Has Airbnb Masterminded the Ultimate Game of Monopoly?
Remember playing Monopoly when you were younger? It was one of my favorite games growing up. Even though I didn’t know anything about economics or investing back then, there was something addictive about the game. I especially relished the special moment when you got to trade in those little green plastic houses for a big shiny red hotel.
Which takes us to Airbnb… As we noted in our in-depth research report last year “The Abundance Economy: Where the Long Tail Meets the Blue Ocean”, it took Airbnb only six years to amass an inventory of over 800,000 accommodation listings in 190 countries. In contrast, it took Hilton Worldwide nearly a century to grow to 11 brands operating 4,200 hotels in 93 countries with total availability of 690,000 hotel rooms. As shown in Figure 1, since last summer, Airbnb has attracted an additional 700,000 accommodation listings versus only 42,000 additional rooms for Hilton Worldwide, a multiple of sixteen times.
Figure 1: Growth in Supply Since Last Summer — Airbnb versus Hilton
Source: Google Finance, Company websites, Brady Capital Research
Most importantly, Airbnb is successfully converting its long tail of inventory into actual revenue. According to the June 17, 2015 article in the Wall Street Journal titled, “The Secret Math of Airbnb’s $24 Billion Valuation”, Airbnb’s revenues are close to approaching $1 billion this year and are forecasted to climb to $10 billion by 2020! According to the company, the average listing is available 66 days of the year. In simple terms this implies that the average listing on Airbnb is available two months out of every year, or that it takes six Airbnb listings to equate to one hotel room. If we multiple this by the average of 164 hotel rooms per hotel, we calculate it takes approximately 1,000 Airbnb listings to create the equivalent of one hotel. Think back to Monopoly: do you remember the thrill of trading in five little green houses for a big red hotel? As shown in Figure 2, this is essentially what Airbnb is doing — in this case trading in 1,000 little green houses (i.e. 1,000 accommodation listings) for one big red hotel.
Figure 2: Airbnb’s Long Tail of Little Green Houses
Source: Heather McGowan, Brady Capital Research
The board game of Monopoly was debuted by Parker Bros. during the heart of the Great Depression (February 1935). Airbnb launched its real-life online version in the middle of the Great Recession (August 2008). By 1937, over 6 million copies of Monopoly had been sold — America loved being able to play this game as it afforded a chance to win and feel rich during a time when everybody was feeling anything but. Three years after its launch, Airbnb celebrated its 1 millionth booking, as people welcomed the opportunity to earn extra income by opening up their home to visitors. Travelers loved the superior value for money, rich variety of unique places to stay and the personal experience of staying in someone’s home.
The rules of the game are starting to catch on — since its launch seven years ago, Airbnb has attracted a long tail of 1.5 million little green houses, the equivalent of 1,500 hotels. The magic of Airbnb’s asset-light business model is its lack of required development capital to build these hotels. At an average cost of $14 million per hotel, we calculate this cost to be approximately $21 billion. Given Airbnb has raised a total of $2.3 billion to date, we know that it cannot have spent close to $21 billion building its game platform.
To reach its ambitious revenue target of $10 billion from its estimated revenue base of $900 million this year, Airbnb will need to grow its accommodation listings by eleven times (assuming no change in its commission rate, average room rate, average days availability). This implies a long tail growth in accommodation listings from 1.2 million (at the mid-point of this year) to 13.3 million. Over the next five years, Airbnb is looking to add over 12 million little green houses to its online version of Monopoly, the equivalent of adding 12,000 big red hotels, which we calculate would cost a traditional player like Hilton $170 billion. From a customer standpoint, assuming no change in the average nights booked, this would mean that Airbnb expects to grow its player base by 11 times from an estimated 16 million this year to over 175 million players by 2020.
Can you imagine Hilton’s next analyst conference call if management announced it was planning to spend $170 billion over the next five years to add 12,000 hotels to its current base of 4,300? Obviously, this would be an impossible feat for Hilton as it is playing a more traditional game of Monopoly in an environment of scarcity (i.e. scarce land, scarce capital, and scarce resources). Just like you can’t put up a red plastic hotel on Boardwalk with the first roll of the dice, Hilton cannot open up a new hotel on Boardwalk overnight. First it needs to find the right property for development (i.e. wait to land on the property itself), buy the land (i.e. pay the bank to get the property deed) and then spend one to two years developing the hotel (i.e. wait each turn to buy a house).
But whereas Hilton operates in the traditional era of Scarcity, Airbnb operates in the new era of Abundance. Airbnb is not just playing by different rules — it has become the mastermind in the ultimate game of Monopoly. And, inspired by its social mission “…to imagine a world where you can belong anywhere…”, people all over the world are starting to come together to play.
Note: This article was inspired by our upcoming in-depth research report “The New Era of Economic Abundance: A Deep Dive into the Blue Ocean and Long Tails of the Top 75 Companies in the Sharing Economy and On-Demand Economy”. In the spirit of the Sharing Economy, Brady Capital Research is partnering with HourlyNerd Inc., a Professional Services company building the long tail in business consulting. A complimentary copy of our research report (along with our pre-recorded webinar) will be available for download at www.hourlynerd.com on Monday, September 28th.
Note: Credit for the Monopoly idea goes to Heather McGowan, a Future of Work and Future of Learning Consultant, who, like Brian Chesky, is an alumni of the Rhode Island School of Design.
