A few weeks ago, I came across a16z’s “Platforms vs Verticals and the Next Great Unbundling”, written by Jeff Jordan and D’Arcy Coolican. The article talks about unbundling of marketplaces – i.e, when a dominant marketplace is challenged by new companies that create tailored, targeted platforms to serve verticalized segments of the incumbent’s customer base.
The classic example of marketplace unbundling is that of Craigslist in the 2000s, best represented with the image below (Li Jin and Andrew Chen even have a name for this time – the “Unbundled Craigslist Era”). Craigslist’s super broad online yellow pages model and it’s excruciatingly painful, annoyingly unwilling to change interface (it’s interface today is almost exactly what it was 20 years ago) made it a ripe target to be chopped up into several different platforms.
The a16z article lists three examples of modern-day unbundling of large platforms that we’re seeing – YouTube, Zillow, and LinkedIn. Jordan and Coolican argue that while YouTube is experiencing unbundling from companies like Twitch (gaming), TikTok (short-form mobile), and MasterClass (educational), LinkedIn is being chipped away by players in specialized verticals – Hired (engineering), RigUp (oil services), Pared (hospitality) because of the lack of differentiation of user experience that it is able to provide.
The rhetoric around unbundling today isn’t limited to companies with focuses too broad and user experiences too shitty. The size of a marketplace (or platform) seems to be held as an important indicator of how susceptible it is to unbundling. As Jordan and Coolican state – “As the platforms grow, their submarkets grow too; their product gets pulled in a million different directions. Users get annoyed with an experience and business that caters to the lowest common denominator.” The larger the marketplace gets, the less tailored experiences they’re able to provide to their customers, the more at risk of unbundling they get.
In the marketplace world, GMV (Gross Merchandise Value) is probably the best and most widely accepted metric when talking about marketplace size. A16z recently released the “Marketplace 100” – a ranking of the top 100 private marketplaces by GMV. Sitting pretty on top of that list accounting for 38% of the 100’s total GMV is – you guessed it – Airbnb.
From a size perspective as the largest private marketplace by GMV, it’s natural to wonder – is the unbundling of Airbnb on its way? A couple months ago, a Hackernoon article argued that it’s actually already happening – stating the rise of luxury rental sites, camping websites, and long-term rental sites as evidence of this unbundling.
I’m pretty curious myself as to whether Airbnb is actually unbundling, or whether it’s really that susceptible to unbundling in the first place. To answer that question, let’s first lay out a few factors that determine the susceptibility a platform has to being unbundled. Fair warning – these may sound pretty vague. I also don’t think this list is comprehensive nor do any of them individually lead to unbundling, but think this could be a good starting framework to think about it.
- Size – Size attracts competition, and large GMV/revenue marketplaces naturally draw the attention of entrepreneurs who want a piece of that pie.
- Pace of innovation – Companies must always stay current and modern, be it through the adoption of new technologies, capitalization on new trends, or close monitoring of competition. Failing to do so makes it easier for challengers to swoop in and provide a better experience to users. I think this was one of the biggest problems with Craigslist. Here’s their interface in 2000 vs in 2020. A picture (well, 2) speaks a thousand words –
- Decomposition of value proposition – When there’s opportunity to break apart the core value proposition of a business into separate processes or components, there’s opportunity to unbundle the business. Let’s take LinkedIn as an example. The value proposition of LinkedIn is pretty multifaceted – maintaining a professional network, building a professional brand for yourself, proving credibility to employers, searching for job opportunities – and this is all just on the employee side. A company like Indeed can come in and work just on the job search aspect (not that Indeed is unbundling Linkedin, it’s possible you’ve never even used Indeed – this is just an example to show unbundling based on value proposition decomposition).
- Diversity of use cases – This is probably the most important determinant of susceptibility to unbundling. You can also think of this point as how diverse the user base is. I don’t exactly mean to talk about how complex the value proposition is, but rather about how the singular value proposition can be leveraged to serve different purposes, and in different ways. A prime example is YouTube. Value proposition – access to any form of video content from around the world, or distribution of video content across the world for creators. The use cases are endless, depending on the user and the type of content they wish to see – educational, sports, humor, documentary, etc. You use YouTube to have fun/relax, to learn something new, to watch a movie (that’s exactly what YouTube is being unbundled on right now).
- Frequency of Use – I believe that marketplaces with more frequent transactions are more susceptible to unbundling. The more one uses a platform, the more annoying the slight inconveniences and drawbacks of the platform become, the larger the opportunity for ‘problems to solve’. In low frequency use platforms, the power of brand value/trust outweighs minor inconveniences in the user experience, which honestly probably often go unnoticed.
(Note – I don’t at all mean to say these are undesirable outcomes for a business. Being a large business, having frequent repeat usage, serving a diverse user base are all great business outcomes that companies strive to achieve. This raises an interesting conundrum of growth, one that marketplace or other platform businesses should always keep in mind – you want to grow and serve as many segments as possible, but don’t want to be unbundled. And thus, growing marketplaces should always have this at the back of their minds and put in place strategies/safeguards to mitigate the risk of unbundling.)
Based on the above framework and taking a pre-covid view of the business, I don’t think Airbnb is (was?) that susceptible to unbundling. Sure, it’s a large platform that has and will continue to attract the attention of competitors. I don’t think it struggles on the pace of innovation dimension. On the renter side, the (former) trust in the Airbnb brand when added to low use frequency (compared to a YouTube, LinkedIn, or even an Uber) helps Airbnb add a further moat against unbundling – searching for rentals doesn’t really happen more than once every couple of months.
