How Airbnb Beat Its Overseas Rivals, and What That Means for Its China Business

Like Uber and Didi, Airbnb now has a Chinese rival.

Last Wednesday, Airbnb announced its plans for China along with its Chinese name, “Aibiying”.

For the next few days, everything said about this challenger to the hotel business on Weibo and WeChat was mockery of the name. An important piece of news about the company drowned in the noise: its own “Didi” had arrived.

On Thursday, Tujia held a large press conference laying out what it plans to do in 2017, viewed from the angles of consumers, operators and property buyers.

At the event, Tujia announced partnerships with eight platforms: Mayi Duanzu (Ant Short-Term Rental), Trip.com Group, eLong, Qunar, 58.com, Ganji, WeChat Hotels and Zhima Credit.

A host lists a property once, and it shows up on all eight. Tujia also released a management tool that lets hosts handle orders from all eight platforms at the same time.

Tujia now has 450,000 rentable listings. Airbnb currently has 80,000 in China.

The whole scene looks a lot like Uber's arrival in China: a Silicon Valley star shows up, and a Chinese rival is already waiting.

For Tujia and the other companies working China's short-term rental market, Airbnb is an unusually good benchmark. It is valued at $31 billion, which among private companies puts it behind only Uber, Ant Group and Xiaomi. It has been profitable since last year, preparations for a listing are under way, and it could go public in the US as early as next year.

For Chinese tech companies used to telling their story by pointing at an American counterpart, you couldn't ask for a better one.

Didi, which pointed at Uber and then took the Chinese market away from it, is valued at $38 billion. Didi is stuck in regulatory trouble right now, but that is no longer something a company can control.

One thing is worth noting, though: Airbnb has no serious rival anywhere in the world. The biggest of them, HomeAway, sold itself for $3.9 billion, and that was on the way down.

Since it was founded, Uber has raised $17.48 billion. Even leaving out the $10-plus billion Didi raised, Uber's rivals have collectively raised a sum equal to 30% of Uber's own funding.

Airbnb's biggest rival has raised $550 million. Leave out China's Tujia and Xiaozhu, and all of them together have raised less than the $1.5 billion that Grab, the Southeast Asian ride-hailing company, announced over the weekend — $1.5 billion led by SoftBank, to pay for Grab's cash-burning fight with Uber in Southeast Asia.

Airbnb's rivals started appearing one after another in 2011, and failed one after another.

The company was founded in 2008 and spent its first two years on the edge of death, getting by on maxed-out credit cards and selling boxes of cereal. How did it beat its rivals and win the trust of hosts and guests?

At first, it was Airbnb chasing Couchsurfing

Couchsurfing was Airbnb's first competitor.

In 2009, Airbnb had yet to raise a first round and was taking a dozen or so bookings a week. Couchsurfing was five years old, had millions of listings and had just been written into the Lonely Planet guidebooks.

Couchsurfing was really a social network. Hosts took guests in for free, and when hosts traveled themselves they could sleep on a free couch too. Host and guest met on Couchsurfing, got to know each other and decided whether to take a particular surfer in.

Couchsurfing had nothing to push users to bring in more users, and it wasn't really a business. All its users came from organic growth, and nobody could make money from it. For a long stretch it was a nonprofit kept running by volunteers, and its only revenue was the fee it charged to verify a user's identity.

To grow, Airbnb set up an automated email system at the end of 2009 that used the rental listings people posted on the classifieds site Craigslist (the site 58.com and Ganji originally copied). From a Gmail account with a woman's name on it, they emailed everyone who had posted a listing on Craigslist, suggesting they put the place on Airbnb too.

They also built hosts a tool that posted a listing to Craigslist with one click, which turned Craigslist into a place to advertise Airbnb. Airbnb had woven itself into its biggest rival's network.

In 2010, Airbnb joined the startup accelerator Y Combinator and, on its mentors' advice, went to New York to visit hosts and look for ways to improve their experience.

They found quickly that rooms with beautiful photographs got booked more often. With rented cameras they shot every host's bedroom and backyard, which made the pages hosts showed on the site far more inviting. Rooms that had been photographed saw bookings rise two- to threefold. The policy of shooting hosts' homes professionally, for free, survives today.

Before that, only hotels put polished photographs on booking sites. That innovation in the rental business helped Airbnb move away from a Couchsurfing-like budget position and toward being an online travel-accommodation company.

