MBA Professors Weigh In - How The Safety of Airbnbs Affects The Company

Five people were shot and killed in cold blood on Halloween night, October 31, 2019. All massacres are horrific, but these murders especially shocked observers because they hardly took place in back alleys buried deep inside the worst parts of big cities.

Instead, the shots rang out from a house in Orinda, California—a wealthy, privileged suburban enclave 18 miles east of San Francisco, in an area associated with many famous celebrities. NBC News anchor Nicole Wallace grew up in Orinda, and the chairman of the board of Hewlett-Packard, Patricia Dunn, owned a home there. Yelp.com founder Jeremy Stoppelman and Olympic figure skating gold medalist Kristi Yamaguchi live in ritzy neighborhoods just south of town.

So what brought the killers there? A roaring “mansion party” promoted via social media was underway at a house booked through Airbnb. Many of our BSchools readers and editors alike have stayed at accommodations provided by this $31 billion home-sharing behemoth gearing up for its Wall Street initial public offering—and it’s a firm that’s lately been the focus of remarks by several business school professors.

Read on to discover whether, following the murders, Airbnb might suffer the same catastrophic fate as WeWork, which imploded only days before the shootings in Orinda.

Shootings Across the Continent

Along with four other gunshot injuries, the killings took place at an out-of-control Airbnb “party house.” When police arrived on the scene, they found more than 100 partygoers fleeing outside and scrambling for cover (KGO TV video report).

The absentee landlord who wasn’t present at the time, Michael Wang, defended his rental decision to the San Francisco Chronicle this way: “Airbnb does not release the customer information before they really book, so we have no way to know [their intentions].” But this wasn’t the first such party booked via Airbnb at Wang’s house. Orinda’s city manager and police had previously imposed conditions on Wang’s use of the dwelling, including a 13-person guest limit, no noise—and no more parties.

Furthermore, that was by no means the only killing or shooting that occurred across North America at an Airbnb property late in 2019:

• On December 15, gunfire erupted at another house party attended by 200 people in Baldwin County, Alabama, adjacent to Pensacola, Florida. A 21-year-old woman was shot and killed at this event.
• On December 5, a woman was shot after at least 55 rounds were fired during a party at an Airbnb rental in Portland.
• About 15 young adults between 18 and 25 years old were inside an Airbnb house in Philadelphia when a gunman fired more than 20 shots into the building on December 18. After being shot several times in his arm and upper torso, one victim ended up hospitalized in critical condition. Those inside told police they had rented the property “to hang out.”
• In Toronto on December 14, yet another roaring Airbnb house party ended in gunfire at 3:33 AM, resulting in bullet holes and gunshot damage to both the party house and an adjacent property.

The Wall Street Journal’s Scathing Report

The Wall Street Journal was instrumental in protecting future investors and employees from WeWork. In that instance, the Journal published the results of their investigation that disclosed how founder Adam Neumann was using illegal drugs aboard a private jet owned by WeWork during international flights, as well as engaging in other reckless activities that reflected poorly on his ability to lead.

On the day after Christmas in 2019, the Journal published results from another investigation. In a scathing article written by Kirsten Grind and Shane Shifflett, this time the Journal aimed their investigative big-data firepower directly at Airbnb:

. . .the Journal looked at data from several cities that require short-term rental licenses, then cross-checked those addresses against police records. There were hundreds of instances of crimes at licensed short-term rental properties on platforms such as Airbnb, including burglaries, sexual assaults and murders. Some occurred at properties that had been subject to previous police activity, or involved individuals with prior police records.

In Minnetonka, Minn., Airbnb guest Derrick Kinchen climbed into bed with the 7-year-old daughter of the Airbnb family hosting him in September 2017, according to the Hennepin County Attorney’s Office. The girl’s father walked in to find the girl’s nightgown pulled up and Mr. Kinchen lying next to her naked and aroused. The father immediately called the police. Mr. Kinchen was charged with second-degree criminal sexual conduct of a victim under 13.

Mr. Kinchen had an extensive criminal record over the prior decade, including at least four misdemeanor convictions for false reports to authority, drug possession and stealing, records show. He pleaded guilty last year in the Airbnb case, court records show.

Airbnb’s Safety Record in Perspective

Some readers initially criticized the Journal’s report because it didn’t compare the death and injury statistics that Airbnb reported with similar statistics from other industries, and especially with hotel industry data. Fortunately, here at BSchools, accurate comparison data wasn’t difficult for us to locate.

From 2004 to 2008, each year on average 7,840 violent crimes occurred in hotel and motel rooms in the United States. Furthermore, on average, about 4.8 million people stay in a U.S. hotel or motel on any given night. That works out to 1.752 billion guests each year.

Time for some quick finite math: What is the probability of a guest’s exposure to a violent crime in a U.S. hotel or motel room in a given night? At first, that might seem like a small value:

• 0.00000447488584 (or 0.000447488584 percent)

Now, Airbnb downplays the risk to guests at their properties. The company claims 0.05 percent of trips had a serious incident during the past 12 months: a safety-related issue reported by a guest or a host.

