to create new streams of revenue, which it has already begun to do.  But if these efforts don’t meet investors’ expectations, Airbnb could very easily come back with its guns blazing.