How The Hotel Industry Got Blindsided … And Why Yours Could Be Next

Posted in: Staffing Factoring Articles- Jul 07, 2014 Comments Off

Airbnb was recently valued at an eleven figure sum, which overshadows all, except the largest hotel chains. The usual criticisms to tech valuations aside, the impact of Airbnb on the traditional hotel industry is definitely being felt. But why did the industry fail to spot this threat for so long? How does something like Airbnb come out of the ordinary and change the rules of an entire industry? And how could something like this be repeated in another industry?

Getting Blindsided By Platform Thinking

Airbnb is the latest in a series of disruptions brought about by internet businesses over the last 10 years. The likes of YouTube, Wikipedia, the iPhone App Store, Amazon, Uber, oDesk, and even Twitter, restructure the value chain of traditional industries and threaten to put their traditional counterparts out of business.

The recent Jill Lepore – Clay Christensen debate notwithstanding, one has to admit that disruption is a reality, and Christensen’s theory serves well to explain why incumbents, in general, get blindsided.

Long one of the most bastardized words in startup circles, disruption ironically has very little to do with the adoption of a radically new technology. Instead, a disruptive offering gives up some attributes that appeal to a core market, in order to gain advantages in a low-end market. The offering takes hold in this low-end market, continuously moves up-market through improving quality, and eventually disrupts established competitors.

AirBnB serves as an example of how today’s networked platforms compete with traditional industry behemothswithout appearing to do so, at all. Platforms connect producers and consumers – hosts and travelers in the case of Airbnb – and facilitate their interactions and exchange. Platforms often solve a problem that would traditionally have been solved by a manufacturer or a service provider, e.g. a hotel or a staffing agency, with one key difference: These platforms do not “own” inventory, and are, hence, seemingly incapable of controlling quality.

When a new platform comes up, it rethinks the four fundamental assumptions that govern business:

  1. How is value created?
  2. How is value consumed?
  3. How is quality controlled for the value creation?
  4. How does value creation scale?

Any business must answer these four fundamental questions. Most sustaining innovation, in fact, is an improvement along one or more of these parameters.

Platforms like Airbnb rethink these assumptions and restructure the traditional value chain and operating model for the industry.

  1. Rethinking value creation: Airbnb allows anyone with a spare mattress or room to run their own BnB, by giving them access and tools to market themselves to a potentially global market.
  2. Rethinking value consumption: It wasn’t common for travelers to stay at strangers‘ apartments in a new city. AirBnB created a new behavior and changed the very design of the traditional trip.
  3. Rethinking quality control: Hotels are known for their service quality and the reliability of the customer experience. AirBnB, on the other hand relies on a peer curation mechanism to ensure quality and reliability.
  4. Rethinking scale: Traditional hotels would scale by adding more rooms through new properties. Airbnb doesn’t own inventory. Instead, it scales by improving its ability to match users, leveraging better data.

At launch, platforms like Airbnb are dismissed as error-ridden experiments at best. They offer a new alternative by rethinking value creation and often create new behavior by rethinking value consumption. However, they fail to offer the quality and reliability that is offered by their traditional competitors. Apartments on Airbnb get raided, self-published books lead to a dip in quality and Wikipedia pages are vandalized. Eventually, platforms succeed when they create a strong curation system to separate the best from the rest. Over time, the platform scales by improving on its ability to match the right goods or services created on the platform with the right consumers. With strong curation and scalable matchmaking in place, the platform rapidly gains traction and develops the reliability needed to spill over to a mainstream market, blindsiding its traditional competitors in this process.

This pattern in platform-enabled disruption isn’t specific to AirBnB. Platforms like YouTube, Wikipedia, KickStarter, oDesk and the Android app store, all exhibit these characteristics to varying extent. We discuss this in further detail below.

Rethinking Value Creation

Amazon allows anyone who has a story to tell to publish much like Airbnb allows anyone with a spare mattress to run a B&B. Wikipedia built a massive repository of knowledge without relying on experts. Kickstarter re-imagines an alternate model of venture funding, especially for creative projects.

By democratizing the tools of production and delivering access to a global market of consumers, these platforms unlock sources of supply that would otherwise not have existed.

Such supply explosion is usually accompanied by two key shifts:

  1. Reduction of friction in tools of production: Every time friction is removed in the production process by making it easier or cheaper, it affords the possibility of an explosion in supply. Twitter’s 140-character limit brought down the effort in creating content and opened up the market of content creators as compared to traditional blogging. Platforms like Behance, Dribbble, Threadless and 99Designs enable independent designers to serve a global market, benefiting from the fact that the tools of design and printing have been democratized over time. One expects a similar shift in industrial design as 3D printers become more popular.
  2. Access to a global market for the first time: Word processing software had always been around but only a small minority was self-publishing books. Amazon’s Kindle publishing platform offered not just the tools but also access to a global market for the first time.

