06: Destination: Disruption

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Before hotels there was home sharing. Take a historical look at the hospitality industry from horse carriage inns to the personalized sharing economy.

It all started with an air mattress. It became a cultural phenomenon. But it wasn’t that Airbnb invented the home-sharing industry – far from it. Couch-surfing has been a thing for a long time, but even way, way before that, the ancient Greeks and their community spas offered a communal luxury space devoted to rest and relaxation. By the mid-19th Century, the Industrial Revolution led to the birth of the inn – rooms above bars on people’s horse-and-carriage paths between cities. And when railways came to pass, commutes became easier, and wealthy business travelers demanded giant, opulent hotels in hundreds of cities.

As the middle class proliferated, and the automobile became the dominant form of transportation, standardized, affordable hotels cropped up all over the post-war world. The Holiday Inn started a trend of clean, reasonably-priced accommodations that provided a consistent experience in any city. But while they were consistent and predictable, they were hardly interesting. They were in need of disruption, and the Internet helped lead the charge.

But what happens when the Internet moves into your neighborhood? Enter Airbnb. After floundering for three years and running thin of funding, Airbnb changed their messaging: They corrected market inefficiency and coined the “sharing economy.” It was revolutionary. It was counter-culture. Now, everyone can be a micro-entrepreneur… even without being a homeowner! With 800,000 rooms for rent in 89 countries, it forced the hotel industry to come up with new and exciting ways to provide experiences for discerning clientele. Where will the hospitality industry find itself in the next decade? Find out in this episode of Trailblazers.

“Airbnb [was] this completely fringe idea that no one– and I mean no one– thought would work, and grew to become this thing that just grew like wildfire, caught on like crazy with the consumer, and has disrupted the hotel industry and become, really, part of our cultural zeitgeist.”

LEIGH GALLAGHER, ASSISTANT MANAGING EDITOR OF FORTUNE MAGAZINE

What you’ll hear in this episode

  • Where did the “air” in “Airbnb” come from?
  • The worst idea that ever worked
  • Hospitality goes way back to its roots
  • Why cars and jets necessitated hotel standardization
  • Affordability and standardization in the post-war US
  • Can you tell a Hilton and Hyatt apart?
  • Finally, you can see a hotel before you check into it
  • What happens when the Internet moves into your neighborhood?
  • What people really need is a hole in their wall
  • Disruption doesn’t mean the old guard has to lose
  • Finding out where people go helps determine what they need
  • The future of hospitality

Guest List

  • Leigh Gallagher Is an editor at Fortune and the author of The Airbnb Story: How Three Ordinary Guys Disrupted an Industry, Made Billions…and Created Plenty of Controversy.
  • Jan Freitag Is the Senior Vice President with premier hotel benchmarking service STR.
  • Chekitan Dev Is a professor of marketing at Cornell University’s school of hotel administration.
  • George Corbin Is the former Senior Vice President for Digital at Marriott International. He is now the Chief Digital Customer Officer at Mars.
  • Alison Griswold Is a reporter for Quartz, covering the sharing economy. She formerly wrote for Slate and the Business Insider.

[MUSIC PLAYING]

WALTER ISAACSON: It’s 2007. And the city of San Francisco is going through a tech boom like few seen before. But we’re not at the top of some glass-and-steel skyscraper, or even in the unlit basement of a struggling startup. Instead, when the kitchen of a surprisingly glorious loft apartment of roommates and struggling design students, Brian Chesky and Joe Gebbia. And this morning, they’ve gathered at the kitchen table in an attempt to solve a major problem. The rent is due, and they don’t have it.

But what they do have is square footage. And they also know that one of the biggest design conferences of the year is coming to town and that there are more attendees than there are hotel rooms. Hotels are booked to capacity. While Chesky and Gebbia don’t have the rent to afford their massive apartment, they do have a lot of space to potentially rent out. This is the moment when they hit on the idea of building a website and offering up space in the loft that they can’t afford.

The offer is unique. It isn’t something that would tempt your typical hotel patron. Chesky and Gebbia will not be giving their guests their own washroom, or bedroom, or even a bed. All Chesky and Gebbia offer is floorspace and an air mattress. And if you haven’t guessed yet, that is where the “air” part of Airbnb comes from.

