Travel sharing economy update: Uber and Airbnb’s growing pains

This week we take a look at recent developments in the travel sharing economy featuring two revolutionary companies experiencing some growing pains. First, Uber received some negative publicity recently arising from an alleged plan to put together a research team to ”help Uber fight back against the press”, presumably, because of the attention being given to Uber’s allegedly super aggressive methods of competition with its rivals such as Lyft. Second, Airbnb was the subject of a report [see Airbnb in the City (October 2014)] prepared by the New York State Attorney General regarding the legality of Airbnb’s New York City listings [see Matthews, Most Airbnb Listings Violate Law, AG Says (10/17/2014)].

Uber Update

Uber, as expected, is continuing to have a disruptive impact on traditional transportation systems. In Barro, Under Pressure From Uber, Taxi Medallion Prices are Plummeting, www.nytimes.com (11/28/2014)(“In major cities throughout the United States, taxi medallion prices are tumbling as taxis face competition from car-service apps like Uber and Lyft. The average price of an individual New York City taxi medallion fell to $872,000 in October, down 17 percent from a peak reached on the spring of 2013…In other big cities, medallion prices are also falling, often in conjunction with a sharp decline in sales volume. In Chicago, prices are down 17 percent…’I’m already at peace with the idea that I’m going to go bankrupt’, said Larry Ionescu, who owns 98 Chicago taxi medallions…In November, Chicago medallion sales prices averaged $298,000 well below the $357,000 price that was typical this spring, but far up from the $50,000 price of a decade ago. But it’s easy to see why he’s worried…A seven-mile ride from the Loop to the University of Chicago in a medallion taxi costs about $26, including tip. The same trip cost $12.29 this April with UberX, the lowest-cost service option from Uber. The crucial question for medallion owners like Mr. Ionescu is, if Uber is that much cheaper than a taxi, why would anyone take a taxi, and therefore why would any driver pay to lease a medallion?. Mr. Ionescu says his revenues are down around 25 percent, and he’s having trouble leasing out his whole fleet”.

Uber Behaving Badly

In Manjoo, Uber, a Start-Up Going So Fast It Could Miss a Turn, http://www.nytimes.com (11/19/2014) it was reported that Uber “the hot start-up is facing its toughest challenge yet-curbing its ugliest, most aggressive impulses before its win-at-all-cost culture begins to turn off investors, potential employees and the ride-hailing public at large…’The dangerous thing in tech is the narrative’ said Jan Dawson, an independent industry analyst. ‘The more stories that come out about Uber behaving badly-whether it’s about the way it competes with rivals or the fact that an executive discussed looking into journalists-the risk is that it starts to become the main story about the company, rather than the great service it provides or its low prices’…Technology companies live and die by culture…

What that means is that a company’s ultimate success or failure is determined less by anodyne technological prowess than by the values and behavior of people who work there. This may be particularly, true for Uber, which is in many ways an incorporeal company. It owns no cars, its drivers are at-will contractors who can easily switch to rival services, and its customers are just one tap away from some other service. What’s more, though it is growing quickly, it is still young and many people haven’t ever used one of its cars. If Uber’s brand becomes associated with bad behavior, what’s to stop people from choosing its rival Lyft-or from just hailing a taxi?”

Fight Back Against The Press

In Isaac, Uber Executive’s Comments Leave Company Scrambling, http://bits.blogs.nytimes.com (11/18/2014) it was reported that “BuzzFeed News reported that Mr. Michael, Uber’s senior vice president for business, detailed a plan to ‘hire four top opposition researchers and four journalists’ to act as a sort of defense against what he saw as a wave of recent antagonistic press coverage…The incident put a renewed focus on Uber’s confrontational attitude toward the press, a reputation that has grown in the last few years…The article from BuzzFeed, written by Ben Smith, the site’s editor in chief, said the plan Mr. Michael outlined could, in Mr. Michael’s words, ‘help Under fight back against the press’. The researchers, he said, would look into ‘your personal lives, your families’-referring to journalists-and give the media a taste of its own medicine…

On Tuesday, Mr. Kalanick issued a public apology in a series of tweets…Tech companies have gone on the offensive against journalists before. In 2006, for example, it was discovered that Hewlett-Packard, the Silicon Valley hardware giant, has spied on the phone records of nine journalists, including a reporter from the New York Times”.

Are Airbnb NYC Listings Legal?

Referring to Airbnb In The City, the New York State Attorney General’s October 2014 Report [www.ag.ny.gov/pdfs/Airbnb%20report.pdf] [the Report], it was noted in Streitfeld, Airbnb Listings Mostly Illegal, New York State Contends [http://www.nytimes.com (October 15, 2014)] that “The report will say nearly three-quarters of all Airbnb rentals in the city are illegal, violating zoning or other laws. Commercial operators, not hard-luck residents, supply more than a third of the units and generate more than a third of the revenue. At least a handful of landlords are running what amounts to illegal hostels. Property owners on Airbnb are indeed making money, but it is not being spread around. Most rentals are in three high-profile Manhattan neighborhoods. Queens, the Bronx and Staten Island barely figure. Airbnb declined to aggressively dispute the numbers in the report, which draws on four years of data it provided to the attorney general after a court fight…

‘We need to move forward’ an Airbnb spokesman, Nick Papas, said.