Although that “safety-related issue” phrase doesn’t necessarily mean “violent crimes,” corporations frequently use euphemisms like these when they equate to worst-case scenarios. And this corporation, Airbnb, wants to spin the data as favorably as possible in advance of its upcoming IPO.

That percentage doesn’t sound large—until one pulls out a calculator app. We can use a little statistical inference to draw a few conclusions:

1. If two million people stay at an Airbnb property each night, as the company claims, that means 1,000 serious safety-related incidents kill or injure an Airbnb guest, each night, somewhere around the world.
2. In other words, a guest’s probability of ending up a victim of violent crime at an Airbnb property is 111.73 times greater than their chance of ending up a violent crime victim at a United States hotel or motel.

No, that’s not a misprint by any means. That is almost 112 times more violent than a typical Four Seasons, Marriott, Sofitel, Hilton, or even a Motel 6.

1. Analysts often compare safety statistics to the United States airline industry, which is generally considered to be the “gold standard” for world commercial aviation safety.

The Federal Aviation Administration typically handles about 16.1 million flights each year, and every day on average, 2.79 million passengers fly in and out of U.S. airports.

However, during the past ten years, only one person has died while aboard a commercial flight in the United States. That happened during the tragic case when a detached turbofan blade knocked a piece of engine cowling through the window of Southwest Airlines Flight 1380 in April 2018. That Boeing 737-700 made a safe single-engine emergency landing in Philadelphia but one passenger seated next to that window, who was partially sucked outside the fuselage, died from blunt-force trauma.

Now, compare that record with Airbnb’s. In just the last two months of 2019, and in North America alone, at least six people are known to have died because of injuries suffered at an Airbnb property and another six have been seriously or critically injured. At this rate, before the historic impact of the Coronavirus on bookings, Airbnb was on track for its guests to suffer 72 preventable deaths or serious injuries at its North American properties during 2020.

Airbnb’s Years of Safety and Security Neglect

However, there are other disturbing aspects to Airbnb’s safety record uncovered by the Journal’s investigation.

Since Airbnb launched in 2008, its top management has more than once—and most recently in 2017—dismissed proposals from the company’s trust and safety team that would require valid government identification cards like drivers’ licenses for all guests. Airbnb dismissed those proposals even though that remains a universal practice throughout the hotel industry in the United States.

“From the start, the team butted up against employees in charge of expanding the company, according to some former employees. It unsuccessfully fought for more frequent and stringent background checks,” noted the Journal’s writers.

And what’s especially alarming is that Brian Chesky, the company’s billionaire CEO and a co-founder, was among those who voted down the policy change.

People familiar with the conversations told the Journal that the company had studied the issue but found that some users would stop signing up if asked to produce a valid government ID like a driver’s license. One executive pointed out that requiring such IDs would exclude members who don’t have them, like people from developing nations. The article did not say how much revenue the company expected to lose by excluding a fraction of members in third-world countries.

“The way Airbnb handles problems on its platform is likely to be a focus for investors and regulators as the company prepares to go public,” warned Grind and Shifflett. And with an IPO looming, other experts have started to sound alarms about the 11-year old firm’s neglect of safety and security as well.

Renaissance Capital is a company focused on pre-IPO research. Principal Kathleen Smith told Fortune that “now there’s the scrutiny of the public markets, but they’ve been in business for a long time. That they haven’t done this so far is. . .astounding.”

Shielding Airbnb’s “Platform” Under Section 230

The day after the Journal ran its expose on Airbnb, it landed another staggering blow against the company. This time, the focus involved not only how firms like Airbnb but also Facebook, YouTube, Uber, Lyft, food vendor Beyond Meat, exercise bike manufacturer Peloton and even the discredited WeWork—really a real estate arbitrage firm having little to do with online services—all claimed to be online “platforms.”

The reason that lawyers for all these companies instruct client executives to argue so aggressively to convince everyone that they’re online Internet “platforms,” even when doing so stretches credulity to a laughable breaking point, is simple. Online platforms can shield their operations under Section 230 of the Communications Decency Act, meaning that these companies can escape tremendous dimensions of legal accountability, responsibility—and costs.

This anachronistic law was originally enacted to encourage and protect fragile online startups at a time when nobody knew whether e-commerce would work on the Internet. The “magic language” of §230 contains the following 26 words:

No provider or user of an interactive computer service shall be treated as the publisher or speaker of any information provided by another information content provider.

For nearly a quarter of a century, §230 has enabled firms like Airbnb to play by an easier set of legal rules that non-§230 firms—including many content providers and old economy brick-and-mortar businesses—must labor under. Shielded from the costly legal obligations born during the old economy, §230 firms could also capitalize on the all-important network effects that brought them tremendous growth with virtually no additional costs.

Now, it becomes apparent why Airbnb has operated privately for more than a decade without a safety-focused culture that insisted on even the most rudimentary security standards, like driver’s license identification for property guests. If one night five people get shot and killed at a property booked through Airbnb, the corporation can claim that it is “just a platform,” meaning that §230 renders Airbnb harmless from legal responsibility.