And the results were not really what anyone would consider a success. Chesky and Gebbia secure a total of three guests, earning less than a total of $240. In fact, it’s not clear if it was even enough to cover their rent that month.

However, Chesky and Gebbia are convinced that they’re onto something. And that something, Airbnb, is about to fundamentally disrupt the hotel business in ways that will change it forever. Just how their idea goes from failure to the future of the hotel industry is what we’re about to discover.

I’m Walter Isaacson. And this is “Trailblazers,” an original podcast by Dell Technologies.

[DING]

[MUSIC PLAYING]

ANNOUNCER 1: You can be sure that we’re ready to serve you.

ANNOUNCER 2: A magic vacationland for everybody.

ANNOUNCER 3: It puts you within minutes of the places you want to go.

ANNOUNCER 4: Above all, courtesy, promptness, and a big smile.

ANNOUNCER 5: This resort hotel is a facet of American enterprise.

[MUSIC PLAYING]

WALTER ISAACSON: Joining companies like Google, Xerox, or Uber, Airbnb has achieved the mythic status that only the world’s most disruptive companies have reached. It has become a verb. Leigh Gallagher is the assistant managing editor of Fortune magazine. She found the story so intriguing that she wrote a book about it. It’s called The Airbnb Story.

LEIGH GALLAGHER: In Airbnb, I saw this incredibly disruptive social, business, and cultural phenomenon that just started as this completely fringe idea that no one– and I mean no one– thought would work, and grew to become this thing that just grew like wildfire, caught on like crazy with the consumer, and has disrupted the hotel industry and become, really, part of our cultural zeitgeist.

WALTER ISAACSON: The story of Airbnb’s success is particularly intriguing because it wasn’t the first digital booking service. By 2007, websites like CouchSurfer and others were already up and running. And the concept of home-sharing, something your great-aunt might have called “taking in boarders,” isn’t all that revolutionary. Just listen to Brian Chesky, Airbnb’s co-founder, speaking at an Aspen Institute event.

BRIAN CHESKY: I think Airbnb maybe set the record for the worst idea that ever worked. And it was because people said, well, why would a stranger ever want to stay in your home? And the reason I’m saying all this is because of a conversation I had with my late grandfather before he died. He said, well, I used to do this when I was a kid. I said, well, what does that mean? He said, well, Brian, when I was a kid, I used to stay in boardinghouses. And as I started realizing this, like, we’re like either we get credit for or get accused of being a disruptor. And I like to think that, like, well, maybe hotels disrupted what we were doing in the first place. So I don’t think that what we’re doing is massively taking the world into a place that’s never been to before.

WALTER ISAACSON: Jan Freitag, senior vice president with premier hotel benchmarking service STR. Puts it this way.

JAN FREITAG: You could argue that, when Mary and Joseph didn’t find a place in a hotel, they went to somebody offering them alternative accommodations. So this has been around for quite a while.

WALTER ISAACSON: What did Chesky and Gebbia do that made Airbnb take off when others failed? What was their unique spin on an ancient service that caused so much disruption? The answer lies in Chesky and Gebbia’s use of innovation, perseverance, digital technology, anticipating the needs of the market, and one key factor that was totally beyond their control, timing. To understand how all these stars became aligned, we’re going to need to go back to the beginning of the hotel industry. And that’s a long way back, not 100 years, or even 1,000, but back to the very dawn of civilization.

Leave it to the Greeks to have invented the idea of the luxury hotel. They were the first to create facilities combining accommodation, hospitality, and luxury. The elite of Greek society, and later Roman culture too, would spend days in thermal baths, dedicating themselves to rest and recuperation, all with a fee. The legacy of these Byzantine vacations can still be seen today, inspiring all-inclusive resort vacation companies like Club Med and Beaches.

But what we in the West tend to think of as a hotel began around the mid-nineteenth century as a direct result of the Industrial Revolution. Before the Industrial Revolution, the most common type of rental accommodation was the inn. Most offered just a couple of rooms above a bar. They were stopping points for those traveling by horse and carriage.