In the second half of 2010, out of Y Combinator, Airbnb took money from Sequoia and LinkedIn's CEO, and its spending on advertising and photography paid off. By the end of the year its cumulative bookings had grown to 800,000, an 800% increase in a single year.

In 2011, Couchsurfing turned itself into a commercial company and took a large investment from Benchmark, a heavyweight Silicon Valley venture firm. The founding team, which had held to nonprofit ideals, left en masse, and the volunteers were disbanded. Membership tripled after the money came in, but the site slowly lost what made it unlike anything else.

Couchsurfing's website, meanwhile, barely changed and was never easy to use. It never solved the experience problem for hosts or guests, because neither side paid anything — a host had no reason to make the stay better.

“I don't consider Couchsurfing a competitor,” Nathan Blecharczyk, one of Airbnb's co-founders, later recalled. “They charge neither hosts nor guests, so it's much more casual than Airbnb's service. Because you're not paying the site, your expectations of the service are low, which also means a host may change their mind at the last minute. But on Airbnb people pay, and you can see a range of choices.”

All of Airbnb's profit comes from brokerage fees: it charges guests a service fee of 6% to 12% and hosts a service fee of 3%.

That means the price each room rents for directly determines Airbnb's revenue. Airbnb helps hosts dress up their rooms and make them more appealing so hosts earn more, and hosts then have a reason to give guests a better stay. Out of that came a trust between the platform and its users that feeds on itself.

“And besides, if you're traveling with your family, you probably don't want to sleep on a couch,” Blecharczyk added. Though when Airbnb was starting out, the “Air” came from air mattress, which was hardly more sophisticated. It was only on graduating from Y Combinator in the winter of 2008 that they changed the name from “Air Bed & Breakfast” to the Airbnb of today.

A similar shift shows up in Airbnb's fight with every one of its competitors. That kind of growth is also the key to a valuation that multiplied several thousand times in seven years.

With a global network, Airbnb beat its first real threat, Wimdu

Last November, the European short-term rental platform Wimdu was acquired by a company called 9flats.

It was a bleak-looking deal. Well before it closed, Wimdu's largest shareholder, Rocket Internet, had already been dumping the stake it held.

But in 2011, when Wimdu had just been founded at its Berlin headquarters, it was the first real threat Airbnb faced.

Wimdu's interface design was nearly identical to Airbnb's, and its first batch of hosts came from scraping German host information off the Airbnb site and then emailing and phoning each one.

At the time Airbnb had European hosts signing up but no operations team outside the US. The whole company was a little over 20 people.

Wimdu took a $90 million investment from Rocket Internet, Germany's largest incubator. Wimdu was in fact incubated by the three Samwer brothers who founded Rocket Internet, the men behind German versions of eBay, Groupon and Yelp — companies that forced the Silicon Valley originals to buy them back as they expanded abroad.

Wimdu even set up a Chinese outpost, Airizu. Having grown to 400 employees in 100 days and taken the German market, the Samwer brothers began early on to press Airbnb into working with them.

Airbnb refused the Samwer brothers in the end and chose to fight them head-on. Its advantage was that it stood on the US market.

The US takes in more tourist spending than any country in the world, nearly double the number two, China. Every year, what tourists spend in the US adds up to more than six times what they spend in Germany. A tourist who arrives in the US and wants to stay in someone's home uses Airbnb, not Wimdu. And American tourists carried the Airbnb habit back to Wimdu's own headquarters, so that outbound American travelers shaped the behavior of German hosts.

Along the way, Airbnb brought in a European entrepreneur, Oliver Jung, to run global expansion. He had been in the business of copying American companies in Europe himself, and had invested in Xing, the German professional network modeled on LinkedIn.

Over the following year, Jung opened offices in Berlin, London, Barcelona, Copenhagen, Milan, Moscow, Paris, Delhi and São Paulo. He flew constantly between Asia and Europe, interviewing the managers who would run each local office. Brian Chesky, Airbnb's CEO, learned how to run a global company in the same process.

If Airbnb was still an American company when the fight started, by the time Jung left in 2013 it was thoroughly global.

Most people don't stay in a hotel in the city they live in. Airbnb covered the world, so that a user could rent a room anywhere they went. Its challengers, correspondingly, could not cover a few markets — they had to build a network across the whole world to challenge it.

By the end of 2012, Europe was Airbnb's largest market, and Paris, Europe's biggest tourist destination, was the city with the most Airbnb orders. In 2013, Wimdu shut down its Chinese company, Airizu.