In the wrongful death suits following the Orinda massacre, with elite lawyers the victims’ families might win against the party organizers, or Mr. Wang, or the City of Orinda. However, they likely will lose if they sue by far the deepest pocket with the $31 billion valuation: Airbnb, which most likely will completely escape accountability, shielded by its Section 230 defense.

But if Airbnb isn’t responsible for paying wrongful death judgments, what financial incentive does the corporation have to spend the money required to improve any of their business practices or policies to promote greater safety or security? None!

In the United States, although it’s not likely that Congress will bow to rapidly growing popular support for repealing §230 soon (as the focus of 2020 is on COVID-19), court challenges pose very different prospects that could put Airbnb’s low operating cost structure at substantial risk. Already, a federal court has carved out a broad exemption to §230 that shut down online prostitution websites. Furthermore, using novel product liability arguments, trial lawyers have already experienced some success in neutralizing Facebook’s Section 230 defenses against child sex trafficking litigation.

All it would require would be two or three strongly-worded federal court decisions striking down Section 230 within the next few months, and Airbnb’s costs could suddenly explode. It will be interesting to observe whether Airbnb honestly and completely discloses these legal risks in the final version of its S-1 prospectus the firm will release to the public later in 2020.

Moreover, so far Los Angeles, Santa Monica, Portland, Nashville and most recently Jersey City, New Jersey have enacted costly regulations against Airbnb that circumvent §230. Dr. Giacomo Santangelo, a professor of economics at Fordham University and Seton Hall University’s Stillman School of Business explained to the Hudson County View that:

As we’re seeing more and more of these protections for landlords, for tenants and for customers, Airbnb’s profit margin is expected to shrink and this presents a problem for them. If there is uncertainty, they may have difficulty raising money because there’s volatility in the stock. I think Airbnb wants to make sure they have all their ducks in a row before they push forward with that.

More Professors Sound Off on Airbnb

Airbnb has a formidable advantage that WeWork never had: an effective and highly profitable business model. Dr. Arun Sundararajan, an entrepreneurship and quantitative methods professor at New York University’s Stern School of Business who has written a book on the sharing economy, emphasized this point in a December 2019 interview on CNBC.

Dr. Sundararajan notes that in Airbnb’s market space, even though supply is local, demand is global. Airbnb can leverage their global reach the company has built as a barrier to market entry that defends itself against competitors in ways that other sharing economy firms like Uber and Lyft cannot. In the cases of Uber and Lyft, supply and demand are both local, so competitors can challenge ride-sharing firms on a city-by-city basis. That isn’t the case with Airbnb, which wields the strongest network effects of any of these companies in his opinion—effects he expects will be reflected in the firm’s pre-IPO valuation.

Other professors aren’t nearly so optimistic about Airbnb as Dr. Sundararajan. Dr. Makarand Mody, a Boston University hospitality marketing expert who has published seven research articles on Airbnb since late 2018, took exception to some of the corrective steps announced by Chesky following the Orinda massacre. He explained to USA Today:

While in the case of Orinda, while the reservation was booked for 12 people, which might set off Airbnb’s risk-assessment technology, how can the system predict that a listing may be used for a party if someone only lists two guests under the reservation?

Like Dr. Mody, Dr. Cheri Young at the University of Denver’s Daniels College of Business cautioned that Airbnb hosts never exactly know who might show up. Dr. Young emphasized that extensive staff at hotels render them better prepared to manage guest issues. She told the San Francisco Chronicle:

If someone makes noise in the guest room next door, a guest can call the front desk and security will go up there. Whereas if you’re the neighbor of an Airbnb having a wild party, you have to rely on the police, who have more pressing matters. You can call Airbnb and lodge a complaint, but Airbnb doesn’t have a security force across the globe to visit that host.

At Cornell University’s SC Johnson College of Business, Dr. Chekitan Dev, a marketing and branding professor, told the Washington Post that fraudulent scam listings like those disclosed recently by Vice and unmet guest expectations had damaged Airbnb’s brand:

Airbnb’s task becomes that much harder because, unlike a hotel, hosts can turn on and turn off listings at their pleasure. So, verifying the millions of listings all over the world is critical to bolster trust in the brand. Doing so will be a tall order.

Dr. Dev wasn’t satisfied with other corrective steps Chesky announced, like a money-back guarantee. He asserts that Airbnb should not just give guests a money-back guarantee, but a 120 percent guarantee in cases where an unsatisfactory accommodation requires a sudden switch to another place to stay.

“Money back for a last-minute negative surprise is small solace for guests being rendered homeless, even temporarily,” Dr. Dev told the Post.

The Tech Industry’s Defining Question

The Journal astutely framed the issue that could define public opinion toward not only Airbnb but also the entire technology sector during the 2020s:

Now [Airbnb] is grappling with the question that could consume the tech industry in the coming decade: How much responsibility should companies assume for bad things that happen on their platforms?

For the families grieving all their lost loved ones shot and killed inside Airbnb properties, no amount of responsibility will ever be enough.