[HORSE HOOVES CLOPPING]

The luxury level for the humans was usually on a par with what was offered to the horses.

The modern hotel was birthed by the Industrial Revolution with transportation technology exploding. Railways and steam engines meant that it no longer took weeks to get from city to city, but only days, sometimes only hours. This was a boon to business travelers, who can now easily commute between cities in pursuit of commerce. Just like today, the wealthy business travelers of the 1900s liked to live large. And their passion for luxury led to the creation of the grand hotels like the Waldorf Astoria in New York. Giant, opulent buildings with hundreds of rooms and lobbies that created the concept of the wow factor, these hotels weren’t merely a place to sleep overnight, they were places to see and be seen. Merely booking a room demonstrated your position on the top tier of society.

Hotel industry expert Jan Freitag.

JAN FREITAG: Those types of properties, they have always prided themselves at their food and beverage offerings, at the hotel bars. I mean, if you think about the original W Hotel bars in New York City, people stayed in the hotel just to get into the bar.

WALTER ISAACSON: Right up to the 1930s, these grand hotels prospered. Eventually, a handful of these grand hotels ended up being purchased by single owners, creating the first hotel chains. And that’s pretty much the way things stayed until the 1940s and the hotel industry’s next great disruption.

This one would also be provoked by a technological innovation in travel. But it wasn’t a train this time. It was the automobile—

[CARS PASS]

–and the jet.

[JET ENGINE ROARS]

The war was over, and veterans returning home brought with them a desire for travel. At the same time, the price of both airline tickets and cars were getting cheaper and cheaper. And suddenly, a whole new demographic emerged as a customer for hotels, the middle class. And they came with a whole different set of needs. They were not so interested in marble floors and fancy bars. Their main desire, affordability. Fortune magazine’s Leigh Gallagher.

LEIGH GALLAGHER: The first disruption in the hotel industry was the chain motel, the roadside motel. And that was Holiday Inn in the 1950s.

ANNOUNCER 6: Every three days, a brand new Holiday Inn opens up.

LEIGH GALLAGHER: And the notion there was that there were all these big hotels. But we’re going to be affordable. Every room is going to be exactly the same. And people, families, who are on road trips, because the car was new, are going to have a place to park and stay for the night that’s affordable.

WALTER ISAACSON: But as well as affordability, the middle class traveler also demanded the comforts of home. And they wanted to get it everywhere they went.

Professor Chekitan Dev teaches marketing at Cornell University.

CHEKITAN DEV: Even though the city outside the hotel might have been different and unique and exciting, within the hotel’s boundaries, they wanted the service experience to be quite predictable. They wanted the hot water, or they wanted the water pressure. They wanted the ice. They wanted the cold water, wanted things done on time.

WALTER ISAACSON: The middle class traveler ushered in the era of standardization. Soap is individually wrapped. And lobbies in different cities are designed to be almost identical.

In his 1997 memoir, The King of Standardization, J.W. Marriott wrote this.

J.W. MARRIOTT: When I say that the company’s prosperity rests on such things as our 66 Steps to Clean a Room Manual, I am not exaggerating.

WALTER ISAACSON: The grand hotels were completely disrupted. Luxury was out. Clean affordability was in. Hotel chains got larger and larger because they offered the middle-class traveler exactly what they wanted, predictability.

This trend only accelerated in the 1970s, when computer systems began to enable sophisticated reservation systems. Suddenly, the day-to-day business of running a hotel was completely separated from the ownership. To make sure that each hotel in the chain offered the same level of quality, management leaned hard on protocols and standardization. Chekitan Dev calls it—

CHEKITAN DEV: The industrialization of hospitality. That is, we started from 50 years ago kind of a mom-and-pop, single owner-operator business for the most part, to large companies with multiple brands. So it became a lot more clinical, a lot more financial, a lot more analytical. And in that process, I think in the process of industrialization of hospitality, we perhaps lost a little bit of the magic that makes this industry special.

WALTER ISAACSON: What Professor Dev calls the industrialization of hospitality could also be described as cookie-cutter blandness. Unless you read the name branded on top of the building, it could sometimes be hard to tell a Hilton from a Hyatt.