However, easier production and global access alone aren’t sufficient to enable creation of these new markets. Craigslist allowed anyone to run a B&B before Airbnb came along but it never quite powered the revolution in travel that Airbnb did. This brings us to our second point.

Rethinking Value Consumption

The second step in disruption involves creation of new consumption behavior.

Staying at a stranger’s apartment in a new city would have been considered crazy a few years back. AirBnB didn’t just reimagine the supply side of the market, it also created an entirely new user behavior by providing newer and cheaper alternatives. It isn’t mere coincidence that much of Airbnb’s initial traction was driven by conferences and events which forced users to look for cheaper accommodation alternatives. Over time, this usage spilled over form conferences and backpacking to leisure and family travel, and eventually even to business travel.

Creation of new user behavior is often seen with new platforms. made car pooling with strangers acceptable. Zaarly is trying to make domestic help from strangers acceptable, while Kickstarter encourages people to look for funding among their Twitter followers.

Having unlocked new supply and created new user behaviors, the platform now needs to get its third and most important element right.

Rethinking Quality Control

As anyone who’s ever organized a party knows, more isn’t always merrier. Platforms reconfigure supply and demand but they end up with a problem of quality control. As the case study of AirBnB suggests, the average listing, initially, doesn’t compare with established hotels in service quality. If the barriers to participation drop, the quality of participation suffers as well. Unchecked, poor supply leads to a poor consumption experience setting a cycle of abandonment in motion, as in the case of MySpace and ChatRoulette. To avoid this fate, platforms need to get the third part right: Curation.

Curation separates the best from the rest by relying on social signals of quality. The Android app store, Reddit and Quora have a community voting or rating system that bubbles up the best content. Wikipedia’s collaboration tools allow moderators to correct entries and resolve disputes on an article. SitterCity combines expert screening with social curation to differentiate the best babysitters from the rest.

AirBnB has invested heavily in its curation mechanism because of the high risks involved, one of the factors that enabled it to disrupt Craigslist and build a highly liquid, global travel market. In some cases, photographers certify listings. Travelers rate hosts and hosts rate travelers. Additionally, a central insurance encourages both sides to participate further.

Curation keeps the cycle of growth in supply and demand going. As the platform gets better at curation, it finds greater adoption among consumers andconsequently attracts mainstream producers as well, setting a virtuous self-reinforcing cycle in motion.

The single most important reason platforms fail after getting traction is through an inability to effectively curate the production and consumption on the platform. But for platforms to truly disrupt traditional competitors, they need a final key element to operate at scale.

Rethinking Scale

Platforms like Airbnb and Uber threaten their traditional competitors only at scale. To operate at scale, a platform needs to ensure that its ability to match suppliers and services with consumers keeps improving over time. It achieves this by gathering better data on its users and improving the algorithms that match the two sides. Often, on platforms like Airbnb and YouTube, users start off as pure consumers and start producing as well at some point. This further improves the platform’s ability to scale.

The reason disruptive platforms take incumbents by surprise is that they often reach reliability and scale almost simultaneously. By that time, a strong network effect has already set in attracting more of the market around the platform. More and better producers attract higher consumer activity and vice versa. By this time, it’s usually too late for the incumbents.

Getting Blindsided — Understanding Disruption

The reason incumbents get blindsided is because they continue doing everything right but fail to assess a relatively inferior offering as competition. The disruptor isn’t your typical competitor.

The hotel industry dismissed Airbnb when it launched. The new sources of supply didn’t match up to the hotel industry’s standards, which has traditionally innovated by constantly improving the quality of its rooms and its service. Leveraging a strong curation system and improving on its ability to scale using data, Airbnb has successfully booked more than 10 million nights and eaten a noticeable chunk of global travel.

While the past isn’t a great predictor of the future, we can understand specific patterns in disruption in the past to better identify potential markets where such patterns play out in the future. In summary, there are four symptoms that we often see in this pattern of disruption:

  1. A rapid democratization in the tools of production and market access leading to unlocking of new, often inferior, supply.
  2. Improvement of supply over time as curation sets in.
  3. Spillover from a niche initial market to mainstream consumer adoption as the curation becomes more reliable.
  4. An inflection point in growth as the network effect sets in and adoption takes off.

For a resource-constrained startup, a platform approach is particularly appealing, especially when locking horns with incumbents in an industry dominated by service or product quality. This allows a startup to gain traction without attracting the attention of its traditional competitors.

Platforms rewrite the rules of the industries they enter. Contrary to conventional Silicon Valley wisdom, platforms don’t win because of superior features or technology, they win on their ability to create entirely new markets and create new consumer behavior through curation and scalable matchmaking.