The value proposition of Airbnb is not all that complex. To travelers, the value is in easily finding trusted, short term rentals. For hosts the value lies in generating extra income off their houses. The argument can be made that Airbnb’s added value when looked at as a “managed marketplace” is facilitating payments, vetting properties, etc – but these are all so strongly intertwined with the core value proposition of matching travelers and hosts, that they can’t be torn away from it.
The diversity in use cases dimension is probably where the strongest case could be made against Airbnb, and this is exactly the route the Hackernoon article takes. Within short term rentals there’s a bunch of ways you can think about using Airbnb – business travel, budget conscious, camping (all the filters on Airbnb listings lol), plus the kind of users on the platform also varies significantly. Hackernoon lists competitors in three particular verticals – luxury, camping, long-term rentals.
In my opinion, Airbnb recognizes this, and has three primary strategies put in place to mitigate the risk from diversity of use cases. Let’s look at them one by one –
- Separation of Brands – Airbnb’s most significant attempt at providing different users/use cases with different experiences is the way it separates units, brands, and landing pages according to segments of its user base – I’m talking about Airbnb Luxe, Airbnb Plus, Airbnb Work, etc. By separating these offerings, Airbnb tries to make sure it doesn’t fall prey to its brand being perceived a certain way, and a certain way only. Luxe/Plus are meant for high end luxury stays, and their websites’ sleek designs portray a sense of luxury. Work is meant for business travel; there’s also a big search filter right at the top (we’ll talk more about search filters in a second) to provide separated offerings and a separated experience. And of course, there’s Airbnb’s relatively new “Experiences” that’s a whole new line of offerings.
This separation of offerings isn’t a strategy unique to Airbnb – think about Uber with Black, XL, Pool. The LinkedIn equivalent would be to have something like LinkedIn Hospitality, LinkedIn Healthcare, etc –evidently, this strategy is more conducive to some businesses than others, depending on how limitless the use cases are. - Robust Search/Filter Functionality – This is probably a no brainer/most obvious of the three, but still going to list it out. If you’ve ever booked on Airbnb before, you’ll know that there are a ton of ways you can filter and sort your search, down to specific amenities, specific kinds of stay, etc. I’m sure tremendous effort went into designing buckets for this segmentation, plus the filtering process and the Airbnb filtering interface are incredibly easy on the eye. It’s a constantly evolving process, and they’re quick to add filters in the face of competition.
- Acquisition Strategy – Acquisition strategy is an important part of any business, and acquiring competitors is a great way to expand offerings or well, safeguard against unbundling. Airbnb’s acquisition of Luxurious Retreats in 2017 for example helped Airbnb launch Luxe (talked about earlier) and strengthen their luxury offerings.
Let’s see how these hold up to the Hackernoon article’s examples –
- Luxury – The article says Airbnb is considered generic and low-end. I’m not sure if I agree with that in the first place, but as we talked about before, Airbnb acquired Luxurious Retreats in 2017, launched Plus in 2018, and launched Luxe in 2019 to deal with this head on. Acquisition strategy + separation of brands.
- Camping – I personally think this is too small a segment for Airbnb to really worry about. The search/filter functionality would probably be their safeguard, but I understand the argument of that not being enough. Acquiring a company would probably be ideal, but doesn’t seem that easy – Airbnb’s arguably main competitor in the space Hipcamp doesn’t really want to be acquired by them.
- Long-term rentals – Here’s where things get tricky. Before coronavirus I’d have said that Airbnb is almost entirely in the business of short-term rentals, and brands itself as such. Airbnb hosts too didn’t view the platform as one for leases/long term rentals. Take a look at the comment from ‘Jiw0’ on this forum. In light of the pandemic however, Airbnb has been forced to gravitate rapidly towards long term rentals, as demand for short term rentals stays low. However this isn’t as simple a transition – the sublease/longer term rental market is more crowded and not as up Airbnb’s alley is you may think it is.
Airbnb definitely has tried to enter this market – it already has a dedicated landing page to sublets , and there does exist significant host base that looks exclusively for renters for longer than a month. The issue they face now though is the speed with which they need to move most of their revenue into this segment.
I didn’t think that Airbnb was as susceptible to unbundling as many would guess – they had strong strategies in place to deal with it. But given the pandemic and the strategic shifts towards long term rentals that Airbnb is having to make in a short time frame, this does become something that should be at the top of their minds. According to the most recent reports, Airbnb is sticking with its intention to go public this year. Apart from the several questions they’re going to be asked about the health of a short term rentals business during a pandemic, what I’m most curious to hear and see is how they are going to transition to/add a strong longer term rentals business that will probably be the source of their revenues for the next year or so. And as they do this, how will that affect their brand and their positioning as a short-term rental company? Will it be compromised? How will they safeguard against it? As they look to make rapid transitions into a new line of business, I’m hoping they keep in mind – “As the platforms grow, their submarkets grow too; their product gets pulled in a million different directions. Users get annoyed with an experience and business that caters to the lowest common denominator.” Hopefully, they grow their long-term rental business without compromising their brand or experience associated with short term rentals. And hopefully they’re not the next unbundling saga.