Airbnb is all the talk on Wall Street. Its thirty-something founders were nearly broke six years ago. Now it seems likely they will soon become billionaires. Their company connects 600,000 apartment and homeowners in 160 countries with millions of people, seeking cheap lodging online. On one night alone in 2013, Airbnb boasted 250,000 guests staying in its members’ apartments and houses. The home-sharing service is already approaching the worth of some of the biggest hotel chains in the world, including Hyatt Hotels and Wyndham Worldwide.
Sharing has meteoric impact
Airbnb owes its meteoric rise to a new phenomenon – near zero marginal costs – which is disrupting entire sectors of the global economy and giving rise to a new economic system riding alongside the conventional market. Marginal cost is the cost of producing an additional unit of a good or service once a business has its fixed costs in place. For businesses like Airbnb, that cost is extremely low.
It’s not difficult to see why the service has soared in value. For a traditional hotel chain to add another room to its inventory, the room must be built or acquired, at a significant cost. Airbnb can add another room to its inventory at almost no cost, since its website is already up and running.
Private enterprises have every incentive to reduce their marginal costs. Doing so means they can increase profits, offer goods and services at a lower price, or both. But now the internet and other innovations have reduced marginal costs to near zero for some commodities and services, which has left many traditional companies reeling.
An increasing rate of nervousness
The zero marginal cost phenomenon has sowed a path of destruction across the recording and information industries over the last decade, as millions of consumers began to produce and share music, video, news and knowledge with one another on the internet at near zero marginal cost. This phenomenon has weakened revenues in the music industry, newspaper and publishing fields, and the book publishing industry.
Now, as we are seeing with Airbnb, the phenomenon is crossing over from soft goods in virtual space to physical goods in the brick-and-mortar world. Airbnb is making the big global hotel chains nervous because it can connect hundreds of thousands of homeowners with millions of prospective lodgers online at near zero marginal cost. Apartment and homeowners, in turn, are able to rent their properties far more cheaply than conventional hotel chains can price their rooms because their fixed costs – mortgage payments, property taxes and the like – have already been absorbed. The big brick-and-mortar hotel chains, with their huge overhead and operating costs, simply can”t compete.
A recent survey showed that in New York City alone, the 416,000 Airbnb’ guests who stayed in apartments and houses between mid-2012 and mid-2013 cost the city’s hotel industry one million in lost room nights.
Consumers become producers
Hundreds of millions of people are already transferring parts of their economic lives to this new business model. They are making and sharing their own information, entertainment, green energy and 3D-printed products at near zero marginal cost. Besides homes, they are also sharing cars, clothes and other household items via social media sites, redistribution clubs and cooperatives at low or near zero marginal cost.
Nonprofit bike-sharing services are a good example of the new sharing economy. About 132 million bicycles were sold around the world in 2012, with revenues exceeding $33 billion. But now, an increasing number of young people are deciding they don’t need to own bikes; they are perfectly happy to have access to shared bikes, and pay only for the time they use them. As millennials shift from bike ownership to bike sharing services, revenues are likely to plummet in the bicycle manufacturing industry because more people will be sharing fewer bikes.
These kinds of phenomena are going to continue to spread in the years ahead. And as hundreds of millions of people shift large parts of their economic activity to the sharing economy, they will change the course of economic history.