CHEKITAN DEV: When you think of the typical, stereotypical, cliched hotel experience, you think of kind of a bland, boxy, and boring building. Yes, consistent, yes, homogeneous, yes, predictable, but not that interesting, and not that exciting.

[KEY IN LOCK]

WALTER ISAACSON: And then along came the 1980s and a huge rebellion that sent all the blandness scrambling. It’s time for another disruption in the hotel industry, prompted by the changing needs of the customer. This time, it’s conformity that has grown tiresome. The public wants something new. And this desire gives rise to the boutique hotel. Fortune magazine’s Leigh Gallagher.

LEIGH GALLAGHER: These were kind of living-room-style lobbies and high-designed everything. And we’re used to them now. But at the time, the hotel industry laughed at that concept. They said, this is crazy. This is never going to take off.

WALTER ISAACSON: The boutique hotel could easily have played itself out as little more than a design trend. But it transformed into full-on disruption when once again, the changing needs of the customer made a technological revolution.

[DIAL-UP INTERNET CONNECTING]

Jump to the 1990s and the internet going mainstream. Customers can see potential rooms and lobbies online. They can compare every hotel in the city and read a heap-load of customer reviews on those hotels long before making their reservation. The desire for conformity is all but eliminated because, for the first time, guests know exactly what to expect before setting foot in a lobby. Uniqueness becomes the new standard. Cornell professor Chekitan Dev.

CHEKITAN DEV: And not only do they want a unique experience outside the hotel to be in new and interesting places, but be inside the hotel, they want to feel like they’re part of that locality, part of that community, part of that local experience.

WALTER ISAACSON: The quest for uniqueness drives the hotel industry right until the turn of the 21st century, as the general population becomes more comfortable doing things online. And it’s right around here that Airbnb founders Brian Chesky and Joe Gebbia are sitting down at their kitchen table, trying to figure out how to come up with rent. The time is right for another disruption of the hotel industry. Brian Chesky puts it this way.

BRIAN CHESKY: And the idea was, what if the internet moved into your neighborhood? And that’s what this is. It’s the internet moving into your neighborhood. And what it really means is that people, for the first time, can become micro-entrepreneurs. They can actually build a reputation. And they can offer goods and services.

WALTER ISAACSON: But despite these good intentions, Airbnb had a surprisingly difficult time making a go of it. Back in the early 2000s, nobody thought Airbnb was anything other than a great big hole to throw your money down. Fortune’s Leigh Gallagher.

LEIGH GALLAGHER: They did a bare-bones version of AirBed and Breakfast to launch at South by Southwest in 2008. And nothing happened. They launched it three different times. They couldn’t get traction. They worked for a whole year, and they basically got no business.

WALTER ISAACSON: Chesky and Gebbia couldn’t find anyone willing to put money into this new venture, because to a lot of people, the underlying concept behind Airbnb didn’t seem all that new.

LEIGH GALLAGHER: Home-sharing has been around for a long time. It wasn’t necessarily called that. It was called vacation rentals. But it is not a new business. No one would even meet with them, let alone invest in them. And so it sort of began this journey of trying to get people to buy into this idea. And no one would. They ran out of money. Joe and Brian each ran up a credit card debt to the tune of $30,000. They just kept at it.

WALTER ISAACSON: So what did Chesky and Gebbia do to turn Airbnb from a flop into a company valued at over $30 billion? It wasn’t so much that they changed their service. Instead, they changed their message. Brian Chesky.

BRIAN CHESKY: There’s a study that was shown in the United States that the average power drill, I think, was used 13 minutes in its lifetime. And there are 80 million power drills. What the hell? Every neighbor has a power drill. Why can’t they just share? And maybe, it turns out, what people need aren’t power drills. They just need a hole in their wall. So maybe, instead of sharing power drills, the best thing to do is have a service where you press a button if you need a hole in your wall, and someone comes over and they take care of it for you. And if that person has a reputation and you can get it on demand with a click of a button, suddenly, the society could be much more efficient.

WALTER ISAACSON: It was with this idea, the notion of participating in the sharing economy, that things finally clicked with Airbnb’s target market, and not just sharing unused resources, but sharing experiences as well. Leigh Gallagher.