Online travel platforms wanted short-term rentals too, but Airbnb took a different road

HomeAway, which went public in 2010, is in the best shape of any of Airbnb's overseas rivals.

When it listed, it was a company worth $3.2 billion. When it was sold in 2015 to its partner, the online travel platform Expedia, the price was $3.9 billion — not much of a rise.

Over the same 2010-to-2015 stretch, Airbnb went from a valuation of $20-odd million to $20 billion, close to a thousandfold.

Sold in the same package was VRBO, HomeAway's vacation-apartment site.

Brad Stone writes in The Upstarts that Travis Kalanick, Uber's founder, was a VRBO user himself. In early 2009, Kalanick and friends rented a luxury apartment in Washington to watch Obama's inauguration. Kalanick was still hesitating over whether to go into the ride-hailing business, and one of his reasons was that he wanted to build his own VRBO — a high-end Airbnb.

HomeAway, founded in 2005, had long since proved this was a business that worked. Unlike Airbnb, which grew first in big cities, most of HomeAway's properties sat in tourist spots like Hawaii. Most of the listings on the platform, moreover, were put there by apartment-management companies. HomeAway expanded back then by plugging in third-party companies with large stocks of properties in bulk, and after Expedia bought it, HomeAway also plugged into an online travel platform that had traffic and users.

Airbnb had the same idea once: work with professional hosts and bring in a lot of rooms at a stroke. In internal discussions, the founder, Brian Chesky, argued that individual hosts felt warmer, and insisted the company should do more to encourage them. That probably had something to do with the founders' own early days — back when they put a few air mattresses in their apartment and, besides handing guests a little packet with a map, check-in instructions and the Wi-Fi password, would take them around the city.

But Airbnb didn't refuse HomeAway-style expansion in its early years either, and that once brought on a crisis that could have killed it. In New York, its biggest market in those years, large numbers of hosts illegally converted apartments into rooms to rent. One professional host, Toshi Chan, went full-time on Airbnb in 2009 and built a brand called Hotel Toshi with more than 100 employees.

Several of Airbnb's founders had dealt with Toshi directly and had stayed in his rooms.

Hotel Toshi had none of the warmth between host and guest. It had become, in substance, a cheap illegal hotel running on Airbnb. The rooms drew anger from neighbors and complaints from the hotel industry and community groups. It was because of this that Michael Bloomberg, then New York's mayor, set his sights on Airbnb. The trouble in New York has not ended even now.

In 2013, New York passed a new Multiple Dwelling Law, which said Class A dwellings could not be rented for terms shorter than 30 days.

By June last year, New York's law had gone further: not only is it illegal to rent a home on Airbnb for less than 30 days, it is now illegal even to post a listing for an entire home on Airbnb.

Airbnb took down all of Toshi Chan's listings after the new law passed in 2013. It was after that that Airbnb put more and more distance between itself and large hosts, and encouraged individual hosts sharing the spare room in their own apartment.

In February 2016, as a gesture to the New York city government, Airbnb cleared a batch of professional hosts off the platform. Josh Meltzer, Airbnb's head of public policy, wrote to a New York state legislator that the company had removed 1,500 listings in New York City, affecting 622 hosts, 375 of whom — 60% — held two or more listings.

Airbnb had earlier published data on its more than 59,000 New York listings showing that 95% of Airbnb hosts there were ordinary residents renting out the one home they lived in — proof, it argued, that it wasn't interfering with the hotel industry's normal business.

For an online travel platform, the hardest problem in offering non-standard lodging beyond hotels is still the hosts. HomeAway's hosts have to pay the site to advertise their listings. The individual hosts who can't afford to advertise are the ones who truly depend on a platform like Airbnb.

Against other short-term rental platforms that say they care about the traveler's experience, Airbnb is one of the few that also cares about the host's.

Since that winter at Y Combinator, Airbnb has given hosts free professional photography, and the policy has held ever since.

In 2011, just as Airbnb was meeting the Samwer brothers' challenge and preparing to expand worldwide, a blog post by a host created no small crisis: she said the home she rented out through Airbnb had been stripped bare by a guest. It caused a real stir at the time. In the end Airbnb, which had not yet settled its insurance arrangements, paid out of its own pocket and introduced home insurance for hosts.

As it pushed outward, Airbnb hired people away from Pixar to draw storyboards, so that employees around the world would be clear about what the company was for. Storyboarding is a step in making animation: before shooting starts, the plot is drawn out picture by picture.