‘We need to work together on some sensible rules that stop bad actors and protect regular people who simply want to share the home in which they live’…In some contentious spots, like San Francisco, where the local government endorsed a plan last week to essentially legalize Airbnb, a resolution may be in sight. But in New York, where real estate is often viewed as a blood spot, the battle is only deepening…’Anyone operating an illegal hotel should be on notice that the state and city will take aggressive enforcement actions in this area’, said Mr. Schneiderman. ‘A slick advertising campaign doesn’t change the fact that this is illegal activity’”.

The Airbnb Report

The Report is quite extensive and well worth a read. In the Introduction it is stated that “The rapid rise of short-term rental platforms like Airbnb have dramatically expanded the use of traditional apartments as transient hotel rooms-sparking a public debate in New York and in communities worldwide about the real-world consequences of this online marketplace. Where supporters of Airbnb and other rental sites see a catalyst for entrepreneurship, critics see a threat to the safety, affordability and residential character of local communities. Are the new platforms fueling a black market for unsafe hotels? By bidding up the price of apartments in popular areas, do short-term rental make metropolitan areas like New York City less affordable? Is the in-flux of out-of-town visitors upsetting the quiet of longstanding residential neighborhoods?”

“Private” Stays

“By analyzing Airbnb bookings for ‘private’ stays, this report presents a snapshot of short-term rentals in New York City from January 1, 2010 through June 2, 2014…Among the key findings: (1) Short-Term Rentals Experienced Explosive Growth…This year revenue to Airbnb and its hosts from private rentals in New York City is expected to exceed $282 million; (2)

Most Short-Term Rentals Booked in New York Violated the Law…State and local laws in New York-including the Multiple Dwelling Law and the New York City Administrative Code-prohibit certain short-term rentals. During the Review Period, 72 percent of units used as private short-term rentals on Airbnb appeared to violate these laws; (3) Commercial Users Accounted for a Disproportionate Share of Private Short-Term Rentals by Volume and Revenue. Ninety-four percent of Airbnb hosts offered at most two unique units during the Review Period. But the remaining six percent of hosts dominated the platform during the period, offering up to hundreds of unique units, accepting 36 percent of private short-term bookings and receiving $168 million, 37 percent of all host revenue. This report refers to these hosts as ‘Commercial Users’; (4) Top Commercial Users Employed Rental Platforms to Run Multimillion Dollar Short-Term Rental Businesses. Well over 100 Commercial Users each controlled 10 or more unique Airbnb units during the Review Period. Together these hosts accepted 47,103 private short-term reservations and earned $59.4 million in revenue; (5) Private Short-Term Rentals Displaced Long-Term Housing in Thousands of Apartments. In 2013, more than 4,600 unites were booked as short-term rentals through Airbnb for three months of the year or more. Of these, nearly 2,000 units were booked as short-term rentals for a cumulative total of half the year or more-rendering them largely unavailable for use by long-term residents; (6) Numerous Short-Term Rental Units Appeared to Serve as Illegal Hostels; (7) Gentrified or Rapidly Gentrifying Neighborhoods Primarily in Manhattan Accounted for the Vast Majority of Revenue from Private Short-Term Rentals in New York City. Bookings in just three Community Districts-the Lower East Side/Chinatown, Chelsea/Hell’s Kitchen and Greenwich Village/Soho-accounted for approximately $187 million in revenue to hosts”.

Need For Professional Operators?

In Alden, The Business Tycoons of Airbnb (www.nytimes.com (11/25/2014) there is an interesting discussion of the need for large operators to sustain Airbnb. “The so-called sharing economy is supposed to offer a new kind of capitalism, one where regular folks, enabled by efficient online platforms, can turn their fallow assets into cash machines. According to its fans, Airbnb, along with the car-sharing company, Uber, and others, is leading us into a less wasteful, more virtuous future…But the reality is that these markets also tend to attract a class of well-heeled professional operators, who outperform the amateurs-just like the rest of the economy…’There’s a certain amount of liquidity that these large sellers inject into a marketplace that can be very helpful for the marketplace to grow rapidly’…As (Attorney General) Schneiderman has put pressure on Airbnb, large operations have been disappearing from the site. But it still derives about one-third of its revenue in New York from users with three or more listings. And these Airbnb pros have taken up arms…a group of users (are suing) Airbnb to prevent it from handing over the information (about large operators to the Attorney General)”.

Conclusion

The travel sharing economy continues to have a disruptive impact upon traditional travel marketing concepts. Stay tuned.

The author, Justice Dickerson, been writing about Travel Law for 38 years including his annually-updated law books, Travel Law, Law Journal Press (2014), and Litigating International Torts in U.S. Courts, Thomson Reuters WestLaw (2014), and over 300 legal articles many of which are available at www.nycourts.gov/courts/9jd/taxcertatd.shtml .

This article may not be reproduced without the permission of Thomas A. Dickerson.