LEIGH GALLAGHER: Airbnb, it really popularized this notion of sharing the space while both parties are present. Typically, you’d rent someone’s vacation home, and that was it. You just got the whole place to yourself. But this notion of sharing a home while you’re there was very new and very disruptive. And that, incidentally, is one reason why every investor ran screaming from it. They thought that was crazy. People are going to kill each other. It’s never going to work.

WALTER ISAACSON: This message, a focus on community, resonates strongly with the millennials. They’re tech savvy. They live online. And they’re hungry for one thing above all else, authenticity. The concept of a cookie-cutter hotel room horrifies them. Paying outrageous fees to stay at some overly designed boutique hotel seems contrived. With Airbnb, Chesky and Gebbia gave millennials what they didn’t even know they’re looking for, a hotel experience so authentic, it isn’t even a hotel. Leigh Gallagher.

LEIGH GALLAGHER: So all of these forces came together. And they spoke in particular very strongly to millennials, which was, as we know, an enormous market that at the time, it was as yet unclaimed by the hotel industry.

WALTER ISAACSON: To the customers of Airbnb, it isn’t just a pitch campaign, it’s a revolution.

LEIGH GALLAGHER: You were joining this sort of movement, this sort of counterculture thing. It wasn’t just that you were renting a space. The idea was that you would be renting a space from someone, and you would get to know that person. And it was sort of this notion of bringing people together. And their early motto was, “Travel Like a Human.”

WALTER ISAACSON: For better or worse, everyone can now become a hotelier. You don’t need a concierge or cleaning staff. You don’t even need a hotel. You don’t even need to be a homeowner. Even if the only claim you have in the real estate market is the two-bedroom you’re renting, you can monetize your home.

LEIGH GALLAGHER: So that was one of the truly disruptive things about it. And that was one of the things that was the most threatening to the hotel business. Because for all of the castles and igloos and windmills and the fanciful listings that are on Airbnb, most of the inventory is one- and two-bedroom apartments in cities.

WALTER ISAACSON: Lots of cool people wanting an authentic experience and lots of cool spaces for them to rent– the conditions were perfect. Airbnb explodes. By 2010, only three years after offering floorspace and air mattresses, Airbnb booked over 800,000 rooms in 89 countries. In 2011, with investments from Amazon founder Jeff Bezos and Ashton Kutcher, Airbnb hits unicorn status– that means a billion-dollar valuation– all from a website built around the idea that letting strangers into your home is a good idea.

To the legacy hotel industry, Airbnb represents a massive disruption in how they do business. Airbnb co-founder Brian Chesky, however, sees it slightly differently.

BRIAN CHESKY: In Silicon Valley, to be disruptive means you’re changing the world. Outside of Silicon Valley, to be disruptive means you’re changing the way I live my life. And I actually kind of like my life. And I think if we’re labeled as disruptors outside of the Valley, where the term really matters, I think we are viewed as a company where suddenly, the old guard has to lose, and suddenly, there aren’t going to be any hotels in the future. And then suddenly, neighborhoods are going to get turned upside down. And all of these horrible associations happen when you start to think about disruption. And it’s kind of exciting from a narrative of technology, like changing the nature of cities. But I like to think that if we are disruptive to the way the world is, that’s only because that world was disruptive to the world before that.

WALTER ISAACSON: Regardless of whether Chesky sees Airbnb as a disruption or not, for the legacy hotel chains, it has certainly changed the way they see their business. But given the enormity of the challenge in front of them, how can these hotels fight back? To stay competitive, the hotel industry is borrowing a page from Airbnb and trying to make their institutional offerings more personal. George Corbin is a senior vice-president for digital at Marriott International.

GEORGE CORBIN: When you look at the innovation agenda, a lot of it has to do with what do we do to adapt ourselves and adapt the things that we’re doing to interact with customers, to serve them better on property, to be there and be more personalized for them. WALTER ISAACSON: Not only are they trying to personalize the experience for their customers, but they’re constantly trying to innovate on ways to make their customers’ stays more convenient too.