Airbnb's storyboards drew every stage a user passes through in using Airbnb. Fifteen of them covered a guest's experience of booking on Airbnb; another 30 were about hosts.

Every year, any host who has completed one successful transaction on Airbnb can attend the host conference. The host conference is Airbnb's event of the year: beyond the more ceremonial exchanges, the point of it is to convey the company's strategy and market plans for what comes next.

Favoring individual hosts over the kind who hold a lot of rooms did slow Airbnb's growth at first. But it left Airbnb the attention to get the basic things right — which became the basis for Trips, today's attempt to offer travelers more than a place to sleep.

Trips, the travel-experience business, is new ground for Airbnb, and the first thing Airbnb thought about was how to use what its hosts already have. You wouldn't see that from a booking platform like Trip.com Group or Expedia. To bring in services in bulk, an online travel platform will always think of third-party suppliers first.

Lately, to help hosts use the space in the homes they already own, Airbnb's design studio has even been studying how to help people put up an extra room in the backyard and rent it out.

Whenever Airbnb extends its business, it brings the whole community along. That is how trust between hosts and the platform got built.

Against most businesses, which grow more standardized as they grow larger, Airbnb is a rare company that has grown less standardized. Hosts around the world offer rooms in wildly different styles, and travel products of their own design, on the same platform.

Today, a mature Airbnb has entered a market that isn't quite the same

Fight after fight, Airbnb has shown an astonishing ability to learn. Starting overseas expansion, the dangerous situations hosts ran into on the platform, giving up large hosts, handling conflicts with regulators in one country after another — Airbnb was never fully prepared before a problem arrived, but once it did, the company solved it fast.

Along the way, Airbnb found its direction: lean toward individual hosts, don't depend on booking platforms, and get hosts and guests alike to recognize and trust the Airbnb brand.

China is the only place besides the US headquarters where Airbnb has a product and engineering team. But that team has yet to find a CEO, and its organizational structure is still incomplete.

Before it faced its local Chinese rival head-on, Airbnb already had 5.3 million Chinese users and 80,000 listings in the country. Set against Uber entering China from zero three years ago, Airbnb's starting point is much better.

But while demand for a ride is much the same everywhere in the world, housing is not.

The vacancy rate for homes in China's big cities runs as high as 25%, and the property ads you see all the time urge you to buy an apartment in a tourist city like Sanya or Huangshan, hand it to an asset-management company to rent out, and stay in your own home when you go there on vacation.

Airbnb's rival has fixed on this particular environment.

“Some years ago I bought an apartment in a suburb of Yantai, Shandong. The idea was lovely at first — my wife and children could stay there over the summer. The fact is I've never stayed there myself,” Luo Jun, Tujia's CEO, said at the press conference, using himself to show how Tujia operates on behalf of hosts who buy property outside the city they live in. That apartment brought in an average net income of 10,000 yuan a quarter in last year's peak season. Luo Jun ended the story by stressing that an agent arranged by Tujia handled the whole process.

“We are clearing inventory, helping a country like no other, where the new-home market is especially hot,” he said.

In the five years since it was founded, Tujia has worked with more than 1,000 residential developments, taking on the properties as early as the point of sale, putting them on Tujia and having them run by Tujia's on-the-ground management companies.

Beyond the idle assets, the policy limits on property development are unlike those abroad. Last December, Beijing auctioned four parcels of land and, to hold housing prices down, capped what bidders could pay. In the bidding, the residential portions of all four parcels went to developers on terms that required them to hold the buildings themselves — meaning the housing the winning developers put up on that land can only be rented, not sold.

In an interview after the press conference, Luo Jun also mentioned a call he had taken the previous night from a regional developer, proposing that one building in a new development work with Tujia. That building is exactly the kind of heavy asset a developer is now required to hold.

This market had no shortage of players to begin with — some, like Tujia, set up a dedicated company to run the properties on the ground; others, like Xiaozhu, copy Airbnb and work with individual hosts in China. Now that Airbnb has formally entered China, it is still hard to say whose logic suits this market better.

China's cities hold enormous populations, and far too many people want to be a host or a guest. At the same time, the share of Chinese people traveling abroad rises every year while the country takes in large numbers of foreign tourists. All of that works in Airbnb's favor.

But running idle assets the way Tujia does is also a market that has drawn plenty of companies in.

Once again, a Silicon Valley internet company and its Chinese rival have begun to compete, each carrying a different idea.

Cover image from Visualhunt.