Airbnb and Uber Face Some Harsh Realities

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Could A Nobel Prize-Winning Innovation Have Almost Been Overlooked By Silicon Valley?

Airbnb and Uber are maturing startups both facing some hard realities as they grow. While they have found a loyal and happy user base, they are facing tough resistance from not just the taxi and hotel industries they are disrupting, but also political and social resistance from quarters they probably never imagined when they started their businesses.

In Europe and the US we are beginning to see a backlash against the sharing economy idea. For Uber, this means fighting the existing taxi industry and its government backers. The prevailing argument is that Uber drivers aren’t regulated like taxis and it creates an unfair advantage. Meanwhile Airbnb has been accused of undermining laws related to hotels and rental agreements. It has reached the point where the two companies can’t simply pretend they are casual startups trying to launch a new kind of business. There’s far too much at stake now with their huge valuations and billions in venture capital –and these political and social elements could be beginning to catch up with them.

Just last week for instance, San Francisco floated some changes to proposed rules surrounding Airbnb rentals and a group of housing activists who are tired of seeing apartments converted into long-term Airbnb rentals aren’t happy about it. In fact, last night the board of supervisors voted on the initiative to make Airbnb official in its home city with some regulations designed primarily to prevent people from using their apartments and houses as permanent rentals –along with other controls such as Airbnb hosts registering with the city for a $50 fee. Airbnb was created as a way to rent out an extra room or even your house or apartment during times you weren’t there, but over time it has morphed into more than that, and now some people see bigger profits using their properties for short-term rentals using the Airbnb platform. In a tight housing market like San Francisco’s this is making people understandably cranky.

Meanwhile, Uber, which offers a creative alternative to traditional taxi service by eliminating the dispatcher and allowing Uber users to find drivers close by using their smartphones, has run into a labor problem it might not have considered. Last week, reports surfaced that a coordinated driver protest is being planned for New York, San Francisco and London. Apparently some drivers aren’t happy about temporary 20 percent UberX price cuts being made permanent and they are flexing their collective labor muscles.

This is aside from the fact the Uber drivers have been beat up in Paris, France has adopted legislation to make it difficult for services like Uber by forcing them to wait 15 minutes before picking people up, German courts keep blocking and unblocking it and traditional taxi services go ballistic every time the company tries to make a foothold in a new city.

Airbnb has also faced legal hurdles as some cities block them altogether as illegal hotels and others have at least looked at them dubiously as they try to take hold. These services both came in and provided a way to take advantage of social, mobile and the cloud and blow up existing industries. They gave the people what they wanted, and they have thrived, but as they grow, they run into more and more obstacles and they can’t live in a start-up bubble anymore.


Both of these companies have to face the harsh political and social realities of disruptive change. They are stepping on toes and in cases like Airbnb’s permanent rental situation, they are experiencing first-hand the law of unintended consequences. Surely providing a platform for people to rent out unused space is one thing, but when people begin to take advantage of it as a permanent business model, it changes the dynamic completely, and when you mix this with a volatile housing situation you begin to see that it’s not just about the basic idea anymore. At some point, you have to deal with these other issue too.

I was in San Francisco recently and I made use of traditional taxis and Uber. The taxi drivers were feeling squeezed by Uber’s pricing while their prices were fixed and they couldn’t compete head on. Uber drivers on the other hand seemed to be doing it for the most part for extra money, driving for 4 or 5 hours after finishing a full time job. One guy I met was a former taxi driver and he said the Uber model of passengers finding him beat scanning the sidewalks for his next fare.

In other words, Uber drivers seemed satisfied, but every company faces labor issues sooner or later, but I’m sure Uber just never expected it to happen so quickly. They are trying promotions to help the business grow, but as they make decisions like price cuts, they are learning that they are no longer making them in a vacuum. They have drivers who want a say and it’s probably fair to say management hadn’t considered that when they made the decision to make the price cuts permanent.

But Uber hasn’t done itself any favors either as recent news reports have suggested that Uber is playing nasty games in San Francisco with its rival Lyft where the company hired contractors armed with burner phones and credit cards to call Lyft and then recruit its drivers. What’s more, Lyft accused Uber of requesting and canceling rides. For a company facing serious political problems, acting like a bully is not the smartest business approach.


The two businesses have obviously hit a nerve though and that’s likely because they’re starting to be more than an irritant to established businesses in each of their industries. Uber has received $1.5B in funding so far on an otherworldly valuation of $17B. Whether that number is right or not is subject to debate, but if you believe one number tossed out there, the total available worldwide taxi/limo market is valued at $100B. That means that Uber is already at 17 percent of that number in terms of its projected valuation.

These are all sake-of-argument numbers, mind you, but you can see when you combine Uber with a few other similar services with much smaller market shares, you could be getting to the point where you are making the traditional taxi and limo industry extremely nervous. Then consider the fact some people believe the market has far more potential than the existing one because disruptive business models by their nature tend to grow the market by bringing in more people through simplification and lower cost. That means the overall market potential could be even greater and services like Uber are in a good position to grab chunks of it, traditional taxis, not so much.

Airbnb meanwhile has raised in the neighborhood of $795M and reportedly has a valuation of around $10B, not quite as hot as Uber, but consider that according to a Fast Company article from earlier this year, the company “boasts 550,000 listings in 192 countries, and will soon surpass the InterContinental Hotels Group and Hilton Worldwide as the world’s largest hotel chain.” Again, you can see how that might get the hotel owners’ attention.

It’s also worth noting that Uber is most popular in San Francisco where there is a large population with disposable income who can afford to use car services like this. What happens to Uber if the bubble bursts as many have been predicting lately? Will that have an impact on Uber’s bottom line? If there is a general worldwide recession due to macro factors, what impact will that have on Uber?

Airbnb is more insulated from these types of economic fluctuations because as one Silicon Valley insider told me recently, the model works in a good economy or a bad one. And this person believed that Airbnb might have a brighter future because of this.


Regardless, the fact is I’ve used both these services and they are undeniably convenient and my feeling is they should be given space to grow if for no other reason than they are so popular with users who love these services. But over time as we observe how these types of services work, there will have to be guidelines. They don’t have to be punitive like Germany or France, but they will need guard rails eventually and governments will have to strike the right balance between protecting the public and letting these companies grow.

One thing is clear, they should not be regulated strictly for the purpose of protecting an established industry, which seems to be the case in Europe. Instead, they should be regulated in reasonable ways to provide consumer protection with the understanding that you don’t want to stifle what’s good about them. The Airbnb rules passed by the city of San Francisco last night are a good starting point as a model for other cities to follow.

Both of these start-up companies are operating in increasingly hostile environments and they have to come to grips with that. They are learning that it’s one thing to come up with a great idea and it’s wonderful when funders and users reinforce how great that idea is, but as they experience great success, it’s not a simple matter of just running your business anymore. There are so many more external issues to take into consideration and these companies are facing these harsh realities right now. How they deal with them could help determine their long-term success because companies and people are not measured by the good times, they are measured by how they react to hostility and challenges and these companies are being tested in a big way right now.

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