GEORGE CORBIN: So we start with the customer. And essentially, we ask them, what is it that you’re trying to get done? And it’s not about asking them, what features do you want, it’s figuring out, what it is? Where are the pain points? What are they trying to get done? And then figuring out what is the best way to solve for that.

So if you look just at the app, for instance, it certainly has those things about booking. But it has the other things that we have found are vital to building the strongest relationship with our customers. So that can be things like getting room upgrades. It is the mobile check-in. mobile checkout, the ability to do a service request, the ability to do very localized, real-time messaging wherever you are in the hotel. You have to be smarter about your customer and give them what they need at the time that they need it.

WALTER ISAACSON: Marriott has been focusing on expanding and improving a value that’s been at the core of the hotel industry right from the time of Greek spas, hospitality. And they’re using another technological revolution to do it, beacons.

[CHIME]

GEORGE CORBIN: Beacons are things that can detect where you are. It’s all about pinpointing what is it that the customer most needs at each moment along their journey, and being able to give it to them. I mean, look, it used to be we didn’t actually know anything about you until you walked into the lobby. But now, we can compile that information across multiple stays to develop a fuller picture of who you are, and what your interests are, and what the things are that you need. And that way, each stay gets better.

WALTER ISAACSON: In order to compete with Airbnb, hotels have even changed their actual bricks-and-mortar. Lobbies, which were once designed to either inspire awe or confidence, are now thought of as social hubs. Jan Freitag.

JAN FREITAG: You know, in the 1960s, the lobby was a place where you went from the door to the front desk. And that was it. Right? Today, lobbies are places where you hang out. Free Wi-Fi, you have a coffee shop. You maybe have a bar. And it’s a place where people hang and connect.

WALTER ISAACSON: But the battle between the hotel industry and Airbnb isn’t really a fight about lobbies or hospitality. It’s about market share. Millennials may have embraced Airbnb. But the business community has been more hesitant. And, as it’s been right from the start, the wealthy traveler is a big part of the market.

Alison Griswold covers the sharing economy for Quartz.

ALISON GRISWOLD: You know, if you’re staying in a hotel, you know the fire code is up to standard, and there’s probably a carbon monoxide detector. And if you needed to get out, there is a very laid-out staircase plan. And you don’t get those things in an Airbnb, because it’s someone’s home. And Airbnb isn’t going around making sure that every room that appears on its platform is up to code.

WALTER ISAACSON: Airbnb cannot guarantee that the Wi-Fi is working, or that the neighbors turn off their stereo at 2:00 in the morning. Many travelers still prefer the dependability of a hotel. It’s possible that traditional hotels and Airbnb can exist side-by-side, offering the same service in different ways. Millennials could also lose their appetite for renting rooms in other people’s homes. Jan Freitag.

JAN FREITAG: Airbnb is very, very attractive to millennial customers. And it’s to be very, very interesting to note if, as they grow up and as they get their first, second, third job, will they ever venture outside that app to the standard hotel apps and make reservations on the standard hotel apps? Or will they just live within that Airbnb ecosystem? Ask me in 10 years, and then maybe I’ll be able to see.

WALTER ISAACSON: Airbnb could also change as a company. Most large corporations do. Marriott International, the largest hotel company in the world, which celebrates their 90th birthday this year, started out as a root beer stand. And Brian Chesky recently announced that Airbnb is going to expand into a market called Experiences, where people get to help travelers have a unique experience in the hometown they’re visiting.

Most likely, the future will be something no one sees coming, just as few predicted that the Industrial Revolution would prompt the creation of The Waldorf, or that the automobile would prompt the creation of the Holiday Inn chain. The history of the hotel industry is a sequence of disruptions. Who knows how long it will be before another technological revolution comes along and disrupts it again? The only real certainty is something will.

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I’m Walter Isaacson, and you’ve been listening to Trailblazers, an original podcast from Dell Technologies. If you want to find out more about the ways the hotel industry is turning to digital technology to create personalized guest experiences, be sure to visit delltechnologies.com/trailblazers6. That’s Trailblazers and the number six. You can subscribe to the show on Apple Podcasts or wherever you get your podcasts. And if you like, please leave us a rating and a review. We’d appreciate it. Thanks for